Frank Furman 0:00
We run for checks on prospective residents so we do a background check credit check income verification employment verification so everyone coming in applies first to become a passport member and they go through those you know they can meet that criteria. Once they do then they are able to book rooms essentially so you’ve listed this property same as you would on Airbnb or anything else right you know, you create a listing, you set the prices you upload pictures, you know, it’s it’s we didn’t exactly invent that concept. And then the residents you know, they come they apply to become members they get approved and then they can actually book the rooms they’re you know, looking on the map and say what’s close to work or what’s the price point but I like
Announcer 0:45
Welcome to CRE PN Radio for influential commercial real estate professionals who work with investors, buyers and sellers of commercial real estate coast to coast whether you’re an investor, broker, lender, property manager, attorney or accountant We are here to learn from the experts.
J Darrin Gross 1:05
Welcome to Commercial Real Estate Pro Networks, CRE PN Radio. Thanks for joining us. My name is J. Darrin Gross. This is a podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio.
Today, my guest is Frank Furman. Frank is the co founder and chief growth officer at Pad Split, a real estate technology company headquartered in Atlanta, Georgia. Landlords list their properties on pad splits marketplace and are connected with workforce renters. In a shared housing room rental model. Landlords earn 120 229%, higher net operating income on average, versus traditional single family rental model, while working members of our community have a more affordable place to live. And in just a minute, we’re going to speak with frank about Pad Split, and how it works and its model and what it’s doing for its users. But first, a quick reminder, if you like our show, CRE PN Radio, there are a couple things you can do to help us out. You can like, share and subscribe. And as always, we encourage you to leave a comment, we’d love to hear from our listeners. Also, if you’d like to see how handsome our guests are, be sure to check out our YouTube channel. And you can find us on youtube at commercial real estate pro network. And while you’re there, please subscribe. With that, I want to welcome my guest. Frank, welcome to CRE PN Radio.
Frank Furman 2:47
Thanks for having me. Appreciate it.
J Darrin Gross 2:49
Yeah, I’m looking forward to our conversation today. But before we get started, if you could take just a minute and share with the listeners a little bit about your background.
Frank Furman 2:59
Sure. So I grew up outside of Philadelphia, and went to the Naval Academy for college, majored in aeronautical engineering, did a quick stint in grad school at Johns Hopkins and got a master’s degree in applied physics from now as a commissioned officer in the Marine Corps. So I spent about seven years as an infantry officer commanded at the platoon and company levels to a couple tours in Afghanistan in kind of 2009 and 2011. worked in r&d for a little bit managed portfolio r&d programs for the Office of Naval Research for the Navy in the Marine Corps. And then I did a kind of total 180, I left the Marine Corps took a job with McKinsey and Company in London. So I was working as a management consultant for several years along the way, kind of during this time I got I got married, and you know, started having kids and eventually transferred to our Atlanta Office while at McKinsey and and that sort of along this way, you know, again, I got married my my wife’s brother Atticus, who spoiler alert is, you know, one of my co founders here at pad split. And our CEO, you know, I’ve been investing in projects, and he’s sort of successful real estate entrepreneur, he built this, actually several businesses, but real estate investment, a contracting company, but you know, I always been on the passive side, it was kind of generally aware of what he was doing, but never really on the operating side. And, you know, I had moved to Atlanta, I eventually left consulting, we’re having another child and my wife was going back to work and said, You know, I had this idea, they actually doing it since 2009, this kind of room rental model, this kind of workforce housing model, and, you know, he’d build up a big portfolio of single family homes and apartments and so on, but it’s like, you know, this is the most profitable part of my business. I know what works but you know, there’s operational challenges and so on, but, you know, it could be really big, you know, no one else is really doing it at scale. No one else is doing it across markets. Really. You know, maybe the time is right, you know, technology’s come a long way from the smartphones, kind of the conversation around affordable housing has really changed, it’s kind of on top of everyone’s minds. So that that was kind of where where things started, we, you know, I began sort of helping out on the side is really kind of a side hustle is sort of something to do, I was kind of bored with work. And, you know, I, again, I’d left consulting and left kind of a 60 hour a week job and went to more of a 20 hour a week job. And, you know, because you can only get in so good a shape, you know, at some point you, you kind of look for something, and, and eventually, you know, start bringing on customers, and we kind of got to the point where, you know, we’ve been accepted to a tech accelerator brought on a third, a technical co founder, John O’Brien, is kind of your, you know, standard issue, you know, Stanford, you know, PhD in physics guy, and he’s the smart one. And it’s like, Okay, well, you know, we I didn’t quit my job, you know, I think we’ve got something here. And so that was kind of summer 2018. And we kind of have been grown since since now we’re up over 100 folks with closing on 2500 doors. So we’re moving along everyday is a little bit of a, you know, a struggle, certainly. But we’re still at that stage, but definitely grown a lot since then.
J Darrin Gross 6:14
Awesome. Well, that’s exciting. And first, I want to make certain to acknowledge your your service, I totally appreciate yours, and all the military service to our country. And second, I want to ask you a question. You mentioned something about r&d. And if I understood right, on the timeline, you were in the military at the time, and I was just kind of curious, is that? Did I hear that right? Or is that?
Frank Furman 6:38
It? That’s right, yeah. So after my after my time in kind of operational units, I was a Third Battalion, fourth Marines, I took a, I transferred to a staff tour in DC at the Office of Naval Research. So I was I was a captain in the Marine Corps, still still kind of active duty, but yet managing a portfolio of r&d programs. So I would fund research at government labs, companies, universities, that sort of thing. I’m mostly focused on logistics technology, so water purification, micro grids, kind of alternative energy projects, supply chain kind of analytics, those those sorts of things.
J Darrin Gross 7:16
I think, often it’s easy to think of military as one thing, opposed to all of the support behind it, to make it operational, but again, thank you for your service. Well, let’s, let’s let’s talk a little bit then about pamphlets. So it’s not like your brother in law was he investing just in like, his own portfolio, and that was how he came upon this model was at the
Frank Furman 7:45
zoo. So he had, he’d been a broker, he’d always been in real estate, he graduate from Yale, and Gosh, probably knows, maybe 2002, something like that. came down to Atlanta, had been working for a few companies, but always, always kind of real estate assignment, he went off on his own and was a commercial broker, you know, with a couple partners. And that business essentially went under in 2007. You know, he’s on the land side, so it hit early, and, but he’s looking around and thinking, Hey, you know, all these houses are selling for $20,000, maybe I should buy some houses. And that turns out was a good idea. So he, he kind of saw something that other people hadn’t released not yet. And, you know, build up this portfolio, he, he brought on a partner kind of early on. And so he and Stan, his partner built up this this business try and which is still, you know, going concern, it’s still still upgrading. But, you know, he really kind of stumbled into this. I mean, he bought a bought a property in southwest Atlanta, and he was just buying, what was available, right is, you know, at that time, you have to borrow hard money, and, you know, but you can buy cheap and buys this house, and the two neighbors combine this image and they say, Hey, man, you know, we’re, our house is being foreclosed on. We’re getting you know, we’re getting kicked out of our house, we want to rent rooms and your rooming house. And it’s like, I know what you’re talking about. This is a normal rental, you know, I’m gonna I’m gonna rent it section a, you know, this is, I don’t know what you’re talking about, like, brother, like, look at the house, you know, why is it cut up this way? You know, why do you Why is it set up with that with locks on the doors, you know, it’s a rooming house will pay 100 bucks a week each. And he’s looking at it and saying, Okay, I got all these bedrooms, I get 800 from the Housing Authority, or I get 100 a week. Oh, my gosh, that’s more than twice as much money. So he did it, and then did another one in 2012. And kind of it was always sort of this small part of his portfolio. And it’s the kind of business that in some ways, you know, people look at and they say, Oh, you know, I bet my kids would understand that, you know, sort of young people sharing and I was thinking, no, your grandmother’s want to get it because this is actually how people used to live in particular single people, you know, kind of pre zoning laws that kind of came about in the 70s You know, actually, if you if you really go back, you know, after World War Two, a lot of or even actually, during World War Two, a lot of building code necessitated having boarding boarding units, because that was where young men and women had to live, you know, there was, there were no other options, you couldn’t just get, you know, a bunch of young men and a house has trouble, you know, but a man living with a family working in a factory that was kind of a stable sort of situation. So, this was sort of a norm, and still is in much of the world. But we kind of got away from it, and, you know, culturally, and certainly through kind of zoning, and, you know, building codes and so on, kind of got away from it. But, you know, this is a old way of living and really, you know, most folks, they think about it, say, Oh, you know, I did that in school, right, you know, I had a house and we shut it down, I, you know, I rented room and was fine. Or people say, Oh, you know, this is what my, you know, what my parents are doing and my my grandparents are doing now that they’re in assisted living, and they sort of have it for some reason, that sort of missing middle, you know, kind of once you graduate from school, but before you need assisted living, it seems quite foreign to us. But but that’s really where we focus is how do you bring that kind of student housing dynamic, that kind of assisted living dynamic in terms of the space, but to kind of working folks. So you know, people who generally can’t afford market rents, but are working kind of full time and getting by but and if you can do that, just like with student housing, or kind of assisted living, generate much higher returns? Because there’s huge unmet need?
J Darrin Gross 11:36
Yeah, I’m thinking the model, or at least the the term that I’ve heard referred to this kind of model in the past was like SRO single market, but he kind of thing is that does that?
Frank Furman 11:46
Absolutely. Yeah. I mean, that’s, that’s the idea. That is a term that you may and before other people use regularly, and, you know, unfortunately, not many others. But yeah, sorrows is kind of a traditional designation for it, you hear kind of other terms, some of which are, you know, you hear kind of rooming houses and boarding houses, those are a little different, because they typically including the provision of meals, but the concept is, you know, what I like to say is my house, I’ve six people living here, it’s not because I’m crazy, or, um, you know, whatever, it’s, I have a family and, you know, we share space, and I share a bathroom, I share a kitchen, that’s what normal people do to drive down the cost per person. Now, unfortunately, my house, I’m the only person paying the mortgage, but that’s life. But, you know, it’s, it’s something that everyone does, however, we have this kind of cultural idea that people need to have their own space. So for example, here in Atlanta to build a new apartment, he needs 760 square feet and a parking spot, or parking spot in the city, it’s going to cost you at least 30 grand to get set up. And you know, concrete costs would cause piping cost with costs. So by the time you bill, and 760, square feets a lot of space, I mean, there are multimillion dollar apartments in New York City that aren’t 760 square feet, it’s a lot of room for a single person, I don’t have 760 square feet in my house, I am shut back in with spare bedroom as I’m doing this podcast, you know, it’s it’s like. So the the barrier to entry for a single person is, is really high unless you’re a hire. And so what people do is, you know, they shared space, that’s kind of the way it works. But for people who are unmarried people who aren’t high earners, you know, what do they do? And that’s, that’s kind of our sweet spot and, and kind of a neat, we answer,
J Darrin Gross 13:28
got it. So, a couple things come to mind with with kind of the, the clientele that that your is your target market, if you will. If I understand kind of the concept is if I’m a landlord, I’ve got a place around, I can listen on pad split. And then and then you’ll match up with with prospective tenants that need a place to stay. And so if at that point, I’m assuming there’s a portal, I go on, I list my property. Walk us through the from there. And from that point forward, are you doing any screening? Is the screening up to the landlord? How involved is pad split? Or is it more just a matchmaker?
Frank Furman 14:13
Yeah, so we’re quite involved so we we run for checks on prospective residents so we do a background check, credit check income verification, employment verification, so everyone coming in applies first to become a passport member, and they go through those, you know, they can meet that criteria. Once they do then they are able to book rooms essentially. So you’ve listed this property same as you would on Airbnb or anything else, right, you know, you create a listing, you set the prices, you upload pictures, you know, it’s it’s, we didn’t exactly invent that concept. And then the residents you know, they come they apply to become members, they get approved and then they can actually book the room so they’re, you know, looking on the map and saying what’s close to work or what’s the point price point that I like. And then they book you know, they can book a certain time out, you can’t Book Three months out, because then you’d be, you’d have a dead room for three months you can book again depends on on the landlord or property owners perspective how far out they want to let people book but but it’s, it works centrally like that. So we’re doing all of the kind of lease up screening, marketing of rooms, that’s kind of all on us, we do both, you know, everything from Digital as a very robust referral system, over half of our incoming residents are referrals from other other residents. That’s kind of our our biggest lever on that side. We also post on over 40 kind of automatic listing sites, but sort of funneling people to Pat’s book calm. So what we view as our kind of core competency is filling the rooms with, with good tenants, essentially, from there, because unlike Airbnb, where it’s all prepay, and you know, you’re really paying for one occupancy, and it’s fractional in terms of time, whereas we’re fractional terms of space, you know, one room one room one room, we also handle the payments, processing and collections. So once someone’s in there, yeah, they’re long term. This is somebody works, you know, and lives in the community. So, you know, they’re not prepaying for a year up front, because no one has the the ability to do that. So they’re paying weekly, and we’re Our team is kind of staying on top of folks and working through late fees and all that. And then the other thing that we do that’s that’s really unique is handling the inter resident disputes, right? So that’s something that anytime you talk to a property owner, investor or property manager, whoever they say, Okay, well, great. What happens when someone calls and says, you know, Garan ate my peanut butter. You know, Johnny looked at me funny, you know, I do not want to deal with that, well, maybe no one wants to deal with that. But the fact is, we do. So we have a, you know, 24 seven call center. So those calls come to us. And what our team is trained to do is really de escalate those situations. And part of our model is about providing the flexibility and release valves that facilitate co living and that Okay, so Darrin ate your peanut butter, did you rate him you know, we’ve rating system sometimes people just need to that sometimes people need to transfer, you know, that’s, that’s kind of people can be tough to live together. And unlike being locked into a year long lease, or what have you, where it’s like, okay, I stuck with this for a year, it’s a really toxic situation, hey, you know, you can move and that’s why we have kind of a network of homes. And it’s sort of that shorter commitment, so that you have that flexibility. Because it just cuts down on on issues on that. That side, also, job churn in this demographic tends to be higher, you know, people change locations, people switch jobs, you know, if you’re making 15 bucks an hour, and someone offers you a team, across town, you take it, right. And so people want that flexibility to sort of move and, you know, be close to work and be close to transit and those sorts of things. So that’s a big part of our value proposition is providing that flexibility, kind of tailored to this, this demographic, and this kind of customer base.
J Darrin Gross 18:08
The thought occurred to me, listening to this, my mind typically thinks of rentals is not furnished, but I’m assuming are these are the landlord’s providing a furnished room
Frank Furman 18:19
to ralpher, they are furnished, so no linens, or laundry service, that kind of thing. But they are so it’s not like a hotel. But they are furnished with kind of bad, very, you know, simple furnishings. So that, and that’s for a couple reasons. One is it makes it easier to get people in quickly because you don’t have to worry about Okay, well, they can only come in on a Saturday because they’re moving furniture and that kind of thing. The other thing is, you know, one of the things that we’re we really pride ourselves on is really driving down the cost of housing in that, you know, traditionally one of the things if I if you’ll indulge me in a mini rant, you know, one of the problems that with quote unquote, affordable housing, you know, the the paradigm in this country is, we think of it as cost transfer, right? Okay, you can’t afford your rent, how do we make someone else pay that rent that you can afford? And okay, maybe it’s the local housing authority, you know, whatever. Or even further upstream, hey, we got to provide live tech, you know, tax credits so that people can build more cheaply. And all these things. It’s hyper complex. And, you know, the dirty secret of affordable housing is you need to start with affordable housing, like it needs to literally cost less not just have someone else pay. So everyone’s obsessed on cost transfer. We’re obsessed with cost elimination. So furniture is a great example. So, you know, if you look at what people in our demographic typically do for furniture, well, it’s it’s really hard to just outright buy furniture cost a couple 1000 bucks to furnish place and you know, and so on and so forth. So people rent and they go to a place like rent a center one of those places on layaway. And they say, Okay, well, I’m gonna pay well. landlords are lazy and rent a center smart. Right, baby. Bill at the end of the month. And so, if you look at evictions in this country, a lot of times people say, Okay, well, I pay my bills sequentially, I get my cell phone bill, I pay that cell phone bill, I get my rent a center bill, I don’t want to lose my couch. So I’ll pay that bill. Well, that hit on the 28th my rents always due on the first because landlords, you know, want to make their accounting easy. It’s like, well, I don’t have the money, I can’t pay that rent, I just paid my cell phone bill, my furniture bill. It’s like, Okay, well, that was clearly a bad idea, right? Because now your furniture is going to be put out. But that’s how people operate. So we kind of thought about it from the other way around being customer focus. So okay, well, one, how do we drive down the cost. So renting furniture is a terrible investment, right? You’re paying enormous interest rates you never had, whereas it’s relatively cheap for a landlord to furnish an apartment or house simply, and then kind of baked into the price. So okay, instead of getting an apartment, now, this huge barrier to entry which I can meet, now I need to pay, you know, 20% interest to rent a center, I am paying for it as part of my as part of my rent, and, and it’s a dead but you know, we kind of go from there, the other piece is doing weekly payments, that are all linked. So instead of having, you know, a power bill and a deposit, and, you know, gas bill and a water bill and deposits and a furniture bill and rent bill, and deposits all of them, it’s just one weekly payment. So, you know, the way I kind of phrase it with finances, you know, once the first of the month? Well, I don’t know, once Friday, well, that’s tomorrow, I get paid on Friday, my bill hits on Friday, I paid by Sunday, I’m all sudden you kind of always you’re kind of making it friendly for the renter, rather than friendly for the landlord. Like I’ve been a landlord, you think about and say, Okay, well, how do we make my accounting as easy as possible how to make my operations as easy as possible? You bill on the first you spend your first week worried about collections, every month, one payment, you feel good? It looks good for the bank, you know, it looks good for the lender, everyone’s happy. We kind of turn on its head and say, what’s what’s best for the customer? How do you enable the highest collections rates by making it as easy as possible for them to get into a flow and good habits. And the other thing that we do is we report to the credit bureaus for a partner. And, you know, a lot of our customers coming in the residents are really thin file, folks, right? Not necessarily bad credit, in many cases, they just don’t have a long credit history, well, because we’re reporting weekly payments, that are a big chunk of their income, they get a lot of data points very quickly. And people are adding, you know, 100 points to their credit score after just a couple months. And at in my view, this is honestly, it’s a benefit to them, because it enables them to move up the housing continuum.
But also, you know, I think it’s very representative of what a low credit risk person is, right? If you can make a weekly payment, that’s all in over and over and over again, even if you’re enabled by things like auto pay, and, you know, bundling of all these things into one. You know, that’s, that’s what I do to be a good can’t stop. But I’m actually all that good at paying bills, cuz I have a good memory, it’s that I put everything on auto pay. And I you know, keep it simple on myself. I think that the tools that I use, whether it’s sharing space, or bundling payments, or putting things on auto pay should be available to everybody, you know, that’s how I have a good credit score. And, you know, it’s how I’m been able to save money on housing. And so we’re trying to democratize that.
J Darrin Gross 23:27
No, I love all that. You said there. I mean, the credit thing I was gonna ask her, I typically would think of a lot of these type of tendons just from personal experiences kind of unbanked. You’re getting money, money orders, as opposed to you know, check from a checking account and thing, are you how are you working with them? As far as you mentioned, auto paying that I would typically associate that with more of having a traditional banking relationship.
Frank Furman 23:56
Yeah, it’s a great question. You’re right, and that many folks are unbanked. That’s just the reality of, of the demographic. Now, we’re all electronic payments. So we don’t take checks, we don’t check money orders. However, it was one of the things that we’re technology has kind of changed this industry a lot just in the last kind of five years, even since we’ve gotten started in that. You know, this was a cash business. You know, when I did the first house in 2009, it was you know, it was a metal Dropbox, right, you put in your cash you put in your money order, you picked it up weekly, you know, that was how you operated. Well, now anyone can get a prepaid debit card, at any Walmart, any CVS, there’s all sorts of electronic payment solutions that go kind of cash to cash flow electronic. So even people who are unbanked, even people who are essentially paid in the cash economy can make electronic payments and had really quite low fees with a lot of these services. And that’s something that’s very new, you know, they could pay them and phones are another good example, you know, 1012 years ago. Not bad. Many people have smartphones, or at least certainly in this demographic, but today everyone does, you know, you can do it all on your phone, and we’re kind of mobile first on that side. But, you know, it’s one of those things where that, you know, technology has made this model much more accessible to this demographic.
J Darrin Gross 25:19
Like that that’s, that makes a lot of sense to leverage the technology that you’re probably familiar with. And it’s easily available. Why don’t I ask you, you mentioned kind of the tenant thing, I’m just kind of curious on the screening thing, is there? You know, I know historically, for like a market rate screening, you know, there were things like three times income to rent, you know, no, serious, you know, criminal activity or, or, you know, violent or, you know, whatever, is there a standard that you guys use that you that you screen for?
Frank Furman 26:03
Absolutely. So we’re able to underwrite tenants at a much with much lower levels of income and traditional rentals for a few reasons. One is, the cost is lower. So we don’t use three times, which is, which is absolutely the standard, you know, three times rent as income, we do two acts. And the reason for that is it isn’t just rent. So unlike a unit, this kind of rule of thumb of Okay, 1/3 of your income should be spent on housing. Well, the bill you pay to pass split is housing, utilities, furniture, so we allow it to be up to half. So you know, that it kind of lowers that bar a bit, but it’s more, there’s more kind of bills included in that. The other so that, you know, that’s that’s how we kind of underwrite the bad side of it, we do the same thing, you know, we do a background check. So no felonies, you can go back seven years by loss, we, you know, we go back as far as you can. And then our credit checking is definitely is is sort of proprietary algorithms we’re much more looking for, what kind of debt do you have? And is it in collection. So for example, you would treat student debt differently than debt to a landlord, for kind of obvious reasons. So we kind of, we don’t just rely on a FICO score, which is really designed to think about, will you pay your mortgage, we’re much more focused on? Are you good at paying your bills? And what kind of bills do you owe kind of thing. But it’s, you know, it’s a process that we’re always kind of learning and trying to get better at, and we have a data scientist on staff, but it’s, it’s kind of uncharted territory. I mean, I’m sure you can appreciate this coming from the insurance industry and kind of actuarial mindset that goes into it, but it takes a ton of data to, to really know a whole lot. And, you know, it’s actually part of the, one of the reasons why we’re focused on getting to scale and that, you know, everything becomes a little bit easier when you’ve got a lot of them, because you can bundle them, you can have that data set, you can kind of share risk, that kind of thing. So, you know, lending on one, ball pad split is a problem. But if there’s 1000, you can bundle them up and sell them, you know, to insurance company or whatever, if you’ve got one property to insure, well, that’s a weird risk. You don’t know how to underwrite it, it’s challenge. So okay, how do you get to 1000? You know, 10,000, so that people feel more competent, they can sort of spread that risk out and go from there. Same thing on on screening, right? We, we like to think we’re doing better than anyone in the industry and we very unique data set, I feel a lot better when we have 10 times as many customers because our data will be much better, and we’ll be able to be more predictive and, and underwrite even more effectively.
J Darrin Gross 28:47
No, that’s always true. The bigger the numbers, the more predictable. Definitely truth. He wanted to ask you quick on zoning. Yeah. I know from you know, my personal portfolio, I’ve got a couple of these group homes where you have, like, five unrelated people is basically the same model. Sure, there’s a, there’s a, an operator, that is my tenant, who then like basically subleases to these individuals. And, but one of the questions are, remember when we were we actually built one, you know, there were some zoning things I want to say that it was five unrelated people was kind of the the max for a residential or the for to be a home versus it for a and again, this was in kind of like a quasi medical kind of thing or facility versus a home kind of thing, but I was kind of curious. Are there any issues, zoning issues? You know, what, if you’re looking for a prospective landlord, and I’ve got a three bed, two bath, I’m assuming that that kind of fits all day, but is there a maximum Bed Bath count? That works? The answer is
Frank Furman 30:03
it depends a lot on the location. So, you know, real estate is a hyper local or lives under a hyper local regulatory regime. Oftentimes, I mean, it can, I mean, always kind of harp on Atlanta, but it’s where we have the most units. So it’s where I where I live, but there’s 83 municipalities in metro Atlanta, we’re in probably 20 of them. Sometimes, you know, it’s like you cross the street and you switch municipalities in fall under a whole different zoning regime. So in some places, they’re quite permissive. So for example, the definition of a family in Atlanta is no more than six unrelated parties for borders and two rooms and domestic servants. It’s among the more permissive definitions in the country. You go a bit to the north, you go into Cobb County, and it’s no more than two unrelated parties, which is about as restrictive i would i would argue, possibly illegally restrictive if it were ever to be challenged. But But okay, fine. I there are kind of broader questions about whether or not you can define family that way from a fair housing perspective that I think will probably be adjudicated over the upcoming years. But as of today, there is absolute kind of zoning risk in certain municipalities, in some cases, not very much at all. And they’re quite permissive, in some cases, quite restrictive. So we work with landlords not necessarily to be their law firm, because I don’t want to run the world’s least profitable law firm. But but more around, how do you think about that risk framework? And how do you look your local zoning regulations? How do you think through what what’s kind of right size, but really where we like to get involved is very early in the process for the investors, because what we found is that, you know, code enforcement doesn’t go around and count toothbrushes, you know, the zoning officials aren’t going around and saying, Oh, you know, these people in this house is that a family or you guys related are your friends, that isn’t how it works. It’s less top down, it’s much more bottom up. So, you know, it means you need to kind of rein in some folks because they look at him and say, Okay, I see where four bedrooms work, I see where five would work better than six is better. And then 10 is, you know, even much, much better. And, you know, hey, six may be great. Seven may be perfect. But at some point, you’re going to hit up against that threshold where you say, okay, that’s is that in harmony with the neighborhood? Is it going to lead to a lot of cars is going to lead to a lot of neighbor anks? And there’s no, there’s no science to it, you know, oftentimes I’ll, I’ll get involved, I mean, everyday, really, with investors to say, you know, hey, what do we think about 123 Main Street, it’s on a cul de sac, you know, you’re not gonna have much street parking, or Oh, it’s on a corner lot, you’re gonna have a ton, and hey, it’s steps from a bus stop. Well, that means fewer cars, which means fewer neighbor complaints, you know, so on social, is it a build up area where, you know, there’s apartments across the street, no one’s gonna freak out when there’s renters? Who are a little more transient? Or is it a neighborhood that’s, you know, a little subdivision where they actually don’t like reading period? You know, you’re, you’re begging for trouble. For example, I advise every investor to avoid Hoa not because, you know, it is automatically outlawed or anything that, you know, I, I, for one, you can’t pay me enough to read a bunch of Hoa bylaws. But oftentimes, there’s a catch all if you know, anything we don’t like is against the rules. And it’s adjudicated at Jerry’s house on Tuesdays. And, you know, I think that you’re just asking for trouble in terms of neighbors. So there’s a risk mitigation framework that you have to go through to say okay, what is going to reduce the risk of neighbors having issues and it’s about the right asset and the right location and with with a little bit of discretion to say, hey, this would work fine for five or six bedrooms all day every day. But 789 10 Wow, that actually that might be pushing it a bit. So how do you kind of think about it from there?
J Darrin Gross 34:07
I was gonna say that it was kind of my thought was it’s the the neighbors of where the complaint would come from. It’s always Hello. It’s not gonna be the guy counting toothbrush. It’s gonna be the neighbor complained as somebody Exactly. Saw on my backyard. So you indicated you’re in Atlanta, the area there and and you’re looking to grow. Is there a direction a city you’ve identified? Is there a place where you’re going next?
Frank Furman 34:40
Sure What we’re in eight markets today. So Atlanta is kind of our our core markets where we got our starts where we have our most units, but we’re also pretty heavy in Texas. So we’re in Houston and Dallas today. We’ll be in San Antonio soon enough. Pretty heavy in Florida. So we’re in Jacksonville Tampa today and should be in Orlando shortly. We’re in New Orleans or Richmond, Virginia, we’re in Indianapolis. So we’re generally focused on, you know, smile states, or how we want to think about a kind of sunbelt, like the Midwest, generally, but typically, you know, for the reasons you kind of hinted at, like to stay at a more landlord friendly states for, you know, risk mitigation purposes. So, that’s where we’re focused, I think we’ll be effectively nationwide by the end of 2022. But we’re, we take a very intentional, you know, kind of approach for launching a new markets because on one hand, as I said, we, you know, there’s network effects this business, you don’t want to be the first, you know, you don’t be the only house in municipality, because you want to be able to transfer folks, you want to be able to have people move around when they need to. So we’d like to come in with kind of a critical mass or pipeline of properties. And, you know, we’d like to, for us, our growth engine is good investor outcomes. So when investors have high yields, they’re doing well, they brag to their friends, they do more properties, you know, that’s, that’s how we grow. Frankly, I’ve never been all that good at selling this stuff, you know, it’s only only investors kind of selling it, that it’s been effective. When they bad outcomes, they won’t do any of that stuff, you know, they’ll they would trash us and so on. So we tend to be, you know, in some ways, maybe even cautious to say, Okay, how do we, how do we set people up for good outcomes. And so, you know, that means turning down business sometimes. And, you know, again, every week, I’m talking to someone and saying, hey, this, I love the enthusiasm, this is the wrong asset, you know, you’re going to, like, let’s find one, that’s not going to be a single, let’s find one, that’s going to be, you know, at least a double or maybe a homerun, because, you know, we want good outcomes. You know, that’s, that’s how we grow.
J Darrin Gross 36:48
So do you work with your your investor clients to identify property to work better that kind of want to hear?
Frank Furman 36:54
Absolutely, yeah, very involved, we have a preferred vendor network, and essentially, every city we’re in, and some of them are not, which includes kind of agents and brokers, I includes insurance and includes general contractors, property managers, that kind of thing. So yeah, we tend to get we tend to get quite involved on that front. And also, because those preferred vendors are oftentimes another growth engine for us, you know, you got a, you know, an agent who really gets it and understands the buy box. Well, they’re, they’re bringing their investors to it. So
J Darrin Gross 37:28
Frank, if we could, I’d like to shift gears here for a second. Yeah. By damn an insurance broker, and work with my clients to assess risk and determine what to do with the risk. And there’s a couple strategies we typically consider, we first look to see if we can avoid the risk. If that’s not an option, then we look to see if we can minimize the risk. And when we can’t avoid or minimize, we look to see if we could transfer the risk. And that’s what an insurance policy is. And I like to ask my guests if they can look at their own situation. And you can frame this however you like. But looking at your clients, investors, tenants, the market, however you want to identify what you consider to be the biggest risk. And for clarification is, as much as risk is associated with insurance. I’m not necessarily looking for an insurance related answer. But if you’re willing, I’d like to ask you, Frank firmen. What is the biggest risk?
Frank Furman 38:33
Yeah, I feel like I’ve been talking about risk the whole time. Maybe I shouldn’t put on a sunnier face to start. But yeah, it’s a great question. It’s, it’s funny ask because I oftentimes get asked about insurance, that tends to be a smaller challenge for passport houses, because ultimately, it’s a rental property, the big risks and insurance that, you know, your kind of homeowner’s policy or, you know, kind of landlord policy would cover are the same, you know, risk of a tornado is the same risk of tornado, you know, we, we can be blamed for many things, but typically not for controlling weather. So, you know, that tends to be relatively straightforward. To me, the biggest risk to our business kind of gets to your point, certainly about zoning, but it’s, I’d say less is a distinct zoning question and more. But certainly one around like kind of government involvement and prohibition. I mean, it’s it’s, I guess, you could broadly call it the the NIMBY movement, being weaponized and certainly you’ve seen it with, with other startups, certainly in the space and an Airbnb is a great example, where, you know, Airbnb, their core offering of letting people rent out their properties was essentially legal everywhere in the United States 10 years ago, you know, there there may be some small exceptions and you know, we can have the debate about you know, whether or not they should have been paying hotel tax in this map, but generally, it was just kind of off the books. No one even thought it was that strange If in 2005, you said, Hey, I’m going to run out, you know, I’m going to leave my house for a week, and I’m going to have someone pay me for the, you know, to live there for a week, no one would say do you would have no issue at all. Now, obviously, they, you know, they grew, they got a ton of coverage. And, you know, they’re they’re issues that people use party houses and you know, a bunch of guys come into a residential neighborhood to go to a, you know, for a big football game, and they are throwing a kegger and neighbors are mad. You know, I get it. I also live in a quiet neighborhood. I have kids, you know, I like I, we all have a little bit of the the nimbyism in us, right, especially on, you know, work nights and that kind of thing. So, so I get it. They also, of course, have a very powerful competitor and kind of hotel companies and so on let’s consolidate and well resorts. So there’s, there’s a little bit of that, too. So, you know, fast forward to 2021, and many municipalities have either straight prohibitions that are new, you know, they’ve been legislated into existence, or pretty onerous requirements on Airbnb, and in some cases aren’t actually been easy for them to answer, right. Because one of the unfortunate things about our kind of the way the politicians think about these things is like, they think Airbnb is operating all these units when clearly they’re not, you know, they’re, it’s a marketplace house or operating a unit. So Airbnb doesn’t know what’s going on, or doesn’t check the maintenance or, you know, whatever. That would be almost impossible for them to do. So. Okay, fine. But they’ve, they’ve obviously faced a lot of headwinds, but they were able to get big enough and secure enough that they could kind of attack them head on for us. You know, I anticipate some of the same sort of challenges. We, you know, we’re in the workforce housing business. And, you know, everyone loves workforce housing, except in their street, you know, except in their neighborhood, except in their town, you know, they want they want it to be somewhere, you know, they want to get their Starbucks coffee at the you know, for cheap, but, you know, they don’t they don’t want to house the barista, so, okay, fine, we’re gonna face some of the same headwinds, but can we get to a size and scale quickly enough, fast enough, become accepted enough to where you’re, you know, not necessarily too big to fail, but where you can face those challenges head on, and where the, you know, the disruption of blocking things as at least as much as, you know, the disruption that you’re causing, because, you know, real estate and renting, you know, that’s it’s not always an easy business, you know, we have challenges, you know, as I like to say, our, our residents are cut from the crooked timber, that is humanity, you know, and they, they sometimes fall short of what they’d like to do, you know, predominant good people, but sometimes they can only Park like jerks, you know, sometimes they, you know, cause trouble. You know, that’s, that’s just the reality of it. When you have a couple 1000 these people, it’s inevitable. So can we get big enough, fast enough and really create enough value in the marketplace that, look, the hadn’t there, headwinds are coming. You know, that’s, that’s inevitable, but we can face them with kind of a worthy challenge. And when communities say, Hey, you know, we don’t actually like workforce housing in this town, we’d say, Okay, well, we’re already here. So, you know, what’s next? Do we need to tell you where they are? Do we need to, you know, this or that? How do we conform and meet it? But have it not be such an onerous? You know, have it have to have the scale to where we can meet it?
J Darrin Gross 43:34
Yeah. No, I love the concept. I love the name patch, but I think it’s kind of, it’s a great name for you guys.
Frank Furman 43:42
credit to act as he came up with it, I had nothing to do with it. So
J Darrin Gross 43:46
well, it’s, you know, it’s easy. Kind of identifies what you guys do. That’s kind of a, you know, a curated thing. And no, I wish it goes all the all the best, I think there’s definitely a need fordable housing is is a challenge nationwide. And as you said, you know, the the cost elimination versus the cost transfer. I mean, I think one of the challenges we really face is when we try and make it less, less costly, we end up in you know, pumping a bunch of money into something and end up eventually, you know, making it more costly. Usually with the the model is and it’s just a theory versus reality kind of thing and I love your guys’s approach. So
Frank Furman 44:31
thank you yeah, I was always appreciate the opportunity to just sort of, you know, I maybe there were a few mini rants in there, but you know, just talk about what we do and spread the good word. Oh,
J Darrin Gross 44:41
that’s great. Frank, where can listeners go if they would like to learn more connect with you?
Because straight to our website, just https://www.padsplit.com. There’s, you know, plenty of resources there for both kind of residents and for hosts and, you know, if you sign up to create a host account, one of our knowledgeable much friendlier than the kind of sales staff will will reach out immediately, I assure you and kind of walk you through everything. And of course I can just be reached. I’m just a frank@padsplit.com. So I’m easy to find.
Awesome. Well, Frank, I can’t say thanks enough for taking the time to talk today. I’ve enjoyed it. learned a lot. And I hope we could do it again soon. Of course. Thanks so much. All right. For our listeners. If you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow? That’s all we’ve got this week. Until next time, thanks for listening to Commercial Real Estate Pro Networks. CRE PN Radio.
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