Co-Living (rent by the room) BRRRR

[Jake Baker]

I recently purchased a property in Jacksonville, FL, and plan to execute a BRRRR strategy with a coliving model (renting by the room). The property is in a B-class neighborhood, and while I'm comfortable managing coliving setups, I'm curious about any potential nuances around refinancing and insurance for this type of property.

Are there specific loan types or lending policies I should know when refinancing a rent-by-the-room property?

Do lenders or appraisers treat properties with coliving setups differently?

Are there any insurance policies or providers you recommend for this unique use case?

I would love to hear from anyone with experience navigating these aspects of a coliving BRRRR strategy!

[Jonathan Greene]

Look up @Grant Shipman. All he does is co-living. He will have a variety of answers to your questions.

[Jake Baker]

@Jonathan Greene Grant is awesome! I know him personally, and he is the reason I got into co-living. BP should have him write the co-living book. 

[John O'Leary]

Are you just renting by the room or are you using Pad Split?

[Max Ferguson]

@Miller McSwain is a great resource for the topic, he would be happy to talk to you! I know he has gotten creative on the lending side for products used to get the properties. 

I have no clue on insurance, but appraisers should treat the property different if you plan to add a few more rooms. As you know bedrooms are worth more to appraisers than an extra living room. Calling the appraiser to see what you can do to push it up a "C-Level" would be smart before doing any reno also, might only need a few things to make it far more valuable in the eyes of the bank.

I've heard of a tactic for figuring out demand, which is to put up a dummy or coming soon listing on facebook marketplace and see the amount of activity you get on it. 

Good luck and keep us updated!

[Jake Baker]

Quote from @John O'Leary:

Are you just renting by the room or are you using Pad Split?

 @John O'Leary , we rent by the room on a one-year lease and do not use a pad split. Pad Split tends to have shorter stays. 

[John O'Leary]

Understood. A key consideration here is the refinance process. When converting common living areas into additional bedrooms, many DSCR lenders might view the property as non-conforming, which could pose challenges. A common strategy used by investors, such as those operating through PadSplit, involves purchasing the property, completing basic rehab, refinancing, and then using cash for the interior build-out.

Another potential red flag, even without converting common areas, is the addition of individual locks on bedroom doors. Lenders and appraisers may see this as a sign of a room-by-room rental setup. To avoid problems, it’s best to add these locks after the appraisal on a turnkey purchase or after the refinance is complete.

Also, most DSCR lenders will assess the property's market rent as a single unit rather than the combined rents of individual rooms. If you're working with a community bank or a traditional lender, these issues may not be as relevant.

[Miller McSwain]

Quote from @Max Ferguson:

@Miller McSwain is a great resource for the topic, he would be happy to talk to you! I know he has gotten creative on the lending side for products used to get the properties. 

I have no clue on insurance, but appraisers should treat the property different if you plan to add a few more rooms. As you know bedrooms are worth more to appraisers than an extra living room. Calling the appraiser to see what you can do to push it up a "C-Level" would be smart before doing any reno also, might only need a few things to make it far more valuable in the eyes of the bank.

I've heard of a tactic for figuring out demand, which is to put up a dummy or coming soon listing on facebook marketplace and see the amount of activity you get on it. 

Good luck and keep us updated!

 Thanks for the shoutout!

I have 6 Co-Living properties (41 rooms) in Colorado Springs.

Insurance:
I've been seeing insurance companies start to offer Co-Living specific products that are very expensive (2x-3x normal cost). If you have a good insurance broker, you should be able to use a more standard policy though. My broker shopped around and found 3 companies that allowed us to add Co-Living clauses (SafeCo, Auto Owners, and Travelers). So the premium is still the same cost as usual and we are covered.

Refinance:
I've only had 1 experience so far with an appraiser coming to the property after a Co-Living remodel. In that case, she comp'd it assuming it didn't have the extra bedrooms and then just gave us a $3k boost for each room we built (2). I don't think this is normal though. I've heard of either:
1. Taking the doors off of the rooms when the appraiser comes so that they aren't rooms. Instead they are "flex spaces" or "offices".
2. Tearing down any rooms that are a little wonky before the appraisal.

For example, I bought a HUGE (3300 sqft) 3 bed house. I turned it into a 7 bed house.
2 of the new rooms are super useful to an end buyer and would bring us to a total of 5 (which would comp very well). If we decide to refi in 3-5 years, though, we may time a couple of the leases to end at the same time and spend ~$6k to tear 2 rooms down and rebuild them. Totally not efficient, but its something we may have to do. If it allows us to pull $100k+ of equity out, then it was well worth it though.

[John Morgan]

I've got a few houses I rent by the room. I've only done an appraisal on one of them which I added two bedrooms to. The appraiser didn't count them as bedrooms. lol. But my DSCR lender and commercial lender used the individual rent for each room since the appraisers market rent wasn't very high.

[Miguel Juraidini]

Quote from @John Morgan:

I've got a few houses I rent by the room. I've only done an appraisal on one of them which I added two bedrooms to. The appraiser didn't count them as bedrooms. lol. But my DSCR lender and commercial lender used the individual rent for each room since the appraisers market rent wasn't very high.

John, can you share which lender you use to take a DSCR loan on the co-living property?

[Kyle Deutschmann]

Quote from @Jake Baker:

I recently purchased a property in Jacksonville, FL, and plan to execute a BRRRR strategy with a coliving model (renting by the room). The property is in a B-class neighborhood, and while I'm comfortable managing coliving setups, I'm curious about any potential nuances around refinancing and insurance for this type of property.

Are there specific loan types or lending policies I should know when refinancing a rent-by-the-room property?

Do lenders or appraisers treat properties with coliving setups differently?

Are there any insurance policies or providers you recommend for this unique use case?

I would love to hear from anyone with experience navigating these aspects of a coliving BRRRR strategy!

While I agree the rent by the room strategy can be great if you know how to manage it well, from a lending perspective, a lot of 30 year DSCR note buyers won't allow properties with individual room leases, so it could make refinancing more challenging.