Commercial Real Estate Podcast

JF2801: Rethinking the Rent-by-the-Room Model ft. Johnny Wolff

Written by Joe Fairless | May 4, 2022 11:00:00 AM

Johnny Wolff is the founder of HomeRoom, a real estate investment platform that increases investors’ rent by 50% by enabling them to invest in single-family homes remotely and rent out each room separately. In this episode, Johnny walks us through how investing with the platform works, what the target markets and demographics are like, and how they identify the ideal properties for their investors.

 

How HomeRoom Works

HomeRoom has a method for identifying single-family homes where there is a high potential for profit in renting by the room. They then facilitate a purchase of one of these homes by a HomeRoom investor, and they remain involved in the management of the asset, helping the investor find tenants and assisting with ongoing management once the property is leased. It’s essentially a turnkey-provider-meets-Airbnb platform.

 

How They Identify the Best Properties

“My cofounder Mike is a data scientist from Airbnb, and so he’s built a data layer that actually helps us identify homes for increased returns in a couple of ways,” Johnny explains. They select properties based on appreciation potential first, then focus on the area’s population growth and typical rent rates. The goal is to find a property that will deliver 50% more in rent to investors on average by renting out individual rooms. 



Target Markets and Demographics

Johnny says most people assume that HomeRoom rents to 20-year-old college students who are just going to “burn the house to the ground.” However, the average age that HomeRoom rents to is actually 29 — mostly young professionals. “People are delaying marriage, they’re in a lot of student debt, they’re trying to get out of that student debt, and income has not kept pace with housing prices,” he says. “So more and more people are living like this.” Many HomeRoom property tenants opt to live with roommates versus renting a studio apartment for twice the price.

Johnny believes HomeRoom’s rent-by-the-room model is ideal for any market. “The need for this type of housing is actually pretty universal,” he says, “because even in cheaper areas, people would prefer to pay 50% of the rent.” Currently, they have properties in Kansas City, Dallas, Austin, San Antonio, Tampa, Indianapolis, and Pittsburgh. Their goal is for HomeRoom to be in 1000 U.S. cities.



Johnny Wolff | Real Estate Background

  • Founder of HomeRoom, which focuses on remote investing via co-living apartments and buildings.
  • Portfolio: GP of 22 units
  • Based in: Kansas City, MO
  • Say hi to him at:

Best Ever Book: The 50th Law by 50 Cent and Robert Greene

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TRANSCRIPT

Slocomb Reed: Best Ever listeners, welcome to The Best Real Estate Investing Advice Ever Show. I'm Slocomb Reed and I'm here with Johnny Wolff. Johnny is joining us from Kansas City, Missouri. He's the founder of HomeRoom, which helps investors invest remotely in co-living single-family homes. He has a personal portfolio of 22 units and HomeRoom has helped investors invest in over 750 units within those single-family homes. Johnny, I normally ask people for a little bit about their background and what their current focus is, but I really feel like we need to dive into an explanation of the platform of HomeRoom and how this investment strategy works.

I want to catch our listeners up to the conversation we had before we started recording. HomeRoom is a platform for investors who are doing a “rent-by-the-bedroom” of single-family homes. Fix me where I'm wrong and help us understand how it is that this platform works.

Johnny Wolff: That's right on the money. The way we like to say it is we're a real estate investment platform that increases investor's rent by 50%. We do this by enabling them to invest in homes remotely and rent out each room separately.

Slocomb Reed: Let's unpack that, enabling investors to invest remotely. Which aspects of the investment process are you working on? Are you identifying the properties that need to be purchased?

Johnny Wolff: Yes, sir. My co-founder Mike is a data scientist from Airbnb. He's built a data layer that actually helps us identify homes for increased returns in a couple of ways. One is appreciation potential, and that's based on a number of basically math-type things that he does to identify immigration from one city to another, population growth... There are a lot of other variables there. But the biggest thing that he focuses on is how much can you rent a bedroom for in that specific area, in that specific city, specific zip code.

We're essentially saying, "Hey, if we buy this house and we rent it by the room, we can get 50% more on average." Some of the time it's more, some of the time it's a bit less. But the goal is really that using a different approach increases investor's yield.

Slocomb Reed: I'm going to make a bunch of assumptions and move the conversation faster for our Best Ever listeners, Johnny... You guys have a method for identifying single-family homes where there's a lot of profit potential in renting them by the room. You identify those for your investors, you facilitate the purchase of that home by one of your investors, and then you're involved in the management of that asset for the investor, helping them find bedroom tenants and then the ongoing management when the property is leased?

Johnny Wolff: Yeah, that's exactly right. Yep.

Slocomb Reed: So it's like turnkey provider meets Airbnb platform.

Johnny Wolff: Yeah. We found that roommate houses - if there's a specific [unintelligible 00:06:56.12] factor, they do a lot better, and we're really good at finding those houses. So we essentially have taken the Airbnb marketplace meet turnkey provider. We'll help you find that exact house. We do have a number of people that already have a house and they'll just put them on our platform, just like Airbnb. But we find that investors buying homes means it's exactly right, it's perfectly selected.

Slocomb Reed: Gotcha. I like to be frank, Johnny... Where is your profitability coming from in this process? You're helping investors identify purchases and to manage them. Are you taking management fees? Where is the profitability for you, as an actor in this space?

Johnny Wolff: Yeah. We make money in two ways. By facilitating the transaction, we have partners that will help the investor find or essentially purchase and set up the property. That's an agent, an interior designer, a lender, and a contractor. We actually make lead generation fees from those partners who help the investor. In addition to that, we have a 15% ongoing platform fee. We'll raise the rent 50% and then we'll take 15% ongoing. We don't charge a lease-up fee though, so it ends up being not that much more expensive than a typical property manager.

Slocomb Reed: I need a better frame of reference for the kinds of properties that you are identifying. I'm an investor and a real estate agent in Cincinnati, Ohio, and the first thing that comes to mind with rent-by-the-bedroom is student rentals, particularly around the University of Cincinnati. And ain't nobody in Cincinnati hiring an interior designer for those student rentals. Everybody's going to tell you that's a waste of money; just get it rented. Students aren't going to care anyway, and most of them are bringing their own furniture; these are unfurnished.

So I need a mindset shift to understand here... Generally speaking, what are your target markets in terms of what metro areas, but also, what are the target demographics for the best renters for this kind of situation to maintain profitability and stability for your investors?

Johnny Wolff: That's one of the common questions that we get pretty universally, is "Hey, are these like 20-year-olds that are just going to burn my house to the ground, essentially?"

Slocomb Reed: That's where my mind went. Totally.

Johnny Wolff: If you went to college, you're like, "I don't want to rent to my 20-year-old self. No one does." The average age at HomeRoom is actually 29. One of the things that we've seen from a demographic shift standpoint is that more people are living with roommates than ever before. Between 18 and 35, 26% of people are living with roommates today in the United States. People are delaying marriage, they're in a lot of student debt, they're trying to get out of that student debt, and income has not kept pace with housing prices, so more and more people are living like this.

So we have a ton of people who are like, "I don't really want to live in a studio apartment before I get married for 15 years." So they live with roommates. We actually [00:09:56.14] and over, so we don't typically house students; it's very rare. But yeah, it's mostly young professionals, so it's definitely different. You can see the house behind me on my Zoom - I'm not sure if the listeners can - but that's one of our properties; it's beautiful, stainless steel, interior designed, and people stay for a couple of years. We very, very rarely use full deposits when people leave.

Slocomb Reed: Gotcha. I am a Cincinnati, Ohio-based investor. Everything I'm hearing you say makes me think that you are in higher cost of living areas. With my knowledge, albeit limited, of different metro areas where housing situations like this for people in their late 20s who have a decent income, the first place that comes to mind is Seattle. Are you guys primarily in markets like Seattle? Where is your platform most prominent right now?

Johnny Wolff: Our biggest market is actually Kansas City. That's another [unintelligible 10:50] to what we're doing, is that this is probably only needed in Seattle, New York, San Francisco, LA, the places where apartments are like $3000 to $5000 a month. I lived in San Francisco for about 10 years after college, moved to Austin, and then moved to Kansas City, where I started HomeRoom... And I've found like a universal need for rent-by-the-room housing. We started in Kansas City; that's our biggest population. We're in places like Olathe. We actually got a message from Topeka recently, where they want us to come, to Topeka, Kansas.

The need for this type of housing is actually pretty universal, because even in cheaper areas, people would prefer to pay 50% of rent. So that's the other side of the coin. With HomeRoom, the rooms are typically 50% of the price of a studio apartment in the same neighborhood. So if you have student debt, you want to save money for your next life stage, this is a really good way to live. We'll actually be in Ohio, not too long.

Break: [00:11:50] - [00:13:35]

Slocomb Reed: Johnny, thinking through the variables involved in this, understanding of course you have some really solid algorithms and data for understanding this kind of stuff, a room in your house costs half as much as a studio. Rent-by-the-room being able to increase the rent, the property would experience by 50%... It sounds like you'd have to be pretty picky about the markets that you invest in in order to be successful with this. You said it's predominantly Kansas City; is that because Kansas City is your backyard and that's the market that you understand best? Or are there particular attributes to the Kansas City MSA that lend themselves to this kind of investing?

Johnny Wolff: We actually think we could be in any city. We're in seven metros today; we expanded to Dallas, it's our second-biggest presence. Austin, San Antonio, Tampa, Indianapolis, and Pittsburgh... We're also launching in Phoenix currently, and we're looking at Raleigh. We think one thing that is universally better is that more rent for investors is better.

People are investing in all these cities today, and what would be better for them is if they got 50% more rent than they're getting. So our goal is to be in a thousand cities in the United States. We think it's universally needed for tenants, and we think investors invest in usually in most cities, they can make more money with our model.

Slocomb Reed: Gotcha. The metros that you just listed are all seeing explosive population growth, and they're areas where demand is far outpacing supply. I guess what I'm hearing you say is this has the potential to work everywhere. I'm sure our Best Ever listeners, at least some of them are asking, "Would this work in my market, or how would I identify a house where I could do this?" What advice do you have for someone who wants to find a property that makes sense to rent-by-the-room?

Johnny Wolff: I think a bit larger typically is better. You're going to do better with four-plus bedrooms most of the time; making sure there's enough parking on the property, and enough shared bathrooms. Those are the core things that HomeRoom looks for. I personally would recommend someone work with us. I know it sounds self-serving, but it's typically worth it to partner with us. I don't think the markets can have explosive growth.

We actually talked to investors and said, "What's the returns parameter that you prefer?" We have markets like Austin where you are seeing explosive growth, but the cash yield is really suppressed. Then there's markets like Pittsburgh where the population is actually flat, and sometimes a bit down in different zip codes. So that's a higher yield market, but you'll still get more rent there. It just really depends on what flavor of investor you are.

If you want to build your net worth, then markets like Austin, Tampa, and Phoenix are really, really powerful. If you're looking for passive income and you want to use your returns by getting more rent, then Kansas City, Tampa, and Indianapolis are all really good choices. So it really depends on you, it really depends on what you're looking for out of real estate.

That's one of the things that's really cool about real estate, it's a stock and a bond at the same time. You can choose what kind of mix of stock and bond performance do you want based on the city you're in, with HomeRun's model or with any model.

Slocomb Reed: Gotcha. What are the mistakes you guys have made along the way? What are the struggles that you've had and the lessons you've had to learn resulting?

Johnny Wolff: Yeah, there are a lot of mistakes. I've been in real estate investing since 2008, personally, mostly out of state, and I started managing my own properties in 2015. To manage two or three properties, you think you understand it; and then when you scale to a larger velocity, you realize that you don't.

Not being someone that's intimately familiar with construction, the operation side was a piece that we were not amazing at until about a year ago, when we brought on someone that really understood it well. Navigating frozen pipes in Dallas and burst pipes in Dallas, when you have limited property operations experience is a challenge. I think respecting property operations and not respecting it enough is probably a mistake we definitely made.

Slocomb Reed: Gotcha. The solution, the lesson learned is to bring on operators or managers who understand the local market, the needs of local buildings, to help you invest remotely with your operations.

Johnny Wolff: Yeah, I think so. We're actually fully remote. Our operator we brought in [unintelligible 00:18:02.17] part of what they've done is remotely supervise most operations, and they've done that really effectively. We partner with local operators, but we've learned how to do that remotely. What you said is, I think, exactly correct, but we've done it with a bit of one level above.

Slocomb Reed: Gotcha. Well, Johnny, are you ready for our Best Ever lightning round?

Johnny Wolff: Yeah, let's do it, man. Let's do it.

Slocomb Reed: Great. What is the Best Ever book you've recently read?

Johnny Wolff: The 50th Law by 50 Cent. It's about taking big risks and being fearless. I really love that book.

Slocomb Reed: Well, what's your Best Ever way to give back?

Johnny Wolff: I like to help other folks that are working on creating a business. It's a very difficult road in the first couple of years. It definitely punched me in the face for a long time, and it still does on occasion. But yeah, helping a few folks. We reached them through Y Combinator, a few companies that are in the KC area that are looking to try to go through that program as well, and helping them prep for that and think it through, as well as helping other friends that are building businesses.

Slocomb Reed: Outside of operations, Johnny, what is the biggest struggle you've faced in scaling your HomeRoom platform?

Johnny Wolff: Yeah, I think building a team really can be a challenge. The first year or two, we had challenges everywhere, and then put a lot of time into building just the right team, and last year we've grown about 600%. It's interesting how real the struggle is until you have the right team in place across the board. Once that happens, things can click and then you can really take off. It's been a very exciting last year.

Slocomb Reed: Gotcha. 600% growth in a year... Do you attribute that just to growing your team or what other factors are involved in that?

Johnny Wolff: A lot of different pieces, but the unit economics... We figured out leasing remotely. 90% of the folks that live with HomeRoom never see a property before they sign a lease, because we have virtual tours, an online team that actually does video calls with them. Then we figured out the investor messaging around why it was a better deal for them, why they would make more money, and our process for getting those properties set up.

There are a number of different pieces that are flowing into the ecosystem. Once you have all that in place, it works really well. But if you have a missing piece, you're flailing around a little bit. Yeah, it was just the right team, right messaging around the sales, essentially.

Slocomb Reed: Johnny, what is your Best Ever advice?

Johnny Wolff: Best Ever advice is I think to do things before you feel ready to do them.

Slocomb Reed: Nice. Where can people get in touch with you?

Johnny Wolff: They can get in touch with me at johnny@livehomeroom.com, that's my email, and livehomeroom.com is our website.

Slocomb Reed: Great. Those links are available in the show notes. Johnny, thank you, and Best Ever listeners, thank you as well. If you've gained value from this conversation, please subscribe to our podcast, leave us a five-star review, and share this episode with a friend who you think could gain value from learning about this investment concept on the platform HomeRoom. Thank you and have a Best Ever day.

 

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