3-2-1: Do Cottage Courts Pencil Out?, Co-Living, & More
Week #6
Happy 3-2-1 Thursday —
Here’s your weekly dose of small-scale real estate development:
3 things from others
2 things from me
1 picture
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3 THINGS FROM OTHERS
I.
Big news from the Biden administration yesterday. For the first time in recent memory, our government has made an open commitment to addressing housing affordability.
A few highlights:
Boost the supply of quality, affordable rental units by increasing the funding available for Low Income Housing Tax Credit (LIHTC) projects
Create more financing opportunities for homeowners to purchase manufactured housing and 2-4 unit properties using federal programs (e.g. FHA loans)
Work with state and local governments to boost housing supply by leveraging existing federal funds to spur local action
Source: Biden-Harris Administration Announces Immediate Steps to Increase Affordable Housing Supply
II.
Co-living is like dorm life but for adults. Or “Airbnb for long-term rentals involving roommate living” if you’re a CEO/founder trying to raise $75M in venture capital (we get it, dude).
But don’t be too quick to dismiss it as just another glorified roommate setup.
Co-living adds a layer of social experience and intention to simply having housemates through thoughtful design, event planning, and amenity offerings. The idea is to bring people together in a more curated environment where residents have more opportunities to interact, engage, and build community.
It’s obviously not for everyone. But the age-old concept seems to be making a resurgence in larger cities. In 2020, there were 8,000 co-living spaces across the US with another 54,000 in the development pipeline.
In parallel to the social benefits, co-living also offers a creative mechanism to address housing affordability. Rents are often advertised as up to a 30% discount over an equivalent studio apartment. And they have 2x the amenities.
Home ownership should definitely remain a priority, but perhaps co-living will emerge as a strong candidate as a supplementary tool to provide stable, attainable housing.
Source: Under One Roof: U.S. Cities Look to Co-living to Ease Housing Crisis
III.
A new duplex built in an R-1 zone. And (*gasp*), it’s built in the context of the surrounding buildings and neighborhood! Oh my!
The only questions I have are 1) how did the developer get that approved by zoning and 2) why did they put carpet in the bedrooms after all that hard work?
#AbolishExclusionaryZoning
2 THINGS FROM ME
I.
Alright. So you got the co-living spiel up above. Perhaps you’re sold on it, perhaps not yet. But at least you’re prepped.
I’ve been running a mini thought experiment on co-living that I want to share.
I’m under contract to purchase a triplex in Bradford, VT. I don’t own it yet and there’s a lot that can happen between now and closing. But hell, sharing is the name of the game when you’re building in public, right?
If you can look past the overgrown trees, hole in the roof, chipping paint, and general mess on the porch and inside—the building is actually a gem. Especially within the context of Missing Middle housing and its proximity to Main Street.
The plan that I underwrote originally involved a full renovation and the addition of a fourth apartment in the 1,300 sf barn on the left. Aside from me taking one of the apartments as my primary residence, the project is pretty cut and dry.
Except, when you do the math on acquisition and construction costs, there’s little chance that any of the studio/1-BR apartments would rent for <$1,000 / mo (excluding utilities). And that’s just not affordable for half the single-person households in town.
Ok, so what might a co-living space look like instead?
Well, I drew out a quick concept based on existing building dimensions:
10 private bedrooms around 150 sf each
Some private bathrooms, some shared. Minimum requirement of 1 bathroom per 2 bedrooms (7 bathrooms total)
500 sf communal kitchen with bar seating looking out over Main Street and golf course
700 sf rec room with dining table, couches, and foosball/pingpong
Laundry in basement with perhaps a small gym or creative/maker space
Rents around $750 / mo per furnished bedroom and all inclusive (utilities, WiFi, trash pickup, cleaning)
Assume a renovation budget of $400k (a lot of plumbing and electrical are already in place)
Operationalizing would be a whole other story. Careful thought and curation would need to go into programming and branding to prevent it from collapsing into just another chaotic rooming house.
Before anyone says it—yes, parking is a hurdle. However, there is ample space behind the building that could be made into parking with a bit of site work.
And perhaps 10 beds is too many. I could see 6 being more manageable and optimal for fostering a small community.
But it’s certainly worth exploring. Just around the corner, there are co-working spaces, a bustling Main Street, restaurants, and a few vacant storefronts waiting for the right entrepreneur to open up a business.
A small co-living space filled with creatives and entrepreneurs might just be what the doctor ordered.
More to come…
II.
Last week, I wrote about cottage courts and the Cully projects in Portland, OR.
A few folks followed up, curious about affordability. So I figured I’d explore a bit more.
Here are some actual cost figures from the developer of the 16-unit Cully Grove:
Keep in mind—Cully Grove was built in 2013 in Portland, OR. Labor, material, land, and sale/rent prices will vary drastically across different markets and timelines.
So let’s take an example that’s closer to home in Bradford, VT. And, instead of condos for sale, let’s build apartments for rent.
We’ll make a few assumptions:
Land acquisition: $250,000 for a 2 acre site
Density: 9 du / acre = 18 apartments
Apartment typology: (9) 1BR / 1BA @ 500 sf, (9) 2BR / 1BA @ 650 sf (Cully Grove units are between 1,000-1,800 sf but these will never be affordable in my market without subsidy)
Construction costs (hard & soft): $240 / sf (based on the 9-unit project I’m working on)
Total project cost: $2.75M or $150,000 / unit
To make these apartments affordable, let’s look at Area Median Incomes (AMIs) in Orange County. Assuming residents have a $75 / mo budget for heat and electricity (highly efficient buildings should come in a bit lower actually):
1-person household: $3,658 / mo in income leaves $1,022 / mo to spend on housing (after utilities)
2-person household: $4,179 / mo income = $1,175 / mo to spend on housing
3-person household: $4,700 / mo income = $1,335 / mo to spend on housing
Let’s assume rents are set to be affordable to those making 100% of AMI. If there are 6 of each household size, then gross annual rents will be $254k.
With an LTV of 75%, the project will need $687,500 in equity investment. And the remaining debt ($2,062,500) will carry a cost of capital to the tune of $130,000 annually (based on today’s commercial lending terms around here).
Furthermore, 40% of gross rents will go towards operating expenses (maintenance, property taxes, insurance, trash, turnover, property management, etc).
All in, that leaves a paltry $22,400 in annual profits. Even if the developer took none of the cash flow and gave it all to investors, that only results in a 3.3% return on equity.
With the S&P 500 averaging 10% annual growth rate and multi-family apartment syndicators in the mid-west netting 6-8% cash-on-cash returns, you’ll have a hard time convincing equity partners to invest in this project.
But, let’s not give up that easily… here are the levers we can pull to make the project more palatable:
Increase rents (not ideal)
Reduce construction costs on a per sf basis by increasing the density. There are economies of scale with more units
Reduce apartment size and keep target rents the same. This lowers cost per unit and increases profitability
Pay less for the land. Though, at 10% of total project cost, there’s likely not a whole lot of wiggle room there
This is where a financial model comes in handy. Back of the envelop only gets you so far.
Furthermore, the $240 per sf on construction costs is highly variable. I’m anxious to see where we land on my 9-unit project as that will go a long way in determining the feasibility of a project of this sorts.
1 PICTURE
I.
The universal elements of a good, walkable & safe place: variety in a pattern, greenery, narrow fronts & many doors, color & texture, and complex composure.
📍 Freiburg, Germany
From @createstreets
That’s it for today. Thanks for reading. If you haven’t yet, go ahead and subscribe here:
About me: I’m Jonah Richard, ex-Accenture Consulting and Columbia University alum. I’m currently building Village Ventures LLC, a real estate development and investment company focused on creating great places.
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