Maximizing Space & Savings

Scott Brown: Hey everyone, welcome to the Steadily podcast. My name is Scott Brown, partnerships account executive here, and today we've got Quinton at PadSplit joining us. He's the general manager. Quinton, appreciate you joining.

Quinton: Thanks so much, Scott. It's great to be here. The easiest way for us to describe it is using what you already know. Airbnb about 15 years ago was innovative in the sense that they figured out how to monetize time. People were renting out the same rental space, but they were renting it in blocks of time. We took that same approach — how can we do that with space? So when we think of innovative, we're just changing a different revenue stream for the existing piece of real estate.

For real estate investors, if you want to use layman's terms, PadSplit is the nation's largest platform for boarding houses, but it's done like an Airbnb. Very similar to Airbnb, our platform handles the demand side, or tenant member aggregation. We collect all the members that want to book and we provide that. Our service also provides all of the digital revenue collection. All of our members pay digitally, so we handle 97% accuracy for collections rates, and our platform allows for all the communications in between.

It allows a different exit for real estate investment — that's the most innovative way to think about it. But we attack it not from the sense of Airbnb landing at these expensive $3,000, $4,000, $5,000, $6,000 rentals. We do it from a need-based approach. Our focus is on affordable housing with a lowercase A. We talk about workforce housing, senior living, all of these people that are on fixed incomes. Why are they paying 60, 65, 70% of their take-home pay in housing? We created a model where the investor can make more money doing something good for the populations they live in — providing affordable workforce housing in a single room model in a shared housing facility. We rent rooms individually by the room. That's the easiest way to put it.

Scott: That's fascinating.

Quinton: We do the hardest thing in real estate, I think — how do you provide safe affordable housing at an affordable price? We went out and solved the hardest part. My vision of how PadSplit's going to blow up is we're going to be like Uber. There's going to be an Uber Black and an Uber Share version — we're going to have that at some point. But we're making our bones by doing the hardest part first, and then the rest will be easy as we grow up to become the full-size company we want to be.

Scott: Wow, that's fascinating. Quinton, I'm sure you could attest to this — demand has probably never been higher for a product in that type of market, especially with how much housing costs have risen lately. I'm sure your demand is unparalleled right now.

Quinton: Yeah, Scott — I have a 15, almost 16-year-old daughter and this summer she introduced me to a TV show called The Summer I Turned Pretty. And I came back to our company in every meeting with that as my line. I was like, "Guys, this is the summer we turn pretty." With high interest rates and all the tailwinds that everybody else is dealing with, every investor I talked to was on the sideline. They wanted to keep acquiring but couldn't exit — they didn't have a business model that allowed them to exit. And we're sitting over here like, "Come talk to us about our exit." All the flippers, all the buy-and-holders, all the people that owned existing portfolios were like, "Wait — you can make more money on the same piece of dirt?" Yes, you can. You just have to adapt to what we're doing and then you're going to start thriving.

Even Airbnb hosts — if you own a short-term or medium-term rental and your occupancy is low, come visit our website. You're literally looking at a steady stream of income. The people that live in our PadSplits aren't visiting for the weekend. These are the people that work at the amusement parks you're attending, the nurses and hospital workers that are there full-time. It's not going anywhere.

Scott: That's awesome. That sounds super interesting, and that's got to be a great go-to-market strategy. So Quinton, segueing into this — obviously PadSplit has a major relationship with both the host and the tenants, and a huge part of your business is being able to protect both ends. Could you give a little more insight into how insurance plays a role in protecting both hosts and tenants at PadSplit?

Quinton: I'll start with the member side. Our members are members of our membership at PadSplit, which means they can transfer from one house to the next. The best stories I've heard are of a member starting at a really reasonable rate — $139 a week. We charge by the week because we match up to how people get paid. In order to become a member, you have to pass a rigorous background check, criminal background check, and an income verification so you can qualify for the room level you want to book. Everybody has a similar background. From that standpoint, it's highly suggested that you get renter's insurance because you are renting the products and everything in your specific room.

For the investor side, we work with partners like Steadily and get commercial liability coverage for the actual house, like you would for an LLC. That's always our assumption as best practice for owning real estate — for identity, awareness, and liability coverage. There's a standard liability package that we have as guidelines, and then we work with you guys because you understand our business model. There are riders in place that understand what co-living is, so it's standardized.

Our investors are really interesting because they're not geographically limited. If you're a California investor, everybody loves the Sunbelt — you're going to Florida, Georgia, Texas, Arizona. That same insurance policy and provider like Steadily is super key because that investor is building a portfolio and they know they have consistent coverage. Unless you want to go head-to-head with a tornado in a hurricane state — that's a different thing we don't have control over, and there are limitations there — but in most of our markets as we grow across the country, the partners that understand our business model and help us grow are the ones we do business with.

I always joke with our team inside the company: "We don't date our partners, we marry them." Because as a new business, somebody had to step up and say, "Can we work together?" And then we had to go through the process of actually figuring out how to work together. That's how the relationship with Steadily has evolved. When people come new to our product and realize all these vendor partners actually know what we're doing, it helps our new investors get comfortable in this new line of business, which is super helpful for everybody.

Scott: Wow. For a PadSplit host, what would you say is one of the more common misconceptions with insurance?

Quinton: That they can't get insurance coverage. Like they start there. It's amazing what people will default to — the answer is always no for so many people. I get it. There's a risk mitigation component to everything in life. The way I look at it is somebody has blazed the trail before you. It is not really hard when you are the second wave coming through because somebody else has already bumped their head, and that tree branch on the hike has already smacked them in the face. Now we have partners that hold the branch for you as you walk by, just to make your life easier.

Then the next question is what kind of coverage is it? What am I liable for? What happens if member A has a problem with member B? That's what the co-living insurance coverage we utilize covers. We've walked through all of those potholes, and the learnings you have are not so much about how to create it — it's what does everybody else use? Does it apply to me? Am I covered for what I need? You check the boxes, you move on, and then you can focus on being an investor, not an operator. You go look for your second house, your third house, and you build a portfolio. That's great.

Scott: What are some specific insurance needs that PadSplit hosts would have?

Quinton: It's pretty straightforward. We have a $1 million commercial liability coverage and then a $2 million aggregate. Most hosts carry an umbrella on top — I do. I'm a host and an investor. That's just how I'm set up. The minimum is $1 million, $2 million, and that's what our leases require to work with.

As an individual, you can find your insurance provider that handles it. The interesting thing is not all insurance providers understand what we do — whether you have a single short-term, long-term, or commercial rental. It's kind of like property managers. They come to us and say, "I've been doing this for years," and after the first month they're like, "That is a different animal." Same thing for insurance. Why reinvent the wheel? The property is an investment property that fits our model. Here's our partner in insurance with Steadily — go talk to them. They'll guide you through what you're stressing about and tell you what the requirements are because you are one of hundreds of policies they are covering for our individual hosts.

As you grow and your portfolio grows, those requirements actually change because you're trying to cover liabilities differently at one house versus a full portfolio. They can handle that evolution. It's not their first rodeo. The easiest way to put it in layman's terms: make it as easy as possible for yourself. Insurance shouldn't be the reason your investment goes sideways, but it quickly can be. The worst-case scenario usually ends with "and the insurance didn't cover it." When do you figure that out? When the check doesn't come. If you work with someone experienced in this space, they can tell you, "These are the things we need to mitigate against, this is what your policy covers" — and you get a much more comfortable night of sleep. That's essentially what insurance is for.

Scott: Awesome. Quinton, specifically for PadSplit, could you give a little more information on how shared spaces and short-term tenancies might play a role with insurance?

Quinton: There's a rider around co-living and shared housing that covers what we functionally do in the house. The policies are similar to what you'd have for a long-term rental, just with a different coverage piece. Our members on average stay about 9 months, so it's much more like medium-term rental. Our leases start at 31 days, but members actually stay an average of 9 and a third months across the country. It's not very different from standard rentals except there's a rider that covers the fact that multiple people are living there — similar to student housing. That's the most synonymous type of coverage when people ask, "Is it similar to this?" It's like a Granny Smith apple looking a lot like a Gala apple.

As for whether you need specific coverage for co-living and single room occupancy, there was a simple rider created for our package. Your legal department and our legal department had a really long conversation and came out with a document that covers what we actually needed to cover. That's the one implemented for every host coming inbound. The policies are uniquely the same with caveats depending on the state you're in. Because we're national, there are some states where no insurance provider wants to provide coverage — Florida, Houston, New Orleans, the hurricane states and cities. We're well aware of which ones those are. But in plenty of other states we're moving into, our hosts are defaulting to the easiest solution for their insurance needs, which right now is you guys. You guys are a wonderful partner for us.

Scott: Love to hear it. So Quinton, I've got a hypothetical here. Let's say you're a brand new PadSplit host. How would you go about making sure you get quality insurance coverage — specifically around liability, property damage, and loss of income coverage?

Quinton: Because of our partnership, we actually have a landing page. We direct our hosts to steadily.com/padsplit. They go right to the landing page, submit their information, and it's routed to your agents per state, because each state has its own individual pieces. From there, the default coverage the platform needs for the house is essentially the same. What's required by the state — that's between you and the agent. As the investor grows, unique things like loss of rental or other coverages can be tweaked as needed. You will find that you're going to evolve as a real estate investor — you may want to pay more for more coverage early on because you need full coverage, and as your portfolio grows and cash flow increases, you may want to self-cover some things you were paying premiums for before.

The beauty of it is you will evolve. You can have high cash flow from PadSplits subsidizing high appreciation in Airbnbs, subsidizing flips. And because you have one insurance provider, they can actually play in all three of these. It's up to you and the insurance agent to find out which products are best for the multiple properties you're dealing with.

In my own experience, the insurance component was originally taught to me as just a cost item. As it's evolved and I've gotten more sophisticated, I realized it's a support mechanism for what I'm trying to do. If you use it like that — as a partner, talk through it instead of just writing a check every month — you get so much more value out of your relationships with all of your vendors. They're not going to come out of the gate and tell you if you're not asking, and it's hard to know what questions to ask if you've never done it before. My suggestion to anybody watching: if you have an insurance provider and you don't talk to them about the benefits of it, you're missing out, because that's what they do for a living.

Scott: Quinton, you absolutely hit the nail on the head — you stole my talk track. Each real estate investor really does have their own risk threshold. That's something Steadily very quickly caught on to. Investor A is going to be very different from investor B — someone with 10 properties in different markets is going to look at risk threshold differently than an investor with two properties in the same market. It really is a situation-by-situation, property-by-property situation a lot of times.

Quinton: That's the fun part. Partners like you have more experience up and down the pipe of working with different investors. So when I actually talk to agents and people working in insurance about how other people are handling things, you get some really creative answers. Especially when you start adding things like ADUs, converted garages — those seem really fun when the contractor wants to charge you to build it, but then you realize your insurance coverage didn't account for the add-on you just did. Everything has to go together. Because if there's, God forbid, a fire or a flood — until I became a real estate investor, I didn't realize how much I hate water. Water is the worst. It's a perpetual domino effect of terrible.

You hear stories where something flooded in the basement and the coverage wasn't right, and now all of a sudden you have to come out of pocket $25,000. Nobody wants to cut a $25,000 check. The first question you want to ask is, "What is my deductible?" and the answer shouldn't be $25,000. Great insurance partners talk you through worst-case scenarios so you have an understanding — not to scare you, but so you know what risk you're willing to eat. As you get wealthier and things get bigger, you can self-insure a little more, your deductible can go up because it's covered by more cash flow. It's an evolving piece you adjust along the way. But for very new investors, you don't have the bandwidth to go out of pocket. You'd rather pay the deductible and save your money to buy another investment property.

Scott: Seriously. Quinton, I really appreciate this — it's been a super insightful conversation. Could you give just a little more detail on how insurance plays a role in maximizing your PadSplit investment as a host?

Quinton: What it does is mitigate the downside risk. Coming in the gate, everything's new. Most people have never done rent by the room before, never done PadSplit before. They're attracted to us because our revenue model is so high. Then they put six people in a house and there's risk after risk after risk. So you ultimately go back to my favorite saying: is the juice worth the squeeze? That's the answer real estate investors come to when they come to our platform — "I want to squeeze the juice out of it. I'm going to get multi-family returns out of a single-family acquisition, but is the juice worth the squeeze?" That's where the insurance piece comes in, because their mind starts wandering through all the worst-case scenarios.

What I want to point out is that the premiums our hosts pay relative to a long-term rental are significantly lower than you'd think. I thought it would be exponentially larger, but it's not. It's underwritten in a way that's very similar to regular long-term housing. It's actually lower than what student housing would be if you were next to campus — I've shopped it around multiple ways. The insurance piece is actually a barrier that new investors run into — "I'm not going to be able to insure this because it's new." The value of partners like Steadily and us is that we've already solved for that. So move on to the next concern you have. Here's what the invoice is — put it in your underwriting. Does it work? If the math doesn't work, go get a better deal. Beat up your realtor, beat up your wholesaler for a better acquisition cost so it underwrites correctly. You're not going to have a blank on your P&L for insurance. In our platform, they don't let you do it anyway. Don't complain about the expense cost — complain about the acquisition cost. Be a good real estate investor, because that line item's going to be there. You might as well make sure you're going to get covered for what you need.

Scott: Wow, that's great. Quinton, I really appreciate your time on our video this afternoon. I think this is going to be really insightful and helpful for PadSplit hosts, tenants, and anybody looking to purchase rental property insurance. Just to review — in this video we discussed innovative housing, the role insurance plays in innovative housing, common insurance needs for PadSplit hosts, selecting the right comprehensive coverage, examples of PadSplit host claims experience, and maximizing your PadSplit investment.

Quinton: I appreciate you guys inviting me on. The biggest message is: just because the economic conditions change, you can use that as an excuse to sit on the sideline — but the people that are adapting and thriving are the ones that ultimately win. In real estate, time is the ultimate winner. If you are on the sideline waiting, somebody else is taking action and adapting to what the situation in the economy allows. The investors that are converting and adapting into our model for single-room occupancy and shared housing are just collecting more revenue. Because our revenue is what it is, it allows them to keep acquiring properties while everybody else waits for 6% interest rates to come back. You can adapt and apply all the same skills you've always had as a long-term, short-term, or mid-term renter, and using our exit, find a different revenue stream.