Matthew Ryan Real Estate Background:
- A social entrepreneur, founder of Re-viv, which addresses the market inefficiencies in community revitalization efforts
- Primarily focuses on the multifamily value-add and development space in distressed areas
- A previous guest on episode JF1593
- Based in San Francisco, CA
- Say hi to him at www.re-viv.com
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Best Ever Tweet:
“The best way to think about co-living is monetizing an existing market” – Matthew Ryan
Theo Hicks: Hello, Best Ever listeners and welcome to the best real estate investing advice ever show. I’m Theo Hicks and today we’ll be speaking with Matthew Ryan. Matthew, how are you doing today?
Matthew Ryan: Doing great. How about you, Theo?
Theo Hicks: I am well, thanks for asking, and thanks for joining us again. So Matthew was previously interviewed by Joe on episode 1593, so make sure you check that out to learn more about his background. Today is Sunday, so it’s skillset Sunday. We’re going to talk about a specific skill that Matthew is focusing on and how you can apply that to your business… And that is going to be co-living.
Before that a little bit about Matthew. He is a social entrepreneur, founder of Re-viv which addresses the market inefficiencies in community revitalization efforts. His focus is on multifamily value-add, multifamily co-living now, as well as the development space in distressed areas. As I mentioned, the previous episode is Episode 1593. He is based in San Francisco and the website is Re-viv.com.
So Matthew, before we get into talking about co-living, could you tell us just a little bit more about your background and then what you’ve been up to since we last had you on the show?
Matthew Ryan: Yeah. So my background was in the energy efficiency in green building space, specifically focusing on how we can make residential and commercial buildings more efficient. Back when I started the business in 2010, this was a blossoming industry. I ended up taking that skillset that I learned, the kind of comprehensive knowledge of building science and how we can build more efficient and advanced structures and dovetailed that into community revitalization and essentially value-add investing and development.
Theo Hicks: And then now you’re doing the co-living, right? That’s your focus now.
Matthew Ryan: Yeah. Yeah. [unintelligible [00:05:01].09] did the last episode, just to let the listeners know. So we were talking about opportunity zones back then, and that was actually around that time that we’ve launched our opportunity zone fund. And the primary focus was co-living, was to kind of overlay this blossoming industry with this now extremely advantageous tax deferral strategy with opp zones. So we launched our fund, we raised about a million and two million in capital in the early part of 2019. I spent the rest of the half of the year trying to place that capital, and got a little tripped up; we had a lot of difficulties. As everyone knows, we were very much at the top of the cycle, but here we are, back at it again.
Theo Hicks: So I’d never heard of co-living applied to real estate before. This will be very new to me, which is going to be good. I can ask you questions as a complete noob. So you said that the strategy is the using of opportunity zone funds, and then the properties that are developed, those will be co-living spaces, or are these two separate things?
Matthew Ryan: Yes, you hit the nail on the head. And then the as you know, with opportunity zones, the majority of opportunity zone investments are developments. We started in the value-add space, so we’ve kind of created a hybrid, looking at adaptive reuse, converting empty warehouses and districts in Oakland and Berkeley that can be converted into co-working, as well as co-living. And then also taking a single-family home in an empty duplex, triplex, quadplex, and utilizing the existing zoning. We’re looking at lot sizes that are much larger, where there’s available footprint and expansion. And in the early part of 2019, there was also an advancement in California law that allowed us to add up to two ADUs.
Theo Hicks: What’s ADU?
Matthew Ryan: An ADU is an accessory dwelling unit. So it’s a granny flat. So what it’s allowed us to do is basically take, say, a traditional 2000 square foot home that they had three to four bedrooms, right? And expand the footprint of that building up to 4000 square feet, and getting it up to 12 bedrooms. So we’re actually increasing the density between 200% to 300%. And in the context of what co-living is, and I know you want to touch on that, think of it as college-educated 22 to 35-year-olds who are struggling to find an affordable place to live, but they want to live close to a major metro where the high-paying jobs are. Sounds familiar? I’m sure some of us have experienced it or we’ve had friends who have experienced it.
And you know, what’s traditionally happened is those roommates had been bunking up in three and five-bedroom homes, splitting the rent… But then you’ve gotta figure out how you’re going to furnish it, how you’re going to split the utility bills, who’s going to clean the toilets, who’s responsible for the dirty dishes… So the best way to think about co-living is it’s monetizing an already existing marketplace. We call it the Craigslist marketplace, right? Apartments.com and so on and so forth. And it’s really just kind of capitalizing on this roommate situation, but adding degrees of efficiency.
So someone wants to rent a room, they don’t have to worry about getting a bunch of roommates together, putting a big deposit down, and taking that risk. They can simply hop on their smartphone, go to some of these co-living platforms, and look and see what inventory they have available, schedule a viewing, go and meet the roommates, and plug right in.
So it’s a turnkey strategy for people who are new to a city, again, looking for an affordable place to live. They want to be in these desirable areas, but they’re really struggling to find a place. And that’s the simplest way to break it down. There are all different shapes and sizes of co-living developments now. Developers are now integrating them into their mid-rise to high-rise developments. But that’s really the best way I can describe it. And then, of course, you’re sharing furnished areas and common spaces. So it’s not like a true apartment. But it’s really for those people who want an affordable place to live. The typical rents in a co-living are anywhere between 15% to 25% below the market rate and rent of a studio.
Theo Hicks: Okay, so let’s start from the beginning. So if I’m a developer, and I want to develop a multi-family building, with co-living… So do I need to develop a different unit for co-living? Or is it the same unit as before?
Matthew Ryan: Typically, you’re going to see a higher bedroom count. So the traditional multi-family developer, he’d have a one to three-bedroom unit. And if they’re set up in the development space, they’re set up as pods, right? So anywhere between four to six bedrooms, sharing a large common space. So you’re seeing a little bit bigger footprint, which you traditionally didn’t see, and a little bit more sharing of common space in lieu of that, where sometimes you’re using an old Victorian or an old house that had crammed up common spaces. These guys are actually expanding common spaces, expanding now offices post-COVID, where people can have a place to work from home. And they’re even integrating into their bedrooms as well. So does that answer your question?
Theo Hicks: Yeah, it did. So these are the development strategies, but also… I lived in a house in college that had 13 bedrooms in it, I think. So it can be the brand new development or you can be taking an existing, as you said, Victorian type home that has a ton of bedrooms and then turning it into co-living. So that all makes sense.
So if I’m developing an apartment, is it something where it’s I’m developing one? Or would it be like a 100-unit apartment that has a percentage that is co-living and a percentage that is regular? Or would it be all 100 units co-living?
Matthew Ryan: Both, is the short answer. People are also taking apartment complexes that have larger living spaces, common areas, maybe they’ve got a formal dining as well as a kitchen, and converting those extra spare rooms into bedrooms now. So you had a two one with an extra-large space, you can get an extra bedroom in there. That’s one way of working at it, but you’ve got to be careful; you don’t want to create a cramped space. Ground-up developers, yeah, they’re basically doing a four to six-bedroom, sharing a common space… They can start from scratch. Our strategy is typically taking these larger historical homes that have a lot of common space. Again, formal dining rooms, maybe two living rooms, finding ways to convert them, but then also expanding the footprint of the building. Sometimes they have an illegalized basement, so we’ll put a new foundation underneath it, expand the basement. The ADU law allows us to add up to 1,500 square feet additional.
So we’re kind of doing a value-add strategy, plus adding development, adding square footage, which again allows us to increase our bedroom count, squeeze the cash on cash return out of an otherwise not-cash-flowing assets… And again, provide a much superior product to those guys and gals out there just trying to rent on Craigslist and do the buddy-up system.
Theo Hicks: When you’re expanding, is it expanding horizontally? Or do you expand vertically, too?
Matthew Ryan: Wherever the lot will allow us and we can get that back. The nice thing about at the ADU law is typically residential zoning [unintelligible [00:11:48].14] 10 to 15-foot setback. Well, with ADU law you can do it right on the backlot line. So you don’t have to have to work about those setback rules, which is really, really nice, because a lot of these Victorians are built on these very fixed, large, five, six, 7,000 square foot lots, that are practically unutilized. You can fit almost another house there if you wanted to, if the current planning and zoning would allow you to. And that’s where the ADU laws come in and help us kind of expand that footprint.
Theo Hicks: Perfect. So my next question is going to be about where these types of properties are in demand. So can I do this anywhere? You kind of got it a little bit, but I guess be more specific, what are the characteristics of the ideal market for co-living?
Matthew Ryan: It’s funny, because I thought that definition was very defined to what we’re doing, which is extremely supply-constrained markets, with very high barrier to entry, high rent on a one-bedroom; San Francisco, now Oakland, which I think is now the fourth or fifth most expensive metro in the US… The New Yorks, the Bostons, the LAs… But just the other day I met a co-living operator who’s now taking a four or five-bedroom house in the suburbs in Charlotte and converting that into co-living. He’s seeing very strong demand, getting great cash on cash returns, and doing a fantastic job building a portfolio.
So I think, again, it’s from a product and a geographic area, I’m seeing that definition continue to expand. Most of what we think of in co-living is high density, urban areas, expensive markets. But again, we’re seeing success with other operators who are moving into the suburban market in an already somewhat affordable market like Charlotte, out in the suburbs. And he’s obviously seeing demand for his product.
So there is no right answer to that question, to be honest, because again, we’re constantly seeing this idea of co-living evolve, and people, again, just monetizing on that existing model of alleviating those pain points. Because normally, if you’re going to rent a house, and then get a bunch of roommates, you’re going to become the master tenant. It puts a lot of burden on someone who doesn’t traditionally have property management experience. I remember from our conversations, you’ve been through the hell of property management, right? So it’s not an easy game, and it creates a lot of tension. So I think what a lot of these operators are doing a very good job is not only are they taking that burden away from someone, but they’re also adding in community events. They’re also adding in value to those individual tenants. And I think that’s really interesting.
Theo Hicks: Okay, perfect. If I own one of these, how do the leases work on this? Is it an individual lease per room, and I’m charging per room? Or I think you mentioned it’s not going to be one lease one person, and the tenant collects rent from everyone else. How does that work?
Matthew Ryan: Yeah, it typically is a master lease, and then you’re subleasing individual rooms. As far as the larger developers, you’re traditionally going to have probably a professional management company in place. And again, they’re assigning individual leases for the rooms.
Theo Hicks: So the person who owns it – is he the master lease person? Or is one of the tenants the master lease?
Matthew Ryan: Well, typically the property manager — excuse me; let me back up. So you know in the smaller developments we’re instituting professional property management, which is technically the master tenant.
Theo Hicks: Okay, got it. And then you mentioned before about co-living platforms. So you said it’s capitalizing on the Craigslist market, right? That’s kind of what I thought about. And I know Joe – he lived in New York, and that’s how he found a roommate, was on Craigslist. So I know people are doing this already on Craigslist, but are there specific platforms for co-living?
Matthew Ryan: Yeah. And when I say a platform, fancy word for a co-living operator, a property manager, right? But when I’m talking about platforms, they’re instituting these technology platforms where someone’s now just going to their website, here’s the contact number, call me and I’ll set up an apartment viewing. These guys are going so far as they’re creating 3D models with the internals of the building, especially since COVID, especially the ones that are VC backed. They’ve got mobile apps where people can go on there and check inventory, they can scroll pictures of the rooms, they can set up leasing on their phone. So they’re really just taking this a step further and literally building a platform for people to be able to communicate with them, very much like the high-end multi-family leasing companies do. So the level of sophistication that they’ve instituted is what I mean when they talk about a specific platform.
Theo Hicks: I see what you’re saying. So it’s not like a Craigslist for co-living, you’re talking about this specific — like your company would have these technologies that the renters can use to have an understanding of what’s available… Just like if you go to a professional property management company site, and it says, “Here are all the available units we have for rent.” You have that, but then it’s a lot more; it’s as much detail with the models as those. Is that what you’re saying?
Matthew Ryan: Correct. We want to distinguish that there are developers who are vertically integrated in providing the property management in-house. There is few that I know of who are doing that on developing co-living assets as well as managing, but it’s typically the property manager who’s offering those platforms and services for the tenants to be able to go there and check that out. As a developer, we’re not; we’re just simply developing the assets and doing like every developer does, turning it over to a property manager who specializes in co-living, and then there have their degrees of setting up their own platforms for tenants to be able to view and check out the apartments, and lease, and all that fun stuff.
Theo Hicks: So after you develop, are you selling them? Or are the management companies managing them, and you’re still getting the income from that?
Matthew Ryan: Yeah, our strategy is and probably will be to hold over the long term. The reason behind that right now is there isn’t a lot of comps for co-living. The debt market is starting to approach co-living differently since COVID. So I really don’t think it’s advantageous for anyone to be trying to develop a co-living asset and then turn around and sell it, I think you’re actually going to lose a little bit of value in the marketplace until we start to see this make its way up through the chasm, through the adoption cycle, and it becomes more familiar, it becomes more of a regular part of multi-family, which every industry expert has agreed it will be; like, this is a permanent segment. But there’s still some trepidatiousness, and there’s still a lot of unknown in this marketplace.
So that’s not only our motive; we’re traditionally a long term buy and hold value-add investor. But that has also solidified our desire to not only develop assets, but to hold on for the long term, because quite frankly, we think over time people are going to see this 15% to 25% net operating premium that we’re getting on a co-living development versus traditional multi-family, and we think that those assets are going to essentially be worth more. So right now you’re not really getting that value; that level of value is not really being appreciated in the marketplace.
Theo Hicks: That totally makes sense. And so again, on the front end, how is the underwriting process? Not the due diligence, but like before you’re submitting an offer on these properties, how are you high level coming up with the purchase price? So basically, how do you know what rents you’re going to be able to get, and then how do you know the cost of the rehabs?
Matthew Ryan: So we’ve integrated with a very strong [00:18:46].13] and general contracting… Fancy term. A design-build company, general contractor. So they can really help us navigate the nuance, the development, the entitlement phase, which is very short, as well as the construction. So that makes it really easy from an underwriting perspective for us to be in constant communication with them when we get a property, that are generally all the same, but again, they all have little nuances. So that’s been a key portion of our underwriting.
The second piece is it’s extensive. So we’re looking at a couple of different things. There’s now enough inventory that we can go out to other co-living operators who have assets on the ground and see what they’re charging; it’s very traditional for multi-family. The flip side of that is we’re literally going to the Craigslist roommates section, and as well as Craigslist listings for two, three, four or five-bedrooms, and saying “Okay, if we were to split this amongst all roommates, what would be the price per head? What’s the average rent for a roommate?”
We just did this for a property that we’re under contract on right now, where you literally have three levels of consideration. And just like in the multifamily space, now you have to look and see “Okay, my roommates [unintelligible [00:19:53].06] say 1,500 a bedroom. If some were to split a three-bedroom that comes out to around 1,550. But my co-living operators were fully furnished, very high-end products, very well developed.. They’re more 1,700 to 1,750. So where do I land in all this, right? You have to make that determination based on the product that you have available to you, what finishes you’re going to institute… And also trying to keep up with how much supply is out there in that marketplace.
So when it comes to underwriting, those are two key components, just like any value-add investor, right? Your construction costs and your rentals. We will typically on an in-the-door basis, we’ll look at a company like Rentometer, who’s aggregating listings, and we’ll just say, “Hey, the studio rent is 2,000 bucks.” We know we’re going to have to be between 15% to 25% below that; let’s benchmark it at 20% in underwriting.” And that’s how we’ll evaluate the deal as it comes in the door.
The process I just described is obviously once we’re getting a property that we’ve submitted an LOI, or we submitted a purchase sale agreement, we’re starting to get the feeling that the deal is going to maybe go under contract, and then we’ll start doing that extra leg of due diligence. And that’s the extensiveness of our underwriting process. It sounds very simple, but of course, it’s fairly complex. And of course, we spend a lot of time building our performance up to where we can with our own in-house metrics be able to quickly analyze these deals. We’ve gotten to the point now where the smaller co-living deals we can underwrite in 45 minutes.
Theo Hicks: Something I think about – you might have mentioned it before, but it’s just clicking now… So when you say furnish, you just mean the common areas need to be furnished, right?
Matthew Ryan: Correct.
Theo Hicks: Again, this is kind of super-detailed, but are you putting in silverware? Who buys the silverware? Who buys the towels?
Matthew Ryan: Oh, I think that’s a great question. Towels, I’m not sure of. I think that’s what you’ve got to bring your own, especially in the days of COVID. But yes, traditionally, all the furnishings, all the kitchenware, all that stuff is there. Again, they try to make it as turnkey as possible. And there are also operators who are going out there and furnishing their apartments. Some people have differing opinions from a liability perspective, from a tenant preference… But the majority of the operators that I know – very high-end finishes; some are even instituting interior designers to come in here and make these spaces much nicer than the places you and I probably lived in coming at college.
Theo Hicks: Seriously.
Matthew Ryan: Yeah, yeah. So the level of detail there is great. And yeah, most of that stuff is just well finished. And everything’s pretty much supplied, and stocked, and ready. All the way down to the toilet paper and those types of things. All of them have their own cleaning plan. They all have their own cleaners coming in cleaning the place regularly.
Theo Hicks: I can definitely see that there’s going to be a lot of demand for this in the future, for sure. A hundred percent. Alright, Matthew, is there anything else that you want to mention about this strategy, about where people can learn more about you and your company before we sign off?
Matthew Ryan: Yeah, I would just like to say that there is still a lot of degree of doubt in the co-living space, especially with COVID. And we’ve seen this just in the last two months. And I would just like to remind your users – just let’s rewind, let’s go back to say March, or even further, let’s go February, January, December of ’19, and think about the world that we lived in prior to COVID… Because we’re also seeing this – everyone’s moving out of the urban core, everyone’s flying to the suburbs… And there’s a lot of doubt being sown in the co-living space. And for me, it’s very simple – just go back to the world that we were in before, where 72% of all the jobs created out of the last recession were in metros with over a million people. There was a reason why people are flocking to these [unintelligible [00:23:26].17] and there’s a reason why people are going to be flocking to them the future. And once we have a vaccine developed, and we’ve moved past this, I think a lot of the concerns – that are founded, but they’re a little unfounded, they’re a little irrational, about the co-living space… I challenge people just to think about that. The pandemic is a temporary situation, and co-living is very much, in my perspective, a long-term trend.
Theo Hicks: Perfect, Matthew. It was great catching up, and thanks for going in a lot of detail on this co-living strategy. We talked about some of the advantages from both the operator developers’ perspective, as well as from the renters’ perspective. We talked about the strategy… You could develop a new property and turn that into co-living, you can find one of these big — as you mentioned, what your company specializes in are these big single-family Victorian homes, lots of rooms and common areas… You can buy something and expand upon it horizontally or vertically. There’s really a lot of different options you have for the type of property you can buy or create to do this.
You also talked about the market and how you thought that it initially would be the high-density urban areas with really high one-bedroom rents, with very low supply, but then you heard of someone who’s doing it out in a suburban area… So there’s really no specific definition for the market, it can really work anywhere. Maybe a good thing to do would be just go on Craigslist and see how many people are looking for roommates.
We also talked about the underwriting process, and the way you’re approaching the construction cost is partnering with a company that specializes in design and building. And then for the rents, depending on where you’re at – if you’re in one of these high-density urban areas, it might be that inventory to do the traditional rent comps. If you’re not, then you can go on to the Roommates section on Craigslist and calculate comps that way; put a Rentometer, take a look at the studio costs and then reduce that by 15 to 20%, and do it that way.
You said a lot more, but that’s just all I got in my notes… So it’s definitely worth a relisten. At the end, you mentioned how there are doubts around co-living, but if go back to this time last year, I’m sure everyone thought this was the best idea ever. So this situation we’re going through now is temporary.
I can totally see this being a huge thing in five to 10 years, especially with people coming out of school and you’re moving someplace you don’t know anyone. If I move somewhere and I didn’t know someone that lived there that I could live with, I would go on Craigslist, [unintelligible [00:25:51].08]something like this. Matthew, again, appreciate you joining us again today. Best Ever listeners, as always, thank you for listening. Have a Best Ever day and we’ll talk to you tomorrow.
Matthew Ryan: Thank you, Theo. I appreciate it.
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