Call it a co-op for renters, or boarding house 2.0. Startup PadSplit, based in Atlanta, has a novel approach to solving the affordable housing crisis: shared homes, with private bedrooms for residents (or members, as they’re called), fixed utility costs and a business model that makes it all profitable for property owners.
While many co-living startups target affluent and mobile Millenials, average annual income for a PadSplit residents is $21,000. Room rentals—all in the Atlanta area for now—cost roughly $550 a month, including utilities. That compares to an average $1,437 for a 1-bedroom apartment rental in the area.
Residents also report about $460 in monthly savings when taking into account housing, utility and transportation costs, according to PadSplit, which tries to locate its units near public transportation.
Among the benefits for property owners: lower vacancy, lower turn costs, no leasing fees and massive demand, according to the company. It says its property owners have increased earnings by more than 60 percent.
“This opens up more choice for people who have no choices,” says PadSplit founder Atticus LeBlanc (second from right, back row), who recently raised a $4.6 million seed round of financing.
An Inefficient System
LeBlanc got the idea while working as an affordable housing developer and property manager. What he saw were highly regulated, inefficient housing subsidy programs, along with a private market lacking incentives to create affordable housing. With that in mind, he came up with a model that could encourage private investors to create affordable housing by making it more profitable. “Property managers have a typical formula for what people can afford. But as I talked to people earning minimum wage, I realized they couldn’t pay for anything that was available,” he says.
Then he met a man living in a rundown rooming house that was in foreclosure located just next door to one of LeBlanc’s investment properties. He asked LeBlanc if he could rent a room in that house. LeBlanc tried it out. But thanks to all sorts of logistical problems—you had to pick up money orders every week from the property, for example—he didn’t expand the model.
In 2016, he took part in a competition run by Enterprise Community Partners, a housing advocacy non-profit, that was aimed at devising affordable housing solutions. He suggested that, if you could show the private market affordable housing could be more profitable than market rate alternatives, you’d have a faster route to change.
What if you created a marketplace facilitating connections between low-income individuals in need of housing and landlords with four-bedroom houses renovated to fit more people?
A Co-op for Rentals
With that in mind, in 2017, LeBlanc founded PadSplit to turn his proposal into a business. Specifically, property owners take existing housing and renovate them to be shared living spaces for multiple residents, thereby making them accessible to more people and more affordable for owners. (Also, turning existing space into housing for six to eight occupants is a lot faster than constructing new units).
Houses have a shared common area for dining, a kitchen, laundry and, in most cases, shared bathrooms, with a limit of two people per room. And occupants have access to an Airbnb-style rating system, allowing them to evaluate their accommodations.
Utility bills, including Internet, are included in one monthly payment. Property owners also get incentives to invest in energy efficiency improvements, “because those expenses affect their bottom line in a way they don’t in a traditional tenant model,” says LeBlanc.
Owners take care of the building renovations and pay PadSplit a fee that comes out of residents payments. But through a resident management platform, PadSplit facilitates everything from lead generation to payment processing, resident ratings and energy and water consumption monitoring.
To address zoning restrictions, the company created single-purpose entities with rooms for members, not tenants. “It’s effectively creating co-ops for rentals,” says LeBlanc. Also to make sure they’re good neighbors, there are quiet hours from 11 pm to 7 am.
Anne Field is a New York-based journalist who writes about social enterprise and impact investing. A version of this article originally appeared on her Not Only For Profit blog on Forbes.com.