In 2022, 41% of tenants spend more than 35% of their income on rent, As the cost of rent and living rises, wages struggle to keep up. Living in a major city is exceptionally expensive, so most young professionals live in older apartments farther away to save money. After spending so much on rent, it is unfathomable for the younger generation to even think of buying their own home.
But what if there was a way to live in a new apartment and save 30%-40% on rent? In addition, 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 towards a sharing economy. A decade ago, both hailing a cab with strangers and staying in a stranger’s home seemed unimaginable, then Uber and AirBnB emerged and became multi-billion dollar businesses.
There is no doubt that co-living will become a bigger part of our lives in the near future, but it is never too early to build a home. A co-living property generally needs to be built from scratch due to its unique features and layout.
Co-living is a complex strategy and is not about filling an existing unit with strangers. The building needs to be thoughtfully designed for adequate privacy, noise reduction, amenity space and more. Property management is decidedly more labor-intensive, and 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 is extraordinarily fulfilling and rewarding. Now we will examine the pros and cons of co-living.
Qualities of Co-Living
reduces loneliness
Not everyone is an extrovert, but most of us want to feel like we belong in a community. In this new digital age we live in, growing lonely everywhere you look Isolation, especially after the pandemic, has become a problem for many individuals, young and old.
Co-living works to solve the problem of loneliness by pairing residents who are likely to connect as well as organizing a number of community events such as yoga and cooking classes. Some co-living communities also have a budget for weekly dinners.
Overall, co-living, from a social perspective, is working to mend some of the broken fabric of our society.
Affordability
Perhaps the best benefit of living in a co-living space is affordability, which can save tenants several hundred dollars in rent per month. For example, a new studio in Los Angeles rents for about $2,000 a month. A co-living suite will cost only $1,400, which includes furniture, utilities and regular cleaning.
combined with inflation, rising Rate of interestand due to severe supply constraints, households are becoming more and more Out of reach, Many young adults have no choice but to remain a renter. But when renting is just as expensive—if not more expensive—than home ownership in many American cities, it’s just as difficult to get moving.
community Manager
Being 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 greatly improve the living conditions of co-living tenants.
convenience
Co-living is convenient in three ways. First is the location of the property as most co-living properties are built in a popular area close to restaurants and transport. You can reach most places only on foot.
Second, it’s easy to get in. Most co-living properties come furnished and allow short term leases, so you can just pack up and move in with a few belongings. All the necessary things like kitchenware, bed, sofa and a TV are already there.
Third and finally, befriending people in your building is a very convenient way to expand your network. There are so many interesting and unique people you can meet in co-living spaces. Some of these people may have thriving businesses that you can work with. Others may be well connected and can help you advance your career. Some may become your best friends.
This is especially convenient for someone who is moving to a new city where they don’t know anyone.
high 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/sq.ft., a co-living property may charge approximately $4.00/sq.ft. Even with a higher exit cap rate of 50 to 100 basis points, the valuation of a co-living property per square foot can be better than that of a traditional apartment.
Disadvantages of Co-Living
Co-living strategy is not bulletproof. There are some downsides here.
Potential for Bad Roommates
If you’ve had roommates before, you know it’s like drawing the lottery. You don’t really know their habits until you start living together. Obnoxious 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 as much about the cleanliness of the other roommates. Some buildings even have extra sound insulation, so your room is like a mini studio. Common areas such as the kitchen and living room are also cleaned regularly. Many co-living operators also do their best to match roommates and hire community managers. A community manager can act as a peacemaker, facilitating roommate conflicts.
Still, it’s very difficult to eliminate all problems, so it’s a risk that co-living tenants or landlords need to be aware of.
less privacy
Apart from cleanliness, privacy is also a main concern. Equipping the bedroom with locks, preferably digital locks, is a must. Noise complaints are also very common. Most co-living units do not have advanced sound insulation, such as adding flexible channels between adjacent bedrooms. If you are a tenant and moving into a co-living property, you should ask the property manager how insulated the bedroom walls are.
A shared bathroom is usually a nightmare. Asking your roommate to clean the toilet or sink is never a pleasant conversation. It is highly recommended to provide private bathrooms to the tenants. Adding an additional bathroom to an existing building is difficult, which is why the best co-living properties are designed from scratch and by industry experts.
security concerns
Depending on how you look at it, co-living can be better or worse in terms of security. Living with strangers can obviously be unsafe. However, if the background check is done correctly, it can make you feel safer. Depending on the neighborhood you live in, living alone can be dangerous. For example, property burglaries are becoming more common in some cities, so having a trusted roommate is actually safer than living alone.
lack of parking
Co-living properties almost never have adequate parking. This is another reason why co-living isn’t really for families or people who like driving. However, some communities offer car rental, so you can rent a car whenever you want instead of paying monthly car payments and insurance.
Of course, not having a car is another way renters can save money, but that’s not possible for most people in New York and cities outside of the Northeast.
increased wear and tear
Because there are more tenants living together in one unit, the units tend to deteriorate more quickly. Things like flooring, paint, baseboards and doors are easily damaged and will need to be replaced. The property manager needs to check in more frequently to ensure that the property remains in good condition.
Finally, because each bedroom’s lease expires at different times, the unit never receives a full turnover, making it difficult to repair or maintain. 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.
conclusion
Co-living has a place in the future, especially as affordability continues to decline and younger generations feel less confident in their home ownership prospects.
Is co-living the right option for families? No, but for individuals aged 18-30, it provides a cheaper, more connected and more convenient alternative to traditional rental.
As investors, it is important to pay attention to this trend and find ways to potentially profit from it.
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Note by BigPockets: These are the views expressed by the author and do not necessarily represent the views of BigPockets.
