The average rent by the room is 50% higher than the traditional house model. Craig Curelop and Zeona McIntyre discuss this with Johnny Wolff, the founder of HomeRoom Coliving. Johnny talks about how rent by the room is also more affordable overall, especially for the younger people who don’t have credit yet, or just started to. With HomeRoom, it’s also possible for investors to invest remotely. Join in the conversation to learn more!
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Episode 89 – Advantages Of Rent By The Room With Johnny Wolff
How are you doing, Z?
I’m doing great. How are you? More importantly, where are you? Your background looks a little bit different than normal, Craig. I always know when you’re on the run.
Nothing is getting past easy. I am on the bay island of Hawaii. My friends rented a big fancy house so we’re hanging out there. It’s nice and fun. We’re here for a week so we’re trying to get the most of it.
You asked me for a big island recommendation and I thought I had more time but apparently, I need to sum up that so I will try.
No, we are here waiting on your recommendation, Z. What’s been new with you?
I finished furnishing an Airbnb and I have another one that I need to purchase in rapid order. It was quite timely because we have an interesting guest in this episode who has such a cool investing product that is right at Craig’s ally. I might invest in it at some point as well. I don’t know that it will be my next investment but I love the concept.
We have Johnny Wolff. I’ve been in contact with Johnny Wolff for years trying to help each other out. I don’t even know how we got connected, honestly but he has a cool model of making rent by room turnkey. In these markets that are renting traditionally simply doesn’t work or the cashflow is so bad, it’s hard to do. He takes a single-family house and rents it by the room. He says 50% or more rent, which could make a deal that wouldn’t typically work now work. I love what he’s doing and is taking what we’ve done a little bit scrappily and turning it into a legitimate business.
Let’s bring him on.
Johnny Wolff, welcome to the show. How are you doing?
I’m doing awesome. Craig, it’s good to see you. I’m excited to be here.
It’s good to chat with you again, Johnny. We’ve been trying to get you on here for a while so why don’t we kick it off? Where did you first hear about financial independence?
Honestly, I first heard about it on BiggerPockets back in the day I was investing specifically in stocks. In 2007 and 2010, I ran into real estate investing and passive income, Rich Dad Poor Dad, 2010-ish and moved all my money from tech stocks to real estate shortly after that. My money was in Amazon and Google at the time but it still has been a cool journey since 2010.
When did you invest that money?
I sold it to buy real estate. I emptied my stock and went on real estate.
What got you to make that switch from stocks to real estate?
It was the BiggerPockets community, exploring Rich Dad Poor Dad and going down that rabbit hole essentially.
You went from stocks to real estate. What was that first property that you bought? Z, do you have anything to add?
I was curious about what was the light bulb moment that made you think that financial independence was something to pursue? Was it like, “This real estate thing sounds cool,” or was there something more to it?Explore, learn, and ask many questions. Click To Tweet
I bought my first property a year out of college in Midland, Texas, an oil country. I had no idea what I was doing but it was when you could do 10% down and the property was $96,000. I bought that property without a lot of planning or thought and then I watched for three years. I was like, “I’m making money on this. It’s pretty easy and stocks are very erratic.” It feels like the right move after. That’s why a lot of times people are trying to decide how they can allocate their funds.
Real estate is one of those things that has a learning curve where you have to take some time to learn it a bit more than other asset classes. Although, crypto, you have to learn. Everyone has someone on the curve but real estate is the longest. I had learned enough and felt comfortable so then I started to explore more deeply. It was like, “There’s a lot of people that are hacking houses and the returns are good.” The process is not super complicated for them.
When did you buy this place in Texas? What year was that?
It was 2008.
This was before you sold all your stock. You saw the power of real estate investing for yourself and then you read Rich Dad Poor Dad. You affirmed through BiggerPockets and Rich Dad Poor Dad, then you’re like, “I’m all-in.” Stocks, sell, real estate and buy. What happens when you started to get more intentional with it in 2010 and 2011?
I bought a couple of other properties. I worked in San Francisco and get bonuses. I would buy real estate with that money. I also did a self-managed IRA where I took cash out of retirement and did it. It was more learning and moving quickly but it was in 2015 when I realized, “I have several properties. They’re all $100,000.” My background is in finance and financial modeling. With these small bites of value that even though I’m making some passive income, until I get to larger price points, my appreciation is not going to become material and change my life. It’s hard to do that with a $100,000 house.
In 2015, I picked up everything, moved to Austin, Texas and started to buy properties there and rent them by the room. That was the evolution. In 2008, I bought a house, watched it for a couple of years and got familiar. In 2010, I started to dive into the concepts. In 2015, I moved to Austin, got local and rented them by the room.
Do you feel like Austin was where your for-real deal happened? Were you intentional and bought everything with a focus, plan and strategy so that’s where we should go to do a deep dive?
Yes. Austin was the place where I got real about real estate investing. I bought 4 units in Austin in the first 6 months of moving there. The value of Austin property by itself is 3X or 4X like those affordable Midland markets like a seven-figure portfolio. I was managing my properties which seems easy, especially when you’re in a rich market but when you do it yourself, you’re like, “It sucks.” It also teaches you about a lot of the pieces of real estate investing that I was blind to when I had a property manager handling my other properties.
We love to take it slow because a lot of our audience is in their first deal or before their first deal. It’s great when they can see the breakdown. Can you tell us a bit about that first deal that you bought in Austin? How did you find it? What does it cost? What do you rent it for?
My sources were a cup. I had a couple of investment agent contacts. I didn’t do anything aggressive like off-market deal sourcing with postcards or drive. I was looking at the MLS and through networking. The property I ended up finding was a duplex in North Central Austin pretty close to the new soccer stadium there. It was listed for $285,000 and then I found that they had down payment assistance in Travis County, which means I didn’t have to put any money down at all to buy it, which was the coolest deal of my life. I bought it for $285,000 and appraise it for $315,000 during the surprising purchase process and then we rented it out. I lived on one side, rent out the other side and rent out one of the rooms.
What was your mortgage payment on that? What were you getting for rent when you moved in?
At the time, the full-duplex was rented out for $900. On my side, I was living in one room and rented out the other room for $500. I was making about $1,400. I was doing the cashflow numbers and generally, my thoughts were Austin is an appreciation place so I’m going to try to be breakeven and pay for repairs out of pocket. Breakeven meant to cover the mortgage and an escrow account.
That’s a good thing to say because when you’re in appreciating markets, a lot of people who are reading are probably in markets like Seattle, Denver, Austin or even LA and San Francisco like those higher price areas. You don’t even need to break even when your house hacking. You can even pay a little bit towards the mortgage because a lot of your wealth is going to come in that appreciation. In 5 to 7 years after rents increase and all that, eventually, it’ll be cashflowing too. That’s super important to remember when you’re buying properties in more expensive areas.
It’s a net worth equation like, “How much money did you put down? What is your net worth from that property in a year?” In that case, by buying it, my net worth went up by $30,000 because of the appraised value. In a lot of these expensive markets, it’s probably not sustainable for the next years because it will become unaffordable but have an appreciation of 5% per year like in Denver and Seattle. It can be higher but you can say 5%. That becomes powerful when you’re leveraging something that your house hacking, which is essentially 30 to 1 because you’re putting in 3.5% down, sometimes less. If there’s any appreciation on the table and the net worth gains, what you’re going to get from appreciation is powerful.
I wanted to highlight that you said you found these on the MLS because a lot of times people think that if they’re going to find a deal, they have to do all kinds of creative stuff and will never find anything on the MLS. Every single thing that I bought myself and my portfolio has come from the MLS. I’m looking to buy so I’m looking on the MLS. Even though 2015 was a whole different world, I like to highlight to people that deals can be found anywhere. You just have to keep a strong eye on what you’re looking for.
Off-market deals have this mystic to them. No one is off-market. Everyone’s like, “It sounds mysterious and special or something.” Especially in a market like this, off-market deals and the quality of the properties can be questionable. Especially if you’re new and investing, finding an on-market deal can be very beneficial because the purchase process is taller and more diligent. As long as you have a strategy with your market, do it. You can make a lot of money in the purchase or your strategy. It doesn’t have to be super underpriced to get something that makes sense for your strategy. In my case, it was house hacking so getting something that was at the price was good.
Let’s try to find that. I had something I wanted to say about it.
There’s this 2010 soundbite that echoes in everyone’s mind. You have to get 70% ARV and off-market. Otherwise, it’s not a “good deal.” A lot of people can make a lot of money in real estate with different strategies. They can buy at market price. Like a house hack person, their network is going to be way higher even if they buy above market price or a little bit at five years. We love the mysterious special deal but that can get people down and miss out on making money that’s right in front of them.
Money in real estate is made over time. What a lot of people don’t realize because I’m a real estate agent so I’m hustling off-market deals a lot is they’re 90% of the time mega overpriced. Everybody thinks that their house is the most special house and worth so much money but if it’s on the MLS, the price is dictated by the market. You’re getting offers or not. People figure it out that way. Sometimes, it’s a little extra work when you’re getting them off-market. I wanted to hear a little bit about how you figured out about the down payment assistance program because there are a lot of those programs in Boulder County, which is the most expensive county in Colorado. People need to go out there and look for those options. How did you figure that out?You’ll do better cash flow in real estate as you get into bigger homes. Click To Tweet
It was from a lender. That’s how I heard about it. They’re new to investing so they’re scrambling around rapidly learning things. When you’re helping them, you’re moving around a lot and doing a lot of things but for a new investor, that’s good like exploring, learning and asking a lot of questions. You have to be respectful of people’s time because lenders and agents have jobs. By talking to a couple of different lenders, I learned a few things like the down payment assistance program. I saved $10,000, which was not that much but it was pretty cool. Your returns are high when you get money back at closing, which is what I did on that property.
Networking, putting yourself out there and talking to the right people in the space will help you add tools to your tool belt and will help you find things that you may not have heard of before. We always say the things you need to do to get started. First, you need to learn, which is reading to shows like this, reading books and all that.
The second step for that is to get to know people in your market. In that way, you know the tools and the devices and everything that they’ve used so then you can maybe go ahead and use one of the same things. Maybe if you don’t have enough money for a down payment and that’s your obstacle, there’s down payment assistance. If you don’t have a good enough debt-to-income ratio, there are products out there that are okay with a higher debt-to-income ratio or something like that. Make sure you get out there and get networking.
I liked what Brandon Turner on BP say. When he bought his first apartment building, he was talking to everyone he could that he was trying to get into real estate. When you’re getting started in something, having that energy and zeal for what you’re doing are like micro marketing what you’re doing. It gets people talking about that.
We went through Y Combinator and HomeRoom, my company. One of the things they say is when you’re fundraising, talk to everyone. You never know who’s going to connect you to that million-dollar investment check. It’s about being hyperactive and networking your face off or working hard during that deal acquisition phase.
I want to give a plug to the investment-friendly agent because you looked for that when you moved to Austin. Those agents who are investors themselves like Craig and me, know about these products because we’re out there using them. We know about all these interesting, cool things or the lenders that know about those special programs and stuff. Try to find someone with that in mind. Not as much just the agent that sells people their dream home for 30 years and then moves on. It’s a different type of relationship.
An investor-focused agent is a rare breed because they have to work a little bit harder. The house prices of investment properties are usually a little bit lower. There’s a lot of math involved. There are some benefits but some of the agents love that aspect of it. My agent at the time had bought a dozen properties in Austin in 2010. He was independently wealthy but still wanted to help investors. That’s a good spot. Those are good types of people to work with because they’ve benefitted from it and trying in a sense to give back but also are passionate about real investing and how to find great returns for themselves and other people.
Why don’t we head onto what happens next after your first property? The first property was a house hack. You’re a product of BiggerPockets like myself. What happens after the first property? Are you buying numbers 2, 3 or 4? Are you house hacking every year? What’s your strategy?
Sometimes a little faster and I didn’t go in intending to do this but what I’ve found is that if you’re to upgrade from a duplex to a single-family home, they’ll let you do it quicker. The rules on the loans in the long haul that I had would allow that. I got a 2nd house 6 months later and rented it out later. That was in Central Austin.
I want to elaborate a little bit more on that point. You go from a duplex to a single-family home. They’ll oftentimes let you not wait the whole year. Explain that. Is that a different home type?
What banks will say is if you’re upgrading, they understand. Generally, the bank will need a reason for what you’re doing. In that case, I moved from a duplex to a single-family home. It’s a higher value. That reasoning allows it to happen. I bought a house in South Central Austin near the indoor soccer arena that I’ve played out a lot. That was my reason and then I was able to get a second home. I rented out each room so I house hacked again.
I want to poke this at Craig because I have a feeling you didn’t know this, Craig, after all the deals of house hacking.
No, I learned something new every time. I swear. That’s incredible. That’s a great takeaway. If you’re reading this and you’re on your first house hack and it was a duplex, a triplex or a quad and you maybe want to get into a single-family for the next one rent by the room, you are at the 4 or 5-month mark and ready to go, talk to your lender or a different lender if your lender says no. I bet you might be able to get one sooner because it’s huge. Six months is a long time with a lot of appreciation to get in a lot of rent and all that to expedite your process.
It enabled me to move fast. Within six months of moving to Austin, I had increased my real estate portfolio by 5X essentially out of cash value. It was a good move. I didn’t know what I was doing. It worked out in the end and I learned a lot.
I want to clarify your numbers a little bit. When you moved out of the place that was your first Austin home, were you breaking even or were you making $500 a month because you were renting out a room. Where were you at?
It was essentially breaking even plus a little. I was cashflowing $100,000 a month. I ended up refinancing and my cashflow got up to $200. In a market like Denver or Austin, if you can get cashflow, you’re lucky. The rents have not kept up with the price appreciation. That was will still the case in 2015. In 2010, when my agent had bought, he had a portfolio of cashflowing Austin properties but in 2015 and beyond, it became increasingly difficult.
Are you ready to create deals in these expensive markets like renting by the room or Airbnb and all that? We’re still cashflowing in Denver, for sure but not like buying a single-family home or renting out a single-family home. That’s hard to cashflow.
The next home I bought was a duplex with 2-1 on each side. It had limitations on how much I could do rent by the room but I bought the next house after that. I was able to add rooms and create five bedrooms. At a certain number of bedrooms, you start to cashflow in Austin. In that portfolio, it started pretty lean on the cashflow side and got a lot better as I got into those bigger homes.
I wanted to let people know that real estate has these cycles. Sometimes, the first thing that happens is homes go up, condos go up after it and then you’ll see the rents rise. A lot of times people don’t realize that. We’re so short-sided with these things that we think, “The prices of homes are so high. It’s cheaper to rent. I’m going to stay in my rental,” but that’s not going to last. You need to keep up with what’s happening next and watch that whole cycle. Where is it in the cycle? What’s coming next? Even though you bought right away and they weren’t cashflowing, I imagine they’re cashflowing now. Wait a couple of years and it changes a lot.
The cashflow comes on later. If you can get in lean, it will fatten up usually over time. That’s what happened. It’s something that we’re telling investors at HomeRoom as well. It is a very lean time for yield with real estate. There are ways to make deals but property prices have appreciated drastically quicker than rents. What we’re starting to see is a turn though. Rents are starting to outpace when property value increases.If you want to invest, determine what kind of investor you want to be. Click To Tweet
We’ll start to see rents outpacing prices, which means that if you own a property, the yield on that property and the cashflow will be going up. It is a cycle. In any part of the cycle, one of the things that I learned in college is when stocks are up, you buy. When stocks are down, you do well over time. That’s how I think about real estate and how we talk to our clients as well.
In Austin, what does it look like if you have, let’s say, a five-bedroom house and rent that house as a single-family house to a family versus a rent by the room type of strategy? What is the difference in rent?
Each house is different. We say the average rent is going to be 50% higher with the renting by the room if you specifically pick the form factor that matches the maximum rent. In that case, in Austin, I’d recommend a 6-bedroom house or a house where you can add bedrooms to get to 6 bedrooms because rents in Austin are between $600-$800 per room. You’re starting to look at between $3,500 and $5,000 per month in rent. There are no houses that are renting for anywhere near that so you get a drastically more rent when you rent by the room, especially when you go dense. Austin allows up to six individuals in a house so you want to max that out.
You keep alluding to HomeRoom, your Y Combinator and all this stuff. What is it? Tell us more.
HomeRoom is an investment platform where we help investors make 50% more rent. We do that by enabling them to buy homes remotely and rent out each room separately. It’s essentially like a remote house hack opportunity. When you come to us, you live in San Francisco, you want to buy a house in Austin, you look at the cash yield and you’re like, “That’s not good,” we say, “We can get you 50% more if you partner with us to find the home, set it up and rent it out by the room.
We’ve been around for a few years. We grew about 6X over in 2021. We raised the seed round financing from some cool VCs and the team is about 50. It’s been a cool journey. Starting a company is no joke, especially when there’s software involved. It’s been cool. My best friends bought houses with our platform, which is satisfying. It’s going well enough that you trust your company to help you like your mom. You’re like, “Yes. We’re finally getting there.”
If I want to buy a house in Austin, I come through you. You have an agent that hooks it up. You have everything. You would furnish the place. You do everything. Is it turnkey or do we have to go in and do the furnishings and all that and set it up?
It’s turnkey. You come to us. We’ll connect you with an agent and a lender. The agent in each city would be someone that has strong experience with this type of model. It’d be someone like you, Craig. Frankly, if we want to come to Denver, we’ll come to knock on your door but someone that understands renting by the room, the area and the demographic. Our average age is 28. Where do 28-year-olds want to live? We will connect you with an interior designer and a contractor to furnish the space, as well as if we’re going to have bedrooms, we’ll do that. We do all the code so it’s compliant and safe.
We have a platform that allows people to book rooms like booking a hotel very fast. We have our app and software that makes that happen quickly. People can book remotely without having to see the place. It’s pretty cool. Our occupancy is super high. It’s half the price for a roommate as a studio apartment in the same neighborhood. It’s affordable and a cool community. We’ve had a few people that become best friends or get married from it. We’ve housed over 1,000 roommates.
Do you furnish the rooms as well to make it easy for a shorter-term stay like somebody who’s going to come for 1 month or 2 and not have a mattress and all that basic stuff?
Our minimum stay is 90 days or 3 months. We’re not short-term. We do that for a couple of reasons. One, we allow the roommates that are in the house and the new roommate to meet each other digitally and make sure that’s a good fit. That can be exhausting when people are staying for 45 days. Also, every time someone moves, it disrupts the house. It also separates us from short-term rentals. HomeRoom is not a short-term rental company. Our average stay is sixteen months. Our goal is getting that to two years but you can get furnished. We do not furnish the room by default. You can hit a button in your app and pay to have a furnished room.
What do you think does better, the furnished rooms or non-furnished rooms?
Non furnished, for sure. We find that people that are going to stay for sixteen months typically have their furniture or want to design their room. They want to make it home. When it’s furnished already and you’re trying to do a longer-term community, it feels more transient when it’s not your stuff. It’s cool though. Within the app, you can hit a button and transfer from Kansas City to Austin in another one of our rooms. You can move around. Your membership agreement is a time but not a place so you can transition.
We do have some people that are like, “I want a furnished room in Kansas. I want to move to Tampa and have that furnished. I want to go to Austin and have it furnished.” If you want to have that Zeus living type lifestyle where you’re seeing a lot of places, furnished is probably a better experience for those tenants.
I was curious what cities you guys are in because at first, it sounded like it was only Austin and then it sounded like some more and then you said Kansas City. How far-reaching are you?
We’re in eight metros. We launched in Tampa, Indianapolis, Pittsburg and Phoenix. We are in Kansas City, Austin, San Antonio and Dallas. Our goal is to be in every city. We want to be ubiquitous. We want an offering that if you think about living affordably with other people, HomeRoom is what you think about.
What are you waiting on for Denver?
I’m waiting for an invite. You’re the king in Denver for house hack.
Consider it an official invite.
Yes, this is huge. We’re going to Denver.Work with people who have high potential. Click To Tweet
It’s having something a little bit more legitimate than having the mom-and-pop people do this. Investing in these cities is becoming damn near impossible. On BiggerPockets, you hear everything like we want to invest for cashflow. No matter where you go, you still want a little bit of cashflow. At least that opens up the opportunities to invest in cities like Austin or maybe Dallas and Pittsburgh. Those are maybe a little bit cheaper I imagine. I don’t know. It’s great that you are hitting those markets.
On the investor side, when I was investing, I always felt like when I was talking to people in certain markets, they were very focused on those markets. I was like, “What about other markets?” It was so local focus and expertise that it was hard to compare. One of the things we’re trying to do is make it so you come in and we say, “What investor do you want to be? Do you want to be a cashflow investor? Do you want to be an appreciation investor?” We have one guy. His name is Mike, a data science guy. He’s analyzing data trends in different markets. It’s like which flavor of ice cream you want when you invest.
We do tell people that we think you’re going to make more money faster in appreciation markets typically because the leverage of that, like Denver, would be something. I loved Denver and Austin but there’s a huge appetite for some cashflow. In my experience, my Austin properties have kicked all the crap out of everything else. I’ve invested in Kansas City and Midland. Cashflow may not be as good but when you sell, you’re going to be happy. We generally are trying to make it and open up the world for people, where they invest and how they invest in real estate.
You have placed 1,000 tenants. No offense but I don’t suspect people, at this point, coming to LiveHomeRoom.com and looking for places to rent rooms. I feel like there’s probably a little bit of outreach you’re doing. What are some of the stuff that you’re doing to fill these rooms so quickly?
Someday like, “I’ve got to go check out HomeRoom for a room.” That’s typical. Ten percent of our rooms are booked directly through the website. It’s climbing very slowly but we’re getting there. We have a team in Venezuela and the Philippines. We have a split of operations. We have a team called lease marketers and a team called leasing agents. Lease marketers are everywhere. Their job is to list on Craigslist, Facebook Marketplace, Facebook Groups, Roomster.com and all the syndicated sites. The last count is 27 different places. There’s Koding.com and a bunch of them.
Their job is to get our link out there as much as possible. They come into our CRM, which is a ton of turn up. We’re building our own. We have the leasing consultants that are working that. They’ll be texting them, on the phones, doing video calls and helping them with virtual tours. That’s been working well for us. I used to do leasing myself and my all-time high was seventeen and a month or something like that. They did 37 and I was like, “You are crushing them.” That was pretty cool.
I want to go down this whole funnel with you if you don’t mind. You’re getting as many eyes as you can on each listing by putting it into most different places and then you’re calling and qualifying the tenants. What do those criteria look like for you? Do you have equipment or credit score or all that stuff that you look for in tenants?
We know 550, and 550 are no eviction and criminal. It depends like speeding tickets. We’ll let that go but like clean eviction 550. Typically, above 600, it’s full green light. Between 550 and 600, we have other conditions that apply. Some of the times that mean a co-signer. One of the things we found because our tenant base is so young are some of these folks have not established credit yet or only established credit. We generally try to work with people that have high potential. We’ve never had to go through a formal eviction in the history of our company, which is pretty crazy.
The payment is 99.7% with our methodology. We talked to them and we let them talk to the roommates and then we say that on day two of the month if you don’t pay, you start to accumulate late fees. We’re trying to build their credit and discipline in terms of payment as part of the funnel. We lowered the criteria a little bit lower than I initially had. It was 650 before and then my team talked me into going lower and trusting them to grow a bit more.
It seems to be working so I can’t argue with a 99.7% payment. If you did have to do an eviction, what would you do? It’s not a house or an address. It’s a room within an address. How would that work? Does the sheriff comes knocking on the bedroom door or what?
We’ve posted before. We hired somebody to go post on their bedroom door. We’re not doing it necessarily to embarrass them but there is some social pressure with your roommate that you share a kitchen with seeing an eviction notice on your bedroom door. There’s some additional oomph to that. With 0% attentional, we’re not trying to embarrass. How would we evict? We follow all the procedures as normal and then we get a local lawyer and go to the court. Most of the time, we’re working with the tenants because we have a bit stronger relationship than an average property management company.
We’re in an app, chat base and they can slack us. We do community events. A lot of times people know the names of our CSM team. They’ll get on the phone with them and be like, “Pay your rent or leave because you don’t want to go down this road. This is the worst-case scenario.” That’s why their collections are so high and our eviction history is perfect.
Going back to that funnel, you’re getting people from listing them in a bunch of different places. You’re screening them. Once they pass the screening, you sign the lease, get them accepted and you get them in. Once they’re in, what does the maintenance look like? Do you check in on them every month?
One thing in the funnel is we open a window of eighteen hours for them and the roommates to have a conversation. Some of the time, roommates, no one will talk. They’ll share whatever. A lot of times, the new roommate coming in will want to meet at least a couple of roommates to see if HomeRoom is legit, if it’s a good fit and what it’s like. That’s one of the things that we did at the very beginning and we continue to do. It’s a little annoying. I still think it’s valuable. In terms of check-ins, they have an app where they can message us 24/7. They can submit maintenance tickets 24/7 through the app. We do monthly main service as the tenants pay for it.
It’s part of the offering and our maids do it. It’s called maid grades. They submit a report card for how clean the house is every month. If your maid grades drop too low, then we’ll talk to the house and be like, “How do you feel about cockroaches? That is a legit problem if you are too messy.” There’s a normal distribution curve of what houses are. A lot of them are in great shape and super clean but on occasion, on the far end, it’s not quite as clean as you want. We start proactively working with them.
That’s a super valuable tool for people to get into this rent by the room if they don’t necessarily have the time because it sounds like you turnkey. How does HomeRoom make money?
We make money in two ways. As an investor comes in, we’ll connect you with an agent, a lender, an interior designer and a contractor. The agent and the lender help you buy and the contractor and interior designer will help you set it up. We cut all those introductions. Those vendors pay us for the lead generation fee. We make some money upfront for that. On the backend, HomeRoom charges a flat 15%. We don’t do a lease fee of any kind, only 15% of the rent.
We say, “We increase rent by 15% with what we create here for you. You pay us maybe 5% more than a property manager.” It seems like it’s a pretty good deal. We get very little. We think that it’s probably even too cheap. It’s all part of our numbers where we give investors like, “Here’s your 6% cash on cash returns with this out-of-pocket investment.”
What would you say are the typical returns? Let’s tick two markets. Let’s pick Austin, which is probably at the appreciating market and Pittsburg, which is probably less than the appreciating market. Where do you see the ballpark average return on investments there?
It’s a moving target, frankly. When we started in Kansas City, our initial corridor properties were a 15% cash on cash, which is like a Pittsburgh cashflow market. With the transition, even our cashflow markets are sitting at a 6% or 7% cash yield, which 2010 BiggerPockets would not be happy with those numbers. In all markets, we’re trying to be cashflow positive. We don’t go cashflow negative.Learning is the ultimate valuable thing. Click To Tweet
That includes all fees, repairs and maintenance. For Austin, you’re probably looking at 1% to 3%. We also do an ROI calculation though, which shows what we expect your appreciation will be. We have a forecasted inflation number. We will either go above that or below that to create our appreciation number.
If inflation will be about 3.5% over the next five years on average, we think Austin will appreciate about 2% higher than inflation so 5.5%. We will factor that in as well. Your cashflow will be zero but your appreciation will mean your return and your out-of-pocket will be 22%, 23%. I did a lot of math that quickly or didn’t do the math but only talked about it, to be honest. You’ll make a lot on Austin. Anytime the appreciation is above 5% and you leverage, your returns get high.
I got one last question about all this stuff. Let’s say someone is in San Francisco and they’ve never been to Austin before. They want to invest in Austin but they don’t know the areas. Are you picking the house or do they pick the house and you confirm? How does that work?
We put the deals together. We have Mike on our data science team. He created a tool that pulls all properties that come on the MLS. It will auto underwrite them but that’s how we like to screen them and then we’ll do a more detailed underwriting of the property. The properties that will match what we would say is a great HomeRoom maximizes the occupancy and the total returns for the property. There may only be 4 or 5 of those per month in some markets, maybe 10 or 15 but we would generally share those with investors. The investors would select from what we share. Investors can pick and share with us. We find that we’re good at this so we’d recommend using our recommendation engine essentially.
It seems like a very valuable service. Rent by the room is how we did it in Denver for a very long time. There are different ways to do it but if you like the rent by the room numbers and that strategy without the management and the hassle because that’s the biggest obstacle for a lot of people, then HomeRoom might be a good thing. We’re sitting here. It’s May 2022. Everyone is talking about a looming recession.
Honestly, we’ll probably be technically in a recession on July 1st, 2022 when we post a second quarter of losing GDP. In recessionary times, rent by the room would probably thrive the most because people are looking for low-cost areas. People without jobs and stuff like that are going to look for the cheapest possible thing and rent by the room might be that.
Saving 50% on rent is always good but in a recession with stagnating wages and a lack of affordable housing, it’s good. I wish there was more housing inventory, frankly. That’s the only thing that’s still a challenge even for us. The inventory of housing continues to be pretty brutal but we’re seeing room prices accelerate faster in terms of growth than apartment rent prices. It’s a pretty exciting time to be in rent by the room properties. It’s a weird time in general but rent by the room is where I continue to invest in these types of houses. I’m excited about them.
Johnny, congratulations on all of your success and all of that. We need to head into the final part of the show, which is our Final Four. Before we do, do you have any parting words of wisdom for the audience?
Do things before you feel like you’re ready. I wouldn’t say doing them thoughtlessly is good but it’s almost better to move quickly into something like real estate investing. There’s a lot of fear, hesitation and analysis paralysis. There’s a boilerplate at this point. The value is the experience and the learning you get by having stuff in your portfolio.
The value of having a perfect deal that you get in two years is not as valuable as a pretty okay deal now because you’re going to learn and learning is the ultimate valuable thing. Also, it dispels fear and you move faster and make quicker decisions. That’s super valuable too, also in achieving goals in anything. That would be my big thing with real estate investors. Make a move. You’ll usually be happy. Sometimes, you’ll super regret it. There’s both but being slow to act is like death.
It’s super cliché and we say it all the time but the quicker you can take action, the quicker you can fail and the quicker you can make that mistake. Only because you act slow, doesn’t mean you’re not going to make a mistake. You would probably make the same mistake. It’ll be two years from now instead of now. It hurts even more because you’ve wasted so much time. I love that piece of advice. Let’s do the Final Four. Z, kick us off.
Johnny, question number one. What are you reading now?
Have you learned anything?
I had this quote where your incompletion is not a problem. “A great song that only has one verse is still great. You have to write other songs to make it any more beautiful.” When you’re in startup land, everything is broken all the time but what we’re building is beautiful, cool and still incomplete. That was cool learning for me, a positive spin on the current state of our company, essentially.
What is the best piece of advice you’ve ever received?
Not to raise and take other people’s money to start the company because initially, when I started it, I was going to try to raise money from venture capitalists. The advice was like, “You could do that but with the pressure and the speed, you don’t know what you’re doing essentially.” I took my money and risked it. I realized that I sucked and then I had to learn a lot before I was even worthy of taking that next step. I did that with my cash, which felt a lot better than burning my mom’s money, essentially. Honestly, that was valuable advice from one of my advisors, Keith.
That’s what BiggerPockets did as well. I know Josh was in his basement and his underwear working his ass off for years with his money. I don’t think he ever took any money. The entire thing was bootstrapped. It was always like the company will pay for the expenses. It’s slower growth that way but way less risky. Where’s your appetite?
It’s funny that you’re in the basement. At HomeRoom, I was in the basement for three years in Kansas City, although I wore pants. That’s the only difference.
Question number three, what is your why?Do something more impactful and meaningful. Click To Tweet
My why is significance. I was working in San Francisco at tech companies and banks. It was when I worked at the bank where I was like, “This is so meaningless.” I’m trying to convince some people to change this PowerPoint meeting and that’s taken me a whole week. Someday when I’m on my death bed, I’ll be like, “I can’t believe I spent a week doing that.” I knew I wanted to do more and do something more impactful and meaningful. Also, I’ve always wanted to buy my mom a Tesla. I was like, “I’m not going to be able to do that living in San Francisco working at banks.” It’s significance. Doing something that feels like it moved the world and changed people’s lives. It’s pretty broad but it’s what’s driving me.
Is your mom driving Tesla?
She’s on her way.
Next series. Next round.
The last question is what is the weirdest thing a guest has ever done in your house, not the ones you manage?
My girlfriend makes these incredible homemade burritos. They’re so good. It’s pretty addictive. We had a double date. We had some friends come over. Sometimes you’re hungry physically but your soul is hungry like you want to eat. He went a little half. He ate two and a half burritos and then had to go spend time outside because he was worried he was going to throw up because he ate way too aggressively on the burritos. I’m not sure if he threw up or not. He didn’t tell us. The mystery of it is always better. We were all sitting in the living room with him outside sweating. We’d go visit him to see if he was okay but he ended up leaving. That’s the first thing that comes to mind.
Jonny, where can people find out more about you and HomeRoom?
LiveHomeRoom.com. You can email me at Johnny@LiveHomeRoom.com. I’m pretty responsive by email. I’m happy to answer house hack questions. I occasionally will get people emailing me from cities that HomeRoom is not in and probably won’t be in it for a while. I try to give thoughts on what I’d recommend doing. If people ask me real estate advice, it’s always like, “You should house act before buying a HomeRoom. House hack locally.” I always do that first. I’m happy to answer any questions. If you’re looking to invest remotely, it’s LiveHomeRoom.com/Invest.
Thank you so much for coming on the show and enlightening us with some of your knowledge on getting tenants and finding the properties. Also if you want to invest remotely, there’s a lot of value here. We’ll see you next time.
Thank you so much for having me. I appreciate it.
That was Johnny Wolff. What do you think about Johnny, Z?
I’m getting out my checkbook. I’m ready to rock. The concept is super cool. I feel it is so inspiring. It’s one of those things where it’s like this could have been something you came up with, Craig but you can’t do everything. It’s great that someone has the time, energy and drive to make this a reality. I see it becoming way better than Craigslist. It’s such a cool place.
I thought you were continuing to trash on me there when you said way better than Craigslist but he’s got a phenomenal model. I’m like, “I could have thought about this.” He’s putting a lot of work and effort into this and I don’t know if I envy that. If you don’t know what Y Combinator is, go back to my VC days. It is probably a crème de la crème incubator for startups. Peter Theil runs it. It’s a big deal being in Y Combinator. He mentioned it but didn’t make that big of a deal about it but it’s a pretty big deal.
You’re able to get introduced to a lot of big venture capitalists that’ll probably have a lot of backing. He’s got a lot of good mentors and people on his side. At this point, I would be fairly comfortable maybe even investing in HomeRoom, not in the investment properties but if you could invest in their company, it would be a pretty cool thing to invest in. I love his story about how we started as house hackers. He started rent by the room and then saw the bigger picture and light. Now, he’s expanding to multiple different markets and it’s becoming a big deal. That’s a great thing. Z, anything else you want to add?
We’ll have to see everybody in the next episode. In the meantime, if you could leave us a rating or review, we’d appreciate it. Share us with your friends, that helps us grow and let us know if there’s somebody you like to see on the show because there are so many interesting people out there doing cool real estate investments and we want to know about it.
Z, thanks so much for hanging out with me. I will see you in the next episode.
- Johnny Wolff
- Rich Dad Poor Dad
- Y Combinator
- The 15 Commitments of Conscious Leadership
About Johnny Wolff
Johnny Wolff is the CEO and Founder of HomeRoom Coliving – one of the fastest-growing coliving companies in the United States. After starting his career as a financial analyst in Silicon Valley (EA, SanDisk, Guidespark), he relocated to Austin, Texas to pursue real estate investing fulltime. His love for real estate investing and living with roommates motivated him to start HomeRoom in 2017, after an unusually terrible Craigslist roommate experience. In 2020, HomeRoom boasted 99% on-time rent payments, full occupancy, and zero evictions.
Sales velocity for HomeRoom is up 300% in 2021 with hundreds of happy residents across 23 cities in 3 states. Powered by investor funds, HomeRoom recently expanded to Dallas and Austin, Texas. Johnny still lives in one of HomeRoom’s first coliving houses in Kansas City, and enjoys hanging out and surviving the pandemic with his awesome roommates – especially on chicken wing Thursdays.