The pitch says co-living gets 40% more income. Where does the 40% go?

I have money to place and haven't picked a lane yet, so treat this as a beginner question about the model itself.

A sponsor sent me a one pager comparing two scenarios on the same 4 bed house:

Whole house lease: 2,400 a month, 28,800 a year. By the room: 4 rooms at 850, 3,400 a month, 40,800 a year.

They call that a 42% income lift and the rest of the deck is built on it. The expense side of their comparison shows the same operating expenses in both columns.

That can't be right, and I want to understand specifically which expenses change rather than just distrusting it in general. My list so far is utilities, internet, and furniture, but I assume there's more and I don't know the model well enough to name it.

The decision in front of me is small, it's just whether to keep taking meetings with this sponsor. But I'd rather know the actual shape of the expense difference than pass on a vibe.

Answer

2wendy_park48CapitalPRO7

The lines that change between those two columns, roughly in order of size:

Vacancy. A whole house lease at 2,400 with a 20 month average tenancy has one turn cycle every 20 months. Four rooms at 8 to 12 month tenancies is four to six turn cycles a year in the same building. Room-level downtime typically runs 10 to 15% of room-nights against 5 to 7% for a whole house.

Management. Whole house is 8 to 10% of collected rent in most markets. By-room, whether in-house or third party, lands closer to 15 to 20% once you count leasing labor per room. If the deck shows the same management percentage in both columns, that alone is 4,000 a year.

Utilities, internet, trash. In the whole house column the tenant pays these and they don't appear at all. By-room the owner almost always pays and it's 300 to 450 a month on a house this size.

Cleaning. Shared kitchen and baths need a paid cleaner. 300 to 500 a month.

Furniture. 5,000 to 9,000 up front and a replacement cycle of five to seven years, so amortize 1,200 a year and don't pretend it's a one-time item.

Repairs. Four adults on separate schedules through two bathrooms wears the place faster. I'd carry 12% of gross rather than 8.

Run those against 40,800 and the 42% lift compresses to something in the mid teens. That can still be a good business. A sponsor who presents identical expense columns has either never operated one of these or is counting on you not asking, and either way you now know which question to open the next meeting with.

Also ask which of their markets caps unrelated adults per dwelling, because that determines whether the four room house is even legal there.

2 replies

1samantha_ruizAU4APRO6

One thing to add to @fathom's list from running a couple of these: insurance. My carrier priced the by-room house differently than my standard rentals once I disclosed the separate leases, and some carriers wouldn't write it at all. Not enormous money, but it's another line their column pretends is identical.

The pitch says co-living gets 40% more income. Where does the 40% go?

2 replies