As new apartment communities come to market, they’re empty. Jason’s business model is to find those apartment communities, get access to some of those units as they are being leased up, and turn them into short term rentals for 8-24 months. “Pop-up hotels” as Jason calls them, WhyHotel only moves in during the lease up of new communities, helping investors mitigated the normal losses occurred during the lease up. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
Best Ever Tweet:
“In the U.S. between 200,000-400,000 MF units are delivered each year, on average, they take about a year to fill up, so that means there is somewhere between 100,000 to 200,000 units vacant at all times in major U.S. cities” – Jason Fudin
Jason Fudin Real Estate Background:
- CEO and Co-Founder of WhyHotel
- WhyHotel is a platform for renting a full size apartment with a 24/7 hotel staff onsite when traveling vs staying in a hotel
- Based in Washington D.C.
- Say hi to him at https://whyhotel.com/
- Best Ever Book: Hiring A Players
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TRANSCRIPTION
Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Jason Fudin. How are you doing, Jason?
Jason Fudin: Good, Joe. Thanks for having me.
Joe Fairless: My pleasure, nice to have you on the show. A little bit about Jason – he is the CEO and co-founder of WhyHotel. WhyHotel is a platform for renting a full size apartment with a 24/7 hotel staff on site when traveling, versus staying in a hotel. Based in Washington DC. With that being said, Jason, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Jason Fudin: Sure. My background is in institutional high rise real estate development. I managed a couple billion dollars of multifamily for rent apartment developments for a large company called Vornado. In that role I realized – not quickly enough, but pretty quickly – that when you deliver a high rise apartment building for rent, there’s a decent amount of vacancy when you open up, as in it’s almost entirely empty. I saw that opportunity and tried to turn it into a business, which is now WhyHotel.
Joe Fairless: You work with class A developers of multifamily and you propose your business model to them, and partner up that way? Is that the gist?
Jason Fudin: Yeah. For example, a few months ago we opened 100 units with Equity Residential. Equity had a 200-unit apartment building delivering, delivered empty as all apartment buildings do, and we said to them “If you give us access to 95 units, we’re gonna turn those vacant units into a temporary hotel, we’ll put them to work, and Equity will make extra money while you fill up your building with long-term residents. We, WhyHotel, will be able to have an asset that is top class.”
We’re also opening with Brookfield here in about four weeks. So yeah, all top-tier, major real estate player.
Joe Fairless: Are you primarily partnering with developers, or are you working with owners who have existing assets?
Jason Fudin: Just developers. Our model is based on the premise that there’s vacancy during lease-up. We say that each of our hotels is a pop-up hotel, and that it will be there somewhere between 8 and 24 months, depending on how long it takes to fill up the building with renters.
Joe Fairless: Wow. That’s really interesting, because I’m putting myself in your shoes, and the insight – clearly, that makes a lot of sense… But if I’m in your shoes, I’m constantly having to hop around from one place to another, since I’ve got that 8 to 12-month window, versus establishing a long-term portfolio where I can rock and roll, and this company can scale… So how do you think about that?
Jason Fudin: In the United States between 200k and 400k multifamily units are delivered each year, and on average they take about a year to fill up. That means that there’s somewhere between 100k and 200k vacant units at all times in major U.S. cities. This is a pretty large opportunity.
If you went after conventional hotels, the margins are super-tight because you have to justify why your use of land and building is more valuable than somebody else’s in terms of driving profit. In our case, we have to justify why if we do something it’s worth more than nothing, because these units are otherwise vacant… So what it allows us to do is build a national [unintelligible [00:04:05].12] in other people’s beautiful buildings. It allows us to build a brand, back-end yield optimization and a very healthy amount of profit, without taking on the development risk that you would typically see in a real estate deal.
Joe Fairless: Okay. Do you attempt to establish relationships with some core developers, that way you’re not having to constantly reintroduce yourself to new developers over and over and over again?
Jason Fudin: Yeah, the development community knows us pretty well at this point in time. We have deals with most of the large publicly-traded multifamily players, and a lot of the national developers that are backed by pensions… So yeah, there’s less of introducing, it’s more like just “Good to see you.”
Today what’s interesting is we’re found money. We bring something extra to the table. What we expect to have happen now is through the next cycle of high rise multi development, when someone’s trying to get a deal that depends on them trying to buy the land, if they know they’re gonna make a significant amount of money in addition to the regular apartment buildings by having this interim cashflow, they’ll pay a little more for the land. And that means that we go from being a “nice to have” to a “need to have”, because we’re part of the economics that justify the development of that project.
At that point in time it’s not us meeting with our friends and saying “Hey, do you want an extra chunk of change?”, it’s us saying “Hey, we’re the pop-up hotel operator in town. We’re best suited to produce that interim income for you.”
Joe Fairless: As a developer, if I have the 200 units and you come to me and say “Give me 95 of the units”, I know you’re bringing income where there otherwise wouldn’t be, but are there any expenses, or wear-and-tear, or other things that would detract me from doing that partnership?
Jason Fudin: People could always think of something, but no, the answer is we turn the units back in the same rent-ready condition we got them in. An unknown fact to most people is that multifamily buildings actually grow faster when someone’s lived in the units than when they’re new, because you start to have pricing power and you have occupancy… So there’s no detriment to the actual pricing–
Joe Fairless: Will you say that again?
Jason Fudin: Yeah, so when you stabilize the rent roll for an apartment building, for the next on average three years you’re able to grow the rent roll at a rate that’s higher than the overall market, and that’s because now that you have a stable asset, you’re able to push rate and burn off concessions. Buildings that are once lived in, as in literally there’s been one tenant in that unit – you can do better than a brand new building in terms of rates.
Joe Fairless: What are some reasons — because I’m sure you all have approached developers, and there have been some that said “Thanks, but no thanks.” What are some reasons that they’ve stated?
Jason Fudin: Yeah, there’s probably been a bunch that said “Thanks, but no thanks.” One of the biggest reasons we get is how is regulatory gonna work? What we do is in advance of delivering a building we secure permits for a hotel use; we often pull a hotel license. But some folks are like “I’m just not willing to go back into any kind of public process”, and sometimes that is required. We’ll have zoning hearings, and we’ll meet with planning commissions. So that’s one.
The other is the unknown. We’re a newer concept, we’re a young company – about two years old – so some people say “Hey, it’s a 100 million dollar asset, and I don’t know you.” We’re getting way less of that now, given some of the partners we’re bringing in; groups that can validate how we’ve operated and how we’ve been highly productive for the projects… But those are the two – regulatory, and the newness of us as a company.
In terms of economics, the developer is not taking any downside risk. We go about monetizing the vacant units; they’re not paying for that.
Joe Fairless: And let’s talk about that now. From your perspective and your company’s perspective, you just got the greenlight to go into an apartment community… Now what do you do?
Jason Fudin: Normally, we sign an LOI to say “Hey, these are the terms”, and then in parallel we negotiate the–
Joe Fairless: What are the typical terms?
Jason Fudin: Things we’re interested in is how many units are we gonna take in the building, how long are we guaranteed time in the building, what’s the distribution of revenue look like, who’s responsible for what things on regulatory… Kind of the high-level deal points. Basically, carve-outs for lender approval, or regulatory, those kinds of things.
Once we have our set of terms, we then normally go to pursue regulatory while we in parallel finalize the larger agreement. Those larger agreements are like 40 to 60 pages, because they’re big real estate deals… So that’s normally the process. By the time we have the agreement signed and the regulatory approvals in place, we then prepare to open, which is a whole process. We have go-live team that places all the furniture, it gets the telecom set up, we have a general manager that will hire, onboard, train our hospitality team; most of them come from conventional hotel brands. Then two weeks before the things opens, everyone goes through their training and we get ready to go. We’ve been taking bookings for 3-4 months prior, and then we open and it’s kind of off to the races.
Joe Fairless: How many markets are you in right now?
Jason Fudin: As of now I would say it’s one market, but it’s really two. We’re in DC Metro and Baltimore. That has been a plan of ours, to double down in our backyard as we kind of get better at operating and optimizing revenue, and our funnel of customers, and building a brand… But in 2020 we’ll be doing a huge push nationally, and while I can’t say where we’re going yet, I can tell you we’re going to a number of major cities across the U.S.
Joe Fairless: And what’s the value proposition to the consumer?
Jason Fudin: The consumer gets the best end of the deal. They get to stay in these brand new full size apartments for less cost than staying at a residence inn, or a [unintelligible [00:09:28].24] So they get a higher end product… And by the way, everything’s brand new hospitality – great furniture, all the telecom, you can stream Netflix and Hulu on ChromeCast, there’s a full cable package, you have a bedroom separate from your living room, you have a washer/dryer, you have a brand new high-end gym, rooftop pool potentially… So you get all of those things, and you get a 24/7 on-site hotel staff.
So you get all the best parts of the service of a hotel, but all of the space, comfort and lifestyle advantages of a home-share.
Joe Fairless: And where do you see you all fitting in relative to Airbnb?
Jason Fudin: We see Airbnb, HomeAway, VRBO, Expedia, Booking.com — I would say Hotel Tonight, but I just heard that Airbnb bought them… We view all of them as channels. They are marketplaces where we’re able to find customers, and we pay a customer acquisition cost for those customers, and we also have our own set of direct channels and sales teams that sell directly to the community.
Joe Fairless: As you’ve honed the business plan and the execution in DC and Baltimore, what are some things that you’ve learned?
Jason Fudin: We’ve learned a lot of things. One of the things we’ve learned pretty quickly is when you have 100 or more units, unlike just a traditional home share where you have a unit or two, you’ve gotta run the thing like a hotel; you’re staffing it like a hotel, you have the same number of channels and funnels of demand as a hotel… You’re also subject to the same seasonality, days of the week, shoulder days of a hotel. So what we’ve had to get smart on is optimizing the way that we sell into a market, so that we’re able to fill up 100-160 in short order.
Joe Fairless: And from an execution on the ground standpoint, with the go-live team – anything with that process that you have honed? Whether it’s as small as a certain telecom approach, or furniture approach, or as large as just your macro-level strategy?
Jason Fudin: We’ve learned how long it takes to put plates, and cups, and silverware in the unit, and have people work some pretty long hours, having underestimated that originally…
Joe Fairless: How long did it take?
Jason Fudin: It takes about six man-hours a unit, which is surprisingly long, but there’s a lot of back and forth trips, so we’re getting better at that. We have learned how important it is to have the telecom on in advance, because potentially a Verizon or a ChromeCast might just be two weeks late, so you don’t wanna have it turned on right before… There’s a lot of those lessons learned. A lot of them are just on the execution, and so each one just gets easier execute. Decisions on furniture, where furniture [unintelligible [00:11:52].28] get damaged…
On our very first pilot we used Apple TV’s, and people would forget to log out, so we don’t use Apple TV’s anymore… So those kinds of things are just learned along the way.
Joe Fairless: You worked for —
Jason Fudin: Vornado.
Joe Fairless: Vornado. Huge company. I could remember the exact pronunciation. I remember walking by one of their offices in New York City all the time… Were you based n New York or DC when you were working there?
Jason Fudin: DC. I managed a large amount of multifamily development just for the Washington DC market in my first role with them, and then I ended up coming back as an executive to run their innovation group out of DC.
Joe Fairless: Okay, and what are some things that you learned there, other than the main insight that drove the creation of this company? What are some more tactical things that you learned there, that you’re applying with this company?
Jason Fudin: That’s a good question. I would say one of the things I learned personally there is the patience and the time it takes to build something of scale. I’m a pretty high-energy person, and I wanted to be in real estate development. But obviously, buildings don’t grow up overnight, they’re still hand-built. So having to live through the process of putting up a 400 million dollar asset teaches you that patience.
That’s really important for us, because at our company – we’re a startup, we have to grow fast, we are growing fast, but still having an eye on the long game, to know that it still takes some time to get up to a couple thousand units and a couple hundred employees, and it’s not gonna happen overnight. That’s probably one.
And I’d say the second thing that I learned – and I don’t know if it it’s tactical, but… Real estate moves at a different pace than technology. And I think a perfect example of that is I was a development manager for a high rise apartment building, and we had pegged the rents at a certain dollar amount. That was in 2011. Then we went about entitling it, and then building it, and then delivering it. That delivered in 2016, so five years later…
Joe Fairless: Wow.
Jason Fudin: It was a very large project; I think it’s probably worth — well, now Amazon is gonna be on the [unintelligible [00:13:52].03] It’s probably worth about half a billion dollars; it’s a large project. And what’s interesting in that particular project is Uber changed the rental fundamentals of that project, because Uber wasn’t a thing in 2011 in any meaningful way, and it was kind of a sleepy market in Arlington, Virginia. Then Uber arrived, and now all of a sudden we are only a $9 and 9 minute Uber ride from a more active lifestyle market. So while we thought it was a $500-$600/month chunk price discount to live in our building, now people are like “Well, why would I spend $600 more if I can be there in 9 minutes for $9?”
So we had tremendous upward pricing power, having to do with something that we didn’t control, and hadn’t thought about. I think that for me that was a big life lesson, in that real estate doesn’t move at the pace of technology and can be highly disrupted by it when it’s in motion, because you can’t stop it; you can’t stop building a couple hundred million dollar project.
Joe Fairless: Right. It’s a powerful lesson, especially when you’re dealing with those large of numbers, but certainly can be applied to any type of transaction.
Based on your experience as a real estate investor and entrepreneur, what is your best real estate investing advice ever?
Jason Fudin: My best real estate investing advice… I guess I’ve got two pieces – go where the market is going, not where it is today. A lot of people get caught up in the excitement of “This is this amazing spot”, but the spots change, so go where the market is going, not where it is today. And that’s if you don’t have that much money. And if you have a bunch of money, make your own market, so that where it’s going is where you make it. I think that’s important, because [unintelligible [00:15:23].12] large company like Vornado, and they can make a neighborhood that didn’t exist by investing 2-3 billion dollars. But if you’re a smaller developer, you’re not gonna be able to have that kind of outsized influence on any particular submarket. So you’ve gotta go directionally, where the rest of the market is going.
Joe Fairless: And how do you identify where the market is going, not where it is today?
Jason Fudin: You’ve gotta be a local. Anyone who tells you you can develop from afar, without local insight, is cheating themselves.
Joe Fairless: So you’ve got to be local, or have a local on the ground insight.
Jason Fudin: Yeah, you’ve gotta have local talent as part of any project, because sometimes street by street or exit by exit – there’s certain perceptions of what is and isn’t happening, and people know what’s coming… And if you’re outside of that and you’re not living, you’re gonna get tripped up on something you didn’t realize was a thing. You’re gonna be the outsider who made the dumb move.
Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?
Jason Fudin: Yeah, let’s do it.
Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.
Break: [00:16:24].01] to [00:17:09].03]
Joe Fairless: Okay, Jason, best ever book you’ve recently read.
Jason Fudin: It’s called Hiring A-Players. A smart method for hiring people. It has changed the way we hire at WhyHotel. A company, especially a small company, is only as good as its team, and it’s exceptional. Based on hundreds of thousands of hirings.
Joe Fairless: What’s a top of mind tip you can give us from that book for hiring people?
Jason Fudin: Be thoughtful, be structured, and only hire the best.
Joe Fairless: What’s a mistake you’ve made on a transaction?
Jason Fudin: Caring too much about how it impacted the other side of the table.
Joe Fairless: Best ever deal you’ve done?
Jason Fudin: The best ever real estate deal I did was a public deal, where there was a time dislocation between when we tied it up and where the market would be when we got to build it.
Joe Fairless: When you say “time dislocation” – will you elaborate on that?
Jason Fudin: Yeah, basically we tied up a deal with the city at one of the companies I worked at, but we knew we would break ground on it for a number of years because of the process, but we didn’t have to pay for it until we broke ground, and therefore, back to the earlier advice I gave about “Go where the market is going”, we knew that market was moving, and to be able to tie it up, but then not have to break ground until later put us at an advantage in terms of basis and the ability to get a return.
Joe Fairless: Best ever way you like to give back to the community.
Jason Fudin: Teaching. I’ve mentored, I’ve taught at a college level, and I think that to be able to give back to the people that are coming next is powerful, not only because it’s enjoyable, but because they can then have an impact.
Joe Fairless: And how can the best ever listeners learn more about what you’ve got going on.
Jason Fudin: They can go to our website, WhyHotel.com. We say “Why a hotel, when you can have a place like home?”
Joe Fairless: Jason, thanks for being on the show, talking about the insight that led you to co-found WhyHotel, and the business model behind it, as well as the value proposition for all the players – your team, the developers, as well as the consumer. Interesting stuff. Thanks for being on the show. I hope you have a best ever day, and we’ll talk to you soon.
Jason Fudin: Awesome. Thanks, Joe.
