Fractional ownership of luxury vacation homes is popular for a reason. People like the idea of owning a second home they can come back to over and over again, but they don’t like the idea of paying full operating costs for a home where they spend four weeks out of a year.
For those who like to explore new vacation destinations, a private equity fund that invests in luxury vacation real estate offers an alternative way to participate in owning a luxury vacation home.
Equity Residences’ Equity Platinum Fund takes an opposite approach to fractional ownership: instead of concentrating all their assets in one location, they diversify their portfolios across multiple locations. Instead of holding to the residences indefinitely, they state a clear portfolio liquidation horizon, ten years to be exact. Instead of restricting rentals that help to defray high operating costs for luxury vacation homes, they rent their residences out to non-investors and pool rental income to offset high operating costs.
A private equity investment fund that turns a luxury vacation home ownership into an investment with a defined exit timeline and preferred returns for the investors in the form of luxury vacations was created with the help of the same guy who pioneered the luxury fractional industry in the 1990s. His name is Steve Dering.
Introducing Steve Dering
Steve Dering is often called the “pioneer of the luxury fractional ownership industry.” As a former advertising agent in Park City Utah, Steve Dering spent a good portion of the 1980s marketing Deer Valley Resort’s real estate offerings. During this period, Steve found that most people who purchased a Deer Valley home were only spending 3-5 weeks in those homes every year. Steve saw an opportunity to create shared ownership of these homes without the entanglements and financial flaws found in traditional timeshares.
We sat down with Steve to get his take on the differences between fractionals, timeshares, and a real estate private equity model that specializes in sending investors to luxury vacation homes around the world. There are similarities between the models, but there are big differences. Read Steve’s take below to understand the key differences between the models.
Timeshare vs. Fractional Homeownership
Steve tell us that “A timeshare is essentially the pre-purchasing of vacation time. Due to extremely high marketing and sales costs, it is not real estate based.”
So, the purchase price of your time is not based on real estate values and only makes sense if you keep the timeshare for more than five years. Unfortunately, they are usually difficult to sell because there is little resale value and maintenance fees tend to dwarf the cost of the timeshare over the years.
Fractional ownership, on the other hand, allows you to purchase a share of a luxury home in a desirable location. You typically receive more weeks to spend at the home because you share with a small number of other homeowners. You can exit your homeownership at any time, or after a specified number of years, but it is usually up to you or a real estate agent to sell your share.
If the property has not appreciated during your time of ownership, you may not receive a profit with the sale of your share. With fractional ownership, the benefits over timeshares are many, but, according to Steve, “Much of the return on investment is the result of vacation savings when compared to the rental value of their visits to their property.”
Fractional ownership also typically does not permit the ability to rent out unused time and receive extra income to cover costs.
The luxury real estate private equity fund model
When you invest in Equity Residences’ Equity Platinum Fund, you’re investing in a diverse portfolio of homes in many different locations. Equity Platinum Fund portfolio homes and has a set liquidation date, which allows investors to exit at the same time. The financial returns are factored into a fund model, and investors get a great vacation experience without the headaches and high costs of full ownership of a vacation home.
Equity Residences allows investors a destination club lifestyle while investing in a portfolio of luxury vacation homes that can generate rental income over 10 years.
At the end of that 10-year timeframe, the homes are sold, and investors receive their initial investment and appreciation gains. Meanwhile, investors and their families can vacation at any of the luxury homes offered by Equity Residences and their affiliates ThirdHome and Elite Alliance.
With Equity Residences, there is an anticipated financial return, a pre-determined liquidation date, and a financial health benefit of rental income, which can cover most of the operating expenses.
Steve says that “Equity Residences is both a financial and a lifestyle investment in a portfolio of homes in diverse locations. Each investor has the option to maximize either the financial or lifestyle component, or to balance them, according to how they prioritize financial dividends versus personal vacations.”
Equity Platinum Fund Portfolio Criteria:
According to Steve, Equity Residences carefully selects homes for their portfolio based on three specific criteria:
1.) Desirability: This factor takes into consideration the desirability of the location of the home. Each year Equity Residences surveys investors to understand where to buy a home. Popular destinations include the Caribbean, Hawaii, and European cities.
2.) Potential for appreciation: This factors in the desirability criteria, along with any home improvement costs. This is also determined by the expertise and experience of the management team.
3.) Potential rental income: Equity Residences team carefully evaluates the potential rental income of every home they purchase for the Equity Platinum Fund. Rental income allows the Fund to reduce or eliminate operating costs for investors, and, if the Equity Platinum Fund makes an access rental income, pay dividends. Renters are third-party high net worth individuals, and some become investors themselves.
Investors have a say in the expansion of Equity Platinum Fund portfolio. The investors have a stake in the success of Equity Residences, and they become part of the business model and goals.
Investing in a private equity fund with a diversified portfolio is for people who want to travel to new destinations every year, but want to come back to the same location once in a while. While “Fractional ownership is site-specific and is deeded to individuals”, but does not promise any financial upside, a private equity fund is “has a more predictable return on investment since it is a stated business goal and investors can choose from diverse locations when they go on vacations.”
Both fractionals and a private equity fund relieve you of upkeep and maintenance that comes with traditional vacation homeownership so that you and your family can truly enjoy your time together when you visit a vacation home.
To choose a right model that works for you, consider if you are a traveler who prefers to go to the same location year after year and to spend 4-6 weeks a year at the same vacation home? Or you are content with exploring the world?
Also, consider your financial objectives. If you prefer to have your out of pocket maintenance expenses associated with the second home ownership covered by the rental income, consider investing in a private equity fund that specializes in renting vacation homes when they are not occupied by investors.
If a timeline is not an issue and you can hold on to real estate indefinitely and are willing to pay operating costs, consider a fractional. If you want a finite liquidation horizon, consider an investment fund.
If you have a pride in ownership of your vacation home and the thought of sharing it with renters is not acceptable, consider a fractional. If you are comfortable knowing that other individuals are covering your would-be-high operating costs, so you don’t have to, go a fund model.
There is something for everybody!