Which Rental Strategy Is Best? Padsplit vs Long Term

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[00:00] All right, so you're purchasing your first property or maybe one of the first few properties you're new to investing entirely or just to real estate. Let's talk about the difference between investing in a long-term rental and a padsplit property because I get this question quite a bit like what what is

[00:16] the best way to go. Everybody just thinks when you think of rental, you think long-term rental. That's just the traditional thing. It's been around for decades and decades and it's worked. It just has. Um it's very simple. I mean, there's there's things that can complicate even that, but it's far

[00:31] simpler than a pads split or an Airbnb, for example. So, let's talk about this. All right, let's just do a simple pros and cons list real quick and get that out of the way. So, obviously, these are averages and there's there's nightmare situations and and golden situations with both, but um you have lower wear

[00:51] and tear versus multiple occupants, and you have easier insurance and financing options. um widely accepted by many cities and HOAs, even if there is a cap a cap or percentage cap or some restrictions from the HOA. Far more of them are willing to allow long-term rentals than any amount of pad split.

[01:09] And then um you have stable tenency because renewals can stretch uh between 2 to 3 years, sometimes far longer. I mean, you you've seen the tenant that's been there for 10 years and um we'll get to the cons, you know, sometimes they can stay one year and you aren't that churn. Um and but you have a cleaner

[01:24] exit, too. So whenever you're ready to sell, if you are holding for 5 years, uh you get the tenant out, boom, ready to sell. Uh after a simple turn, you don't have to do any any decon conversions. And uh with long-term rentals, you know, with the cons, we have um one door, which also means while it can stretch um

[01:45] each each term can stretch longer and longer, we do have only one stream of income. So if that tenant decides to leave, you have zero income for a month or two or three or how however long it takes to fill that up again. So vacancy is 100% when there's nobody there. Um cash flow can be very thin in Tampa Bay

[02:05] with today's prices, taxes, and insurance. And let's touch on that real quick because we've had taxes go up and up. Uh we've had property taxes, we've had um uh insurance, which for the first time in like forever, we've had a a I've had a drop personally had a drop of $200. uh this year as opposed to 500

[02:22] increase uh for like a couple years in a row it seems. So that's pretty good for the future. But overall taxes and insurance are very high. Um and then interest rates have come down a little bit. We saw the Fed share meet the other day and but now they're saying that they won't reduce again in December

[02:37] potentially. I don't know. Uh I think that we are seeing rates come down over the last, you know, year or so, but it is very slow and overall just rents have not risen enough. long-term rents have not risen enough to compensate for um those factors and a few other smaller ones. So, we have cash flow is just very

[02:55] nearly you have to you have to you can't leverage 20% into a long-term rental and expect to break even. Um so, that's kind of where we're at right now and I'll show you that later. Rent bumps. So rent increases only happen at renewal which means there's slower income growth and and oftent times you're not re renewing

[03:13] to the full market rate with a tenant because you value them being there. You don't want to get that, you know, return hit and spend a th000 or three or whatever it is even a couple hundred and and be vacant for a month or two or three. So that's and then you pay another tenant placement fee for the new

[03:31] tenant. And many property managers charge 50 to 100% of their first month's rent for a tenant placement fee. So finding a new tenant is very expensive. You are far better to renew the same one at $25 increase versus a $75 increase. And that's also why we have so many duplexes and tries and quads and all

[03:49] these multif family properties nearby that have tenants that are paying hundreds of dollars under market, right? Because over the years that just stacks and stacks. So, if a tenant stops paying rent, an eviction pauses all income as well. So, just keep that in mind. You kind of all these scenarios,

[04:09] long-term rentals are very simple, and that's that's and that's in a way a con. So, um, with pads, we have the pros. We have, uh, higher gross and net potential by renting each bedroom. And we're diversifying the income. So, even though it's one property, there are multiple tenants paying. So, we have, you know,

[04:25] one vacancy only loses a fraction of the total. And while yes, you may have um vacancies more often, you may have people staying for, you know, less than a year on average or about a year on average, um that vacancy, you're still going to have money coming in, paying the bills at all times. And then we have

[04:43] a a very strong demand for affordable rooms in Tampa Bay. As we've seen how expensive studio apartments and onebedrooms are, it's crazy expensive. So, you know, it's it's like 11 or or $1,200 for a studio where you can and you have to pay utilities half the time or you can go pay $800 a month or $850 a

[05:02] month all utilities included including internet and you don't have to pay deposits to get all that stuff set up. You just like like it's like you're on Airbnb. You just book a room. Um you do have to get vetted and there's there's a pre-approval process. So, it's not like I'm just saying you can pay money and

[05:16] walk into one whenever you want, but it is far simpler than like renting out a single family house. So, it's it's a lot quicker to get somebody in in some of these cases if you're in the right zip code. And so, because because it's so easy to get to get into some of these rooms, I think the flexible pricing um

[05:35] and the ease of getting in and the weekly pay, it's just like it it's almost a no-brainer for a lot of people are just looking for that type of thing. Uh we also have u with pads you have platform help with uh with marketing and screening and payments. So again they

[05:54] act almost as Airbnb does. I'm kind of using that as an analogy because most people understand how that works now. Um they're going to basically vet your people for you. Um they're going to be the the the rent collectors and the distributions of your profits each month. And they're also going to be the

[06:09] platform where people submit maintenance requests and a couple other things. So, there's a lot of things that you have with the uh with that platform instead of just like typing on to Zillow and and listing your room for rent, which they allow now. You can get anybody and then it's it's just it's a much quicker and

[06:25] simpler like just take advantage of their marketing as well with passpl because it's not perfect. There is more management. There's far more people um there's more messages, more complaints between members probably and there's more turnovers. So, we are able to operate or navigate through all of that.

[06:43] It's not as scary as it may seem, but it is a con compared to to the long-term rentals. Um, there are higher operating costs. I mean, for one, you're paying the the platform itself, which is 8%, and then you have a separate property manager doing the in-person day-to-day stuff. Um, there's utilities you're

[07:00] covering. There's the initial furnishing. There's initial conversion. And when I say conversion, I don't mean like you're basically just putting up additional interior walls and doors. And they can be pressurized walls that um don't actually, you know, that pressurizes and they they expand to the

[07:16] ceiling, the floor and outer walls. So they're very temporary um and don't require permits. And then there are um other things like there's cleanings like a lot of people will pay for a monthly cleaning and it's a good thing to do. I think there's the internet costs. You're paying for internet for everybody. So,

[07:36] just keep in mind like all these things and and with the furnishing I touched on, you're not furnishing it like an Airbnb would. So, you know, you're not really going to be spending $20,000 on decor and nice couches and outdoor furniture like, you know, tables and stuff. Most of it's just bed frames and

[07:55] mattresses and um desks and stuff like that in individual rooms to make them more uh comfortable and convenient for their at home work or whatever they're doing. So there's other things with pads split. There's like we must keep in mind the local rules, occupancy limits. Um we have to keep in mind like parking, make

[08:15] sure there's enough at each house and and HOAs are basically always a no no. I do think that um I do think that pads splits likely will incur, you know, more maintenance um and a larger maintenance maintenance reserve, but because of their because of the far higher gross income,

[08:35] I think you can still keep about 5% reserve for both properties because a 5% reserve at 6,000 a month is, you know, a lot more than 5,000 reserve at $2,500 a month. So, uh, percentwise, I don't think you really need to change that. Uh, I think it will correlate to the amount of rents you're collecting.

[08:55] Um, we have the [sighs] resale and exit, which is still nobody's really selling these right now. Um, there have been a few, and I'm I'm sure there's a few every year, but more people right now are buying because it's such a newer thing. Nobody has owned a pad split in Tampa for 10 years or even

[09:13] I don't even know if it's been technically five years, maybe five or six. uh at the most. So I think most people are still in the holding phase and the growth and purchase phase and not too many people are offloading yet. So in my opinion I think the resell and exit is going to be very simple and

[09:29] smooth. I think as you see people buying um operational Airbnbs as a almost like a business. There will be those people who are interested in that as a pad split as well because there's you don't have to go in and pay for the furnishing and the initial conversion. Everything is already set up for you and not that

[09:45] you can charge a premium. I don't know if you will be at that point in time when you're ready to exit, but there is a chance you could uh because all that work has been done and it's been there's a history there. So, you might be able to sell it less as the underlying asset and more as the like an income approach.

[10:00] So, here's where each one shines. And I'm going to do a uh a simple numbers thing and a comparison for you a little bit later for a property in the 300ish range. So you can see, you know, most people have about enough money to pay for the uh 20% down on a $300,000 starter home in Tampa. So we'll see what

[10:19] that looks like for each each rental strategy. So where each property shines, I think if you want something that is very it's like a low touch and it's uh it's steady, it's finance friendly and it's a it's a very simple and easy resell and easy to manage thing even for yourself. Sometimes I think you need to

[10:36] pick a longterm. Now, just keep in mind I I really would recommend you pay more than the 20% down. You put down more than that, like 30 to 40 if you want to break even and start your like just give you enough cushion and some cash flow starting the next year. I think that's probably what you want to do. Um, but a

[10:54] lot of people don't have they don't want to put more than 20% down. So, I I get it. This is why we're talking about pads. If you want something that's going to maximize cash flow from a single house and you'll probably have to hire, you know, a a property manager but operate it like a small business, I

[11:08] think padsplit is what you want. Now, that's not to say that you have to invest solely in padsplit properties. I think there's actually a very good argument that you should um build a portfolio and you should probably add a padsplit or two to it depending on how many properties and how large it is

[11:24] already. But that high income will help offset other expenses from other properties. So if you get a couple uh pads split properties, it may be wise to go ahead and buy a long-term rental and you can withstand a little bit of negative cash flow for a year or two because those other ones are producing

[11:39] so much. But for those people who are starting out, you don't have properties already bringing in income. Um you know, it makes sense to start out with a pad split so you actually have some income coming in versus negative cash flow. But nobody believes me really when I tell them there is negative cash flow in

[11:54] single families right now unless you're putting 40% down. So I'm going to show you here in a second. All right. I'm just going to show you a uh we're going to look for a property. We are going to look for a property in Tampa. And we're going to

[12:12] do a zero or sorry not zero a uh non- flood zone property. That's what everybody wants, right? No flood zones. We'll do a 300 to $350,000 house. I'm going to look for it and we'll find one in a second. And I'm not going to do too many filters here. I just want to keep uh

[12:35] let's do Hillsboro County. Still a lot of properties to look through. So, oh, no. HOA. That is the one that I should do. and no CDD community development district. So, do not want those as well. And we do want something that's at

[13:07] least, I don't know, 1,600 square f feet probably. You know what? I might as well just do all these filters because I'm not going to find what I want right away. So, unless I do this, we'll do a block exterior. All right, there's only nine properties.

[13:28] All right, look at this one. All right, boom. Found it. Okay, so we're going to do this property. This is a $325,000 property. I'm going to go ahead and pull rent comps on it live from my other MLS sheet right here. And we're going to be looking at long-term rental comps here.

[13:50] And this is a four bed. Okay. I mean, it looks like Let's look at some photos just to verify condition. It's not great. Not really great. Okay. So, it just needs some flooring work, like new flooring. Um, and like I don't know, maybe new

[14:15] paint and put some of these doors back up. Has kind of like an older feel to it, like an kind of older deferred maintenance feel, but some like painted wood paneling over there. Yeah, like needs new new flooring

[14:36] um where the tile is at a minimum and then new paint at a minimum. And let me just compare this with and like pressure washing out here for sure. I'd say this is close to I mean like kind of close to turnkey. Maybe not exactly, you know, with the flooring,

[14:58] but Okay. So, what we're going to do is it looks to me like there's another property nearby within like half a mile. It has uh a little bit nicer um rented for 2550. So after you paint and do your flooring,

[15:21] this will look like a pretty nice house. That kitchen does not look bad. Uh the backsplash is interesting. Um not granite. Oh, you know what? All right, I take this property back. There is a lot of If you can see my mouse right there, these cabinet looks like they're falling apart. It's from Micah countertops, not

[15:37] granite. I think you probably might need to do a new kitchen once you start opening these cabinets up. We're just going to plug it into my calculator here and we'll just compare pad split versus uh long-term rental including all the work. So, it'll be apples to apples. So, purchase price, let's just put in the

[15:54] ask there. Budget, I think no matter how you do it, you're going to be doing the same for both properties. So, the budget will be about about the same um for like the flooring, the paint, and the kitchen, we'll say. So, let's add in [clears throat] kitchen. Um, if you were to redo it

[16:15] entirely, which I just don't know, I feel like you might be able to get away with adding granite to the countertops and and repairing them. So, let's just assume that's the case. Let's just say like $7,000 for that. And maybe new hardware is in there as well. Let's do new paint. Uh, probably

[16:32] four, maybe four to 5,000 there. And then flooring probably 1,800 square feet uh times $10,000. So 21 Well, let's put 21,000. Keep it simple. And then for padsplit, we're going to have about I think with this house,

[16:59] was there a layout here? I think with this house and this layout, you can probably get about seven or eight rooms. So, I'll look at it both ways. And you're probably looking at about $12,000 for for furnishing it, the the setup cost

[17:18] for that. And then we also have the other the other difference between this is setting up the walls and doors. So, there's probably another $8,000 involved with putting up the uh the walls and doors to make some of these additional like four additional bedrooms. So, and I could be wrong on this, right? But we're

[17:34] just going to kind of assume that's the case for now. And you know, well, let's see if we can add a little bit more money. Let's put let's put 25,000 to be safe. So, 25,000 that's just for that's just an extra expense up front for padsplit. So, let's do that. Financing cost. This is pretty average right now.

[17:50] 6.75% 20% down on both. and not using a heliloc. Long-term property management is eight and um pad split we're going to put six. I think it's going to be about closer to six on this one. Uh but pad split we're going to have average of like Europe utilities. So let's add

[18:08] these in real quick and feel free to skip forward to the final conclusion if you want. But we're going to put about 160 a month for water sewer trash. This is eight bedrooms, not you know 10 or 12 internet. So we can see pads we marked true versus and then versus false and long-term is all false. So here's our

[18:29] monthly cleaning for pads split. Let's go down to long-term. I think the rental rate for this one is probably going to be closer to like 2350. It could be a little bit higher, but I think that'll actually get you a rental pretty quick and you're not going to have high vacancy. So we can even reduce

[18:46] vacancy probably a little bit to 3%. Um, listen, even if we push this to $2450, which is $100 under the nicer property, I think that property is just too nice uh to be a rental comp for like to be to be so close to this one. They had a very nice updated kitchen, wood flooring throughout, like hardwood flooring

[19:05] throughout, bathrooms are beautiful, porch, everything, all that. So, I think 2350 is probably the right number here. maintenance reserves, capex, might have to bump that up to three. I don't know if it has a how old the roof for HVAC is currently. And of course, that'll affect numbers, but it'll affect them evenly.

[19:26] We have negative $500 a month cash flow for this long-term rental. And this is a this is a a pretty good area for rental properties. There's a lot of rentals here. Um, now, if you exclude the reserves, you have still -250 a month. So, you're out of pocket even on a good month. And that's how I look at it. On

[19:45] some good months, it would be nice if your cash flow looked positive, even if you were withholding for reserves, but um that's not really the case here. Now, let's go to pads split. Let's put in seven bedrooms just to be generous here because maybe we can't get eight. And let's just look up the

[20:04] Let's look up the uh padsplit uh market. Where is it? Here. Hang on. Here we go. Pad split map. It's what I use for some of the data. This is the Oh, okay. Now it is working. A good little quick indicator of where a zip code is at any given time. This is 33612.

[20:34] Okay. I don't know what's going on here. says Tampa right now has 2,000 118 active rooms, which is kind of crazy. For some reason, this is not working. Let's try this. Okay, you can see the demand 11,000 searches in the past 30 days.

[21:06] Okay, unfortunately this zip this map is not working right now. Um, it should be outlining all the zip codes, but I know I know um where the zip code has been in the past. So, what we're going to do is we're going to put $185 a a week for the average weekly rate by room. And

[21:31] we'll lower the occupancy to 85 though I think it is 90 just to be kind of a little bit generous. Here we have turnover and cleaning per room is $40 per room. So when a tenant leaves after 8 months you're paying uh the property manager, her cleaner, whatever uh about $40 um as of right now to to basically

[21:49] turn the room if it's just a basic generic turn. Um so that's not very expensive, but you'll be able to see where it adds up over time. and then the platform fee which goes to padsplit. And let's do this. So, we're going to estimate about seven rooms. And we'll assume that they all stay about

[22:08] um one year, which is a little bit longer. You can increase this to, you know, 12. If you think that the uh they'll they'll stay um a shorter duration of time, so you'll have more turnouts per turnovers per year, more moveouts. This is also calculating the tenant placement fee to padsplit.

[22:28] Unfortunately, I have not built that into my long-term rental. Um, so that is actually um a difference that I should probably figure out how to add into the the analysis for the long-term rental page because that's a that's a really good fee. That's a big fee you need to remember. Um, so we have here, we'll put

[22:46] this back to seven. We have cash flow $100 a month, 105 after your after your reserve. So, this is already factoring the high vacancy. Uh, the maintenance and reserve is at 5%. Now, let's see what happens if we add in eight bedrooms, $550 a month cash flow. So, if you can

[23:10] get eight bedrooms here, it's a pretty slaming deal. Sure, it's not the highest cash on cash in the world, um, but it's it's far better than any long-term rental you can uh you can find. So, let's also compare the total cash invested, which is a little bit of the cash on cash return is is pulling from

[23:30] the the total cash invested, which is like the rehab, the onetime fee. So, $115 $116,000 here for pads split because of the additional costs, and 91,000 for the long-term rental. So, just keep in mind if you go the padsplit route, you do need money after closing, and often it's it's 20 plus,000 um at at

[23:48] a minimum. So, cuz you need furnishing and walls, doors, locks, all that type of thing to get it uh to get it ready to go. So, I hope you've enjoyed this. You can see the cash on cash is actually negative, which is not great because you are taking a loss um each month. Now, let's before I let you go, I want to

[24:06] show you what it looks like if you do the equity modeling. Equity modeling. Well, actually, what's what's a better way to show this is the IRRa, the internal rate of return. Let's go to the uh All right, let's see. Property appreciation 4% per year. That's correct. NOI growth 2.5 over a 10-year

[24:23] period. So, let's see. The internal rate of return for the long-term rental is almost 6%. And let's see what the you know what I could change is let's change the after repair value because since you're doing the flooring and like the kitchen and stuff, you are improving

[24:41] the value of the home. So, let's just say it's worth 350. And so that's what we're going to base the starting point of the internal rate of return on. So your internal rate of return is probably closer to 7 and a half% uh for a long-term rental and it's 14% for a pad split. So that is basically

[25:05] collecting all of the income each each year from each property or from from either property each month. It's paying down the debt and it's also building your equity and the appreciation and then it's taking the proceeds from your sale at the end of year 10. And so that's how all this that's how the

[25:21] internal rate of return is calculated and I think it's the most full picture um way of looking at your your uh your property, your investment. Please like, comment, and subscribe and let me know if you have any questions about padsplit or rentals or real estate below so I can answer them at another time. Thanks for

[25:40] watching again. >> [music]