Why Understanding Unit Economics Is Vital For Rentals

Many investors believe that they can make money on a rental property without understanding the actual costs of the investment. This episode discusses what is important to know when investing in rentals and how you can use that information to make better decisions.

Dwellsy is a site for residential home rentals, built on the radical concept that true, organic search in a free eco-system creates more value than the pay-to-play model embraced by all current rental listing services. With Dwellsy, renters should be able to find ALL of the rentals, all in ONE place. They should be able to trust that a listing is not fraudulent. And they should be able to quickly distill down to rentals that meet their preferences -- not be driven toward irrelevant listings from paid placement owners and managers should be able to list and lease their vacant units for free. Not free with an asterisk. Free. (You can never create a true, organic search on a play-to-play model).

We are on a mission to transform the home rental market for everyone involved.

Join us! https://dwellsy.com/

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Why Understanding Unit Economics Is Vital For Rentals | Jonas Bordo

What do we do blitzscaling? What are your thoughts on Airbnb? This seemed like they were pretty aggressive with how they scaled and that's one sector of PropTech where perhaps they have worked. Another sector where it probably hasn't worked is WeWork.

Those are two very different companies, organizations, approaches and value propositions. Airbnb clearly grew at an incredibly rapid rate, but one of the things I give them a huge amount of credit for is they were attentive to the marketplace dynamics at every step along the way, and they were willing to stop and address issues that arose. A couple of years ago, they had the crisis with people getting their homes damaged from folks renting it and being left holding the bag with thousands of dollars of damage. They figured out how to address that and move past it to maintain enhanced marketplace dynamics that make everybody feel safe transacting on their marketplace. They were always very attentive to that. Folks at WeWork took a very different approach to blitzscaling in a not necessarily sustainable way.

I'd put Uber in this category too. Although not in PropTech, illustrative of organizations that were willing to break a lot of stuff in order to scale. That's a path that you can go down and certainly, you could look at WeWork through a lot of different lenses, but it’s IPO for nearly $10 billion in value. It’s hard to say that it was a complete disaster. Even though it was pretty messy along the way, some of the last folks in lost some money on that. We will always be attentive to the marketplace dynamics and scale in a way that makes sense based on the opportunity there. Airbnb provides a great model for that and how to do that pretty well.

What's interesting with Airbnb, and I alluded to this with Dwellsy too, is disrupting the idea of what the category is. At the time Airbnb existed, you may have written Airbnb off some couch surfing website because there was no other comparison. Go to a hotel if you want to go stay somewhere, whether it's for business or leisure or you can go to someone's house and stay on their couch.

There was this website called CouchSurfing. Everyone looked at it that way and they were turned down 100-plus times. Eventually, Greylock as one of the investors that understood the pitch. As risky as this is, this is one that we need to go after hard. That's why they did blitzscale because the market was wide open, but it's a very risky strategy for sure.

90% to 95% of the time, a company is not ready for it. You need to have the monetization model figured out and the margin structure correct. Knowing when to step on the gas is as important as going slowly and carefully. It's a timing issue. You crash the company and miss the opportunity to completely if you don't.

One of the big differences between those two is Airbnb had it. They'd figured out their unit model economics and it worked and they knew it worked as they poured more money into it. It might not have been creative in the short-term, but they knew it was going to be creative in the long-term. Whereas,at WeWork, they had a lot of empty office spaces and they had not figured out their unit economics yet. As they scaled up, they scaled up their losses and ultimately ended up being a debacle at a certain point. You are exactly right. You’ve got to know the timing, understand your business, and understand when it's ready for it and when it's not.

Let's talk a bit more about your background. You've been on the private equity side. You've run operations for Essex. What were some of the things you saw there and opportunities within PropTech, generally? Dwellsy is one of the opportunities that you realized you started a company around. What problems did you see and what did you do? Could you educate our readers a bit about your background?

Serving the renter and making it much more of a tech-forward experience that's in line with other purchasing experiences that they might make is a big thing.

Immediately before starting to Dwellsy, I was with Essex. I was running the centralized operations group, all of the internal functions that supported the field teams. I got the chance to see property operations. Our organization was trying to do it as best as it could possibly be done and had the resources and scale in order to do it well.

I saw the challenges upfront and personal. I saw the opportunities. Much of the focus in the industry is on efficient capital deployment and keeping operating costs at a minimum. It was interesting, in my prior role with a company that's now BentallGrennOak, which at the time was Bentall Kennedy, we were operating investment managers.

We managed about $40 billion in assets under management, and we operated most of those assets ourselves, but not all of them. It was an interesting point of observation because I could see how the performance of our assets deferred when we operated them versus when third-party managers operated them. One of the biggest challenges that folks deal with is the agency problem of having somebody else manage things. We saw that directly at Bentall Kennedy, where we saw when we managed an asset, we would get a lot more out of it because we could worry about every last dollar. It was my boss had Essex used to say, “We would spend $0.99 to get $1 because that made sense for us.”

We had $0.99 to work with in order to do that. Whereas other folks who are not the owner and not the operator have different incentives and goals, and that agency problem is a real challenge. A lot of things come back to that in property management and trying to figure out how to solve those problems, but there are also a ton of technology opportunities across the space.

There are some interesting innovations going on both from legacy players in the property management software space and from the new entrance. In that space, that's a robust and interesting place for evolution. Serving the renter and making it much more of a tech-forward experience for them that's in line with other purchasing experiences that they might make is a big one.

I also think hospitalityzation. I don’t know if that's a word, but effectively making the multifamily experience much more like a hospitality experience. It’s a great trend as well because it's a big opportunity. Renters want those services and want those options in their homes. It's a good opportunity for owners and operators to make more money and provide a better and more differentiated service experience for their residents.

Where I want to focus on is your insight that if you have a third-party manager, things don't run as efficiently and you call this the agency problem. You need to have a certain scale surely to justify running your own management and operations. Do you know when the right time is? We at Blue Field Capital, which is the venture fund and a private equity fund that I have worked with before, have invested in some startups in the space, the property management space and they are disrupting it.

We have a lot of readers here who are trying to break into real estate, have already bought a couple of rentals, and am trying to figure out where in the value chain they should play. You've got numerous senior-level executive leadership at large property management firms and real estate private equity firms that are reading this show. What's your view having sat in the shoes that you sat in running operations? What is the right time to outsource to third-party management firms and what is the right time to run it yourself? Maybe it's not about the stage and time. It might be about your own strategy, but any thoughts for people trying to figure out where they should play in the value chain?

The one thing I want to make sure I'm clear on is that third-party property management can be done well. It can also be done poorly and in-house property management could also be done poorly and well, depending on the situation. I have seen both. It's the agency issues need to get managed aggressively. People get themselves into trouble when they don't see the elders, when they don't manage those agency issues, address those right up front, and make sure that there is true alignment of interest in place and that the owner manages with that in mind. With that said, there is no one right time for anybody to consider externally managed versus internally managed. A lot has to do with the organization and what they see themselves doing.

Operations is a completely different skillset capability mindset than investments. I have been part of investment organizations and seen people who are incredibly driven by the deal by the transaction. They are oriented towards that and the day-to-day operations of making sure somebody's plumbing is working. It couldn't possibly have less interest to them.

For those types of organizations, they should have a third-party manager who believes that stuff is important and is called to focus on those things because that can put them in the best place to be competitive. In hybrid organizations that are trying to do both investments and operations, it's always a challenge. There's a lot of sexiness to the investment side of it and some of the operations people look over there and they are like, “Those folks get paid a lot of money and their jobs look easy.” You don't get woken up on New Year's Eve by somebody's power outage, and that sounds nice.

The flush doesn't work.

The light bulb needs to be changed. All of those. There are folks who love that service role. Finding the right mix of people in a blended organization is a real challenge. Setting up incentives and an organization in such a way that it values and respects both sides of that is a challenge. I haven't seen a lot of folks do that well.

It comes down to the specific organization. When I was at Bentall Kennedy, we did that exceptionally well. It was an organization that valued the front-end operations and we saw a lot of our competitive advantage coming from doing that well. We'd built a third-party management platform on the promise that we are going to manage your assets exactly like we manage our own.

We had all these clients who were frustrated because we never gave them any choices. We told them how their property would be run and required them to front the capital when a capital investment was needed, but we manage them exactly like they were our own, which worked well for those clients. We got them great yields and were good operators. That can apply to any situation, but you are exactly right to focus on scale. If you've got 50 units scattered across the country, you should hire somebody. If you've got 50,000 in one geographically consolidated market, you should think about building an operations group, so scale is an important factor but cultures are also important.

To summarize what I'm hearing and to add my own flavor to this. Figuring out what you love, what you are passionate about, and what you want to make your superpower in the real estate game, you've also got to look at the alternatives, the stage, and the locations you are in. It feels to me like many investment firms succeed by being good at only one of three things deal-making, capital raising, or operations management.

Scale is an important factor, but cultures are also important.

Do one of those three things right and you'll do well. I'd add operations management to the construction side and consequently, you see a range of large firms that have grown even because they have got a deal machine and they outsource everything else, or they are good at in-house property management. If they are going to do that, I highly advise, don't try to copy everyone else. Bring in technology because this is one area where of any era in PropTech, property management is one way you could infuse technology PropTech throughout the entire process.

On the other side is construction and I’ve got to tell you here, it's about finding good labor and people you trust. It is that simple. No amount of technology is going to matter if you don't have construction workers and developers who you trust and understand how the finding and code permission cycle works. That would be the advice that I would give and it's built on what you said. Jonas, it's been wonderful having you on the show. How can people reach you? Is there anything you were looking for from our audience base if you'd like anyone to reach out to you for anything? Let them know and also how to reach out to you.

It has been a real pleasure. I enjoyed it. I'm reachable at Jonas@Dwellsy.com. I'm always happy to chat with anyone. In terms of what we are looking for, if you are out there and you've got properties available, we want them on Dwellsy. I'm excited to announce that we opened up an individual listing platform. Even if you only have 1 to 3 units available, you can now list directly on Dwellsy, which is new. If you've managing 5,000 to 20,000 units, we want your units on the platform too. Our aim is to have every unit in the country listed on Dwellsy when it becomes available.

How much does it cost?

It is free. Thank you for that.

Is it free with any asterisks?

No asterisks at all. No charge for lease, leads and listings.

When I researched the space, everyone advertises their platforms as free, but when you look, there's an asterisk and those asterisks might be the first listing free. What variations have you seen on the free side of the asterisk?

There are so many different asterisks. There are asterisks based on the size of the organization. There are asterisks based on the duration of the listing. There are asterisks based on the number of inquiries. First inquiry free, second inquiry you have to pay for. There's conditionality around leases. You don't have to pay for anything until you get a lease, and we'll decide when you get a lease or not.

If we bring you the renter, it's free, but then if they apply, we are taking our cut. It's commission-based.

There's a free, but you have to use our application system. That's another one. There's a bunch related to that, but Dwellsy is and always will be completely free. There is no charge and no asterisks.

Thank you so much, Jonas.

Thank you. It's a pleasure.

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About Zain Jaffer:

Zain Jaffer is an accomplished executive, investor, and entrepreneur. He started his first company at the age of 14 and later moved to the US as an immigrant to found Vungle, after securing $25M from tech giants including Google & AOL in 2011. Vungle recently sold for $780M.

His achievements have garnered international recognition and acclaim; he is the recipient of prestigious awards such as "Forbes 30 Under 30," "Inc. Magazine's 35 Under 35," and the "SF Business Times Tech & Innovation Award." He is regularly featured in major business & tech publications such as The Wall Street Journal, VentureBeat, and TechCrunch.