In 2022, 41% of renters spent more than 35% of their income on rent. As rental and living costs rise, wages are struggling to keep up. Living in a major city is exceptionally expensive, so most young professionals live in older apartments farther away to save money. With so much spent on rent, it’s unfathomable for younger generations to even think about purchasing their own homes.
But what if there was a way to live in a new apartment and save 30%-40% on rent? Furthermore, the rent includes utilities, regular cleaning, furniture, and community events. Sounds too good to be true? It’s real, it’s called co-living, and it’s on the rise.
The Case For Co-Living
The world is moving toward a sharing economy. A decade ago, both riding a taxi with strangers and living in a stranger’s house sounded inconceivable, then Uber and Airbnb emerged and became multi-billion dollar businesses.
There’s no doubt that co-living will become a big part of our lives in the foreseeable future, but building homes is not quick. A co-living property typically needs to be built from scratch because of its unique characteristics and layout.
Co-living is a complicated strategy and isn’t about simply filling up an existing unit with strangers. The building needs to be designed thoughtfully to have enough privacy, sound reduction, amenity space, and more. Property management is certainly more labor-intensive, and the developers have to navigate through local zoning ordinances and building codes to get a co-living project approved.
Although developing a co-living property is risky and time-consuming, it’s exceptionally fulfilling and rewarding. Now we’ll examine the pros and cons of co-living.
The Pros of Co-Living
Not everyone is an extrovert, but most of us want to feel like we belong in a community. In this new digital era we live in, loneliness is on the rise everywhere you look. Isolation, especially after the pandemic, has become problematic for many individuals, young and old.
Co-living works to solve the loneliness problem by pairing residents that are likely to connect as well as organizing several community events like yoga and cooking classes. In some co-living communities, there are even budgets for weekly dinners.
Overall, co-living, from a social standpoint, is working to heal some of the broken fabrics of our society.
Perhaps the best advantage of living in a co-living space is affordability, which can save tenants several hundred dollars on rent per month. For example, a new studio in Los Angeles rents for about $2,000 per month. A co-living suite will only cost about $1,400, which includes furniture, utilities, and regular cleaning.
Combined with inflation, rising interest rates, and severe supply constraints, homes are becoming more and more unaffordable. A lot of young adults have no choice but to remain as renters. But when renting is just as expensive — if not more expensive than home ownership in several U.S. cities, it’s as difficult as ever to get ahead.
Having a community manager is a great way to promote community events. Similar to a Resident Assistant (RA) in college, a community manager is responsible for addressing tenant needs or questions, resolving conflicts, organizing social events, keeping the apartment in order, and more. A great community manager can drastically improve the living conditions of the co-living tenants.
Co-living is convenient in three ways. First is the property’s location since most co-living properties are built in a popular area close to restaurants and transportation. You can get to most places just by walking.
Second, moving in is easy. Most co-living properties are furnished and allow short-term leases, so you can just pack up and move in with some luggage. All the essentials like kitchenware, beds, couches, and a TV are already there.
Third and lastly, befriending people in your building is a very convenient way to expand your network. There are tons of interesting and unique people who you could meet in a co-living space. Some of these people might own burgeoning businesses that you can work with. Others might be well-connected and can help you further your career. Some might simply become your best friends.
This is exceptionally convenient for someone who’s moving to a new city where they might not know anyone.
Higher property valuation
Although co-living properties charge less rent per person, the property is actually able to charge higher rent per square footage because of its density. For example, while traditional apartments rent at $3.00/square foot, a co-living property can charge around $4.00/square foot. Even with a higher exit cap rate, by 50 to 100 basis points, a co-living property’s valuation per square foot can still be better than a traditional apartment’s.
The Cons of Co-Living
The co-living strategy is not bulletproof. Here are some of the downsides.
The potential for bad roommates
If you’ve had roommates before, then you know it’s like drawing the lottery. You don’t really know their habits until you start living together. Unpleasant roommates can really affect your daily life.
This is why some co-living properties have private bedroom locks and bathrooms, so you don’t have to worry about the other roommates’ cleanliness as much. Some buildings even have additional sound insulation, so your room is like a mini studio. Common areas like the kitchen and living room are also cleaned regularly. Many co-living operators also try their best by doing roommate matching and hiring community managers. A community manager can act as a peacekeeper, facilitating roommate conflicts.
Nevertheless, it’s very difficult to eliminate all of the problems, so it’s a risk that co-living tenants or landlords need to be aware of.
In addition to cleanliness, privacy is also a main concern. Equipping bedrooms with locks, preferably digital locks, is a must. Noise complaints are also very common. Most co-living units don’t have upgraded sound insulation, such as adding resilient channels between adjacent bedrooms. If you’re a tenant moving into a co-living property, then you should ask the property managers how the bedroom walls are insulated.
A shared bathroom is usually a nightmare. Asking your roommate to clean the toilet or the sink is never a pleasant conversation. Providing tenants with private bathrooms is highly recommended. Adding additional bathrooms to an existing building is difficult, which is why the best co-living properties are designed from scratch and by industry experts.
Depending on how you look at it, co-living could be better or worse in terms of safety. Living with strangers can obviously be unsafe. However, if background checks are done correctly, then it might make you feel safer. Depending on which neighborhood you live in, it can be dangerous to live by yourself. For example, property break-ins are becoming more common in some cities, so having a reliable roommate is actually safer than living alone.
Lack of parking
Co-living properties almost never have enough parking. This is another reason why co-living is not really for families or people who prefer driving. However, some communities offer car rentals, so you can just rent the car whenever you want instead of paying a monthly car payment and insurance.
Of course, not having a car is another way that tenants can save money, but this isn’t feasible for most people in cities outside of New York and the Northeast.
Increased wear and tear
Because there are more tenants living in a unit together, the units get worn down quickly. Things like flooring, paint, baseboards, and doors get damaged easily and will need to be replaced. The property manager needs to check in more frequently to make sure that the property remains in good condition.
Lastly, because each bedroom lease ends at different times, the unit never really gets a full turnover, making it difficult to make repairs or maintenance. Material selection is extremely important. A property manager can save many headaches in the long run by choosing commercial-grade flooring and more durable paint.
Co-living has a place in the future, especially as affordability continues to decline and younger generations feel less confident in their homeownership prospects.
Is co-living the right choice for families? No. But, for individuals between the ages of 18-30, it offers a cheaper, more connected, and more convenient alternative to traditional renting.
As investors, it’s important to take note of this trend and potentially find ways to profit from it.
New! The State of Real Estate Investing 2023
After years of unprecedented growth, the housing market has shifted course and has entered a correction. Now is your time to take advantage. Download the 2023 State of Real Estate Investing report written by Dave Meyer, to find out which strategies and tactics will profit in 2023.
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.