Vacation rentals are not new. Thanks to the internet and entrepreneurs, businesses took a page out of the Uber/Lyft playbook and applied it to hospitality and people’s individual homes. Most alternative investments solve real world problems; for people who use apps to book their vacations in homes, not hotels, one of the issues is the quality of the experience really depends on the individual host of the property and how well the property is maintained.
For individual vacation rental owners, managing a property can be a challenging task, particularly when considering the work required before and after each renter’s stay. Additionally, local municipalities have increasingly begun to regulate short-term rentals, and these regulations can differ greatly from one location to another. Some areas enforce overlapping rules at the city, county, and state levels, which can complicate the management process.
Many regulations focus on owner accountability, public health and safety, as well as preventing misuse of the property. For quality alternative investment sponsors, they welcome that landscape and can build a multi-property portfolio that caters to quality renters who want quality vacations.
Passive Investment Opportunities in Vacation Rentals
To address these challenges, passive vacation rental investments have emerged. Companies specializing in this sector are raising capital to acquire and manage portfolios of high-quality vacation homes. These companies handle vacation rental regulations and benefit from economies of scale, providing a high-end experience akin to that of luxury hotels. The focus on delivering a consistent, high-quality experience helps build trust with clients, encouraging repeat business.
Regulations often emphasize owner accountability, public health, safety, and preventing misuse of properties. Quality alternative investment sponsors are well-equipped to navigate these regulations and develop multi-property portfolios that cater to discerning renters seeking premium vacation experiences. For more details on the trends and predictions in short-term rentals, check out this article on short-term rental trends.
How Vacation Rental Investments Work
Investors’ capital is typically used to aggregate a portfolio of single-family rental homes in popular vacation markets. By institutionalizing the vacation rental business and leveraging proprietary acquisition technology, these companies can create a strong brand presence, similar to the soft-branding used by large hotel chains. As a result, they can expect to generate initial yields that are 2-3 times higher than those from traditional single-family rentals. For a comprehensive guide on buying vacation rental property, refer to this ultimate guide.
Most sponsors raise capital within a specific range ($50-$100M) and offer a preferred return on a monthly basis. Once investors recoup their original investment, profits are typically split 75/25, with 75% going to the investor.
Returns Beyond the Stock Market
These investments are classified as private, accredited, alternative investments with a liquidity lock-up period of 3-5 years. Investors can expect a preferred return paid monthly, followed by a 75% share of additional profits until reaching a 17% non-compounded annualized return. Beyond this threshold, the profit split adjusts to 25% for the investor. For more insights into alternative real estate investments, check out this blog on vacation rentals to REITs.
The typical lifespan of these funds is 3-5 years. Additionally, if you find an alternative investment-friendly sponsor, you may be able to invest using IRA funds. Managing a single property independently lacks the scale and branding benefits that larger investment firms can offer.
Is This Investment Right for You?
Vacation rentals can be highly sensitive to economic fluctuations and consumer spending habits. In times of economic downturn, properties with strong branding, repeat clients, and excellent management are more likely to thrive, whereas independent operators may struggle or exit the market. While long-term vacation rentals have enduring appeal, short-term rentals demand top-tier management to succeed. If you’re not equipped to manage properties at this level, investing in a firm that excels in this domain might be a more prudent choice.
For more information on market trends and investment opportunities, you can explore insights from Grandview Research on the vacation rental market, iProperty Management’s vacation rental industry statistics, and RCLCO’s 2024 Vacation and Investment Home Survey Report.
Securities are offered through Arkadios Capital. Member FINRA/SIPC. Advisory services are offered through Creative Capital Wealth Management Group. Creative Capital Wealth Management Group and Arkadios are not affiliated through any ownership.
This material was created for educational and informational purposes only and is not intended as tax, legal or investment advice.
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