How to do PadSplit Due Diligence?

Question

Hi Everyone!

I've been house hacking and STRs for a few years now. I'm looking at purchasing another property. In my market, I've noticed a few turnkey PadSplit properties for sale with corporate leases and property management in place.

I've never considered renting by room and nor do I know much of the operations of this strategy. However, the ROI is impressive.

Any tips on questions to ask to vet a property like this? I don’t know what I don't know at this point, but everything sounds too good to be true.

Thanks in advance for your input!

Zach Edelman · Answer

I know from a lending perspective typically lenders will underwrite the market rent from the 1007 unless a trailing twelve month history already exists (12 months of PadSplit income for the subject property). Something to look out for when shopping for turnkey PadSplit's, unless you're looking to buy with all cash.

Michael Dumler · Answer

@Tyler James, I assume you're in the Atlanta market? There's a lot to unpack when it comes to PadSplit properties. First, Zach is correct. Your lender will perform underwriting based on the market rent (appraisal 1007) of the property. Most of the PadSplit deals I've seen on-market are listed from an income approach of the annual performance of the property. Essentially, this is to say that the asking price of the property is listed above market value (appraised value). In this case, the seller would most likely want the buyer to submit an offer waiving their appraisal contingency or at the very least include an appraisal gap coverage stipulation to cover the difference in cost. Second, I can almost guarantee you those turnkey PadSplit properties you're referring to are not turnkey whatsoever haha. I know exactly what listings you are talking about, the photos were taken before occupancy and do not present an accurate representation of the current condition of the home. Keep in mind, the property is tenant occupied, expect wear and tear on the home. For your understanding, PadSplit properties are usually anywhere from seven to eight bedrooms per property. I'm a huge advocate for rent-by-the-room properties but as an investor, you need to understand that you're taking on a lot of risks. During due diligence, you must verify all leases and rent ledgers to confirm that none of the tenants have missed payment. If some of the tenants have missed a payment more than once, I would advise walking away from the deal. In addition, this goes without saying, hire an inspector to thoroughly assess and inspect the property. There's a huge upside to rent-by-the-room investments, however, it's essential to have the correct systems and management in place. If you're interested, I can connect you with my point of contact at PadSplit. She's great to consult with and will answer all of your questions/concerns regarding PadSplit. Feel free to shoot me a text or email to connect (contact info is listed in my bio).

Blake Lewis · Answer

Hey @Tyler James- I work at PadSplit and would be happy to speak with you! A few places to start to directly answer your question:

Here is our optimization guide (you may need a host account to access): https://www.padsplit.com/host/...

Scope of work- https://www.padsplit.com/host-...

During the listing process, the onboarding team reviews photos for functionality, safety etc - for example insuring every room has a smoke detector and other items included on our Shopping Guide - https://www.padsplit.com/host/...

@Zach Edelman and @Michael Dumler thank you for your insights! Plenty of hosts have financed and refinanced with our lender network. Michael is spot on that PadSplit, like any rental property needs to have fantastic teams managing all aspects of the business.

@Rick Baggenstoss thank you for also chiming in, we do even have a marketplace on our site to help facilitate sales. There are a lot of reasons hosts are looking to sell their properties that are more positive than what's been mentioned such as accessing capital to redeploy for additional investments. Collections is over 93% occupancy is over 90% and tenure is about 9 months per member.

To anyone reading this - please reach out to me if you'd like to learn more. I also can connect you to very experienced investors who have been using our platform for years to double their ROI.

Rick Baggenstoss · Answer

Not many folks selling their Padsplits.  However, there are a few catalysts: a neighbor is raising hell about it, insurmountable code violation, high tenant turnover/vacancy, poor property management, didn't permit the work to convert to Padsplit.

I'd dig into these issues in addition to doing your due diligence on the property/structure itself.

Asif Kabani · Answer

As the issue of housing affordability becomes increasingly pressing, co-living models such as PadSplit are emerging as an effective response. These models serve a dual purpose: they provide a solution to the affordability crisis for individuals seeking housing, and they offer a profitable opportunity for those looking to invest. In urban areas where the cost of traditional housing is rapidly escalating, renting out individual rooms through these models presents a more accessible option for many tenants. This strategy is in line with the broader societal trend towards communal and economically efficient living spacesThe perception of STRs is increasingly becoming negative, a trend highlighted by the growing number of local governments imposing regulations, often to address housing affordability issues. In such a scenario, co-living models are emerging as a more positively viewed alternative. Differing from STRs, co-living models actively contribute to alleviating the affordable housing crisis. This should significantly decrease the chances of encountering regulatory hurdles. Consequently, co-living is gaining traction as an investment approach that is both more sustainable and less prone to controversy in the current context of regulatory frameworks.Looking ahead, the anticipated influx of multi-family units could temporarily depress rental prices, affecting various rental strategies, including PadSplit. A possible risk-mitigating strategy might be, is to avoid paying a premium for turnkey properties and instead build a project from the ground up. This approach demands more effort and may involve initial challenges, it can offer a potential safeguard against the risk of declining rental rates. For those who prefer a less hands-on approach, investing in turnkey properties remains a viable alternative.

How to do PadSplit Due Diligence?

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