Fundamental differences exist between private equity funds and vacation clubs as far as their organization and their respective promises of value are concerned.
To see how they diverge, we’ll contrast the business models of vacation club Inspirato and luxury real estate private equity fund Equity Residences. We’ll also look at their individual pros and cons when viewed from a benefit-cost analysis perspective:
How luxury vacation clubs like Inspirato work
Inspirato offers its members the right to rent any of its vacation properties around the world at rates that are theoretically below normal market prices. For this privilege, it charges a $10,000 to $30,000 initiation fee. New members also pay $3,400 every year to keep their account with the company current. Aside from these fees, there are no pre-qualifications for being an Inspirato member.
For its part as a vacation rental service, Inspirato does not own any actual real estate. Rather, the company leases all its properties.
Inspirato raised nearly $50 million for its business in 2014. The company achieved this through investments from Access Venture Partners, Crunchfund, Dag Ventures, Klein Perkins, and Millennium Technology Value Partners. It also managed to secure a marketing partnership with American Express.
Inspirato claims its members save money in the long term despite its steep fees because they pay nightly rates that are lower than those on the open market. This claim is debatable, however, especially when comparing the nightly rates the company offers with the rates listed on vacation rental services such as VRBO.
Benefit-cost analysis of vacation clubs
To properly compare the benefits and costs of Inspirato against the business model of Equity Residences, let’s weigh the costs of a similar experience. To match the service level that the Equity Residences Platinum Fund provides, we’ll assume the following costs:
First, you purchase an Executive membership from Inspirato for a $30,000 upfront initiation fee and retain that membership for ten years. At this membership level, you get vacation privileges and perks similar to what a Platinum Fund investor would also receive. Since Inspirato rolls the dues for your first year into your initiation fee, at the end of your 10-year membership, you would pay approximately $60,600. This would be true whether or not you choose to go to on vacation to one of their properties.
Second, after going on your first two off-season trips for free, you pay Inspirato two weeks rent every year for ten years at an estimated cost of $12,000 per year. During your membership, you rack up rental fees totaling $108,000.
By going on vacation for two weeks every year for ten years through Inspirato, you pay a total of $168,600. This figure includes the annual dues and nightly rental fees, and when averaged, this translates to roughly $1,200 per night spent at an Inspirato property.
Now, consider also that Inspirato doesn’t own its properties and instead leases them. While its properties all look amazing and offer services and amenities at an impeccably high standard, as a member, you receive no equity from its value as real estate.
How private equity real estate funds work
In contrast to Inspirato’s lease-based approach, investors in the Equity Residences business model own actual vacation home property. The company makes this possible by allowing partners to invest upfront on any real estate it buys.
For their investment, the company waives all rental fees for its partners and only charges a visit fee to cover housekeeping costs and other minor visit-related expenses. Partners can also opt not to pay annual dues. Partners, therefore, enjoy all the benefits of vacation home ownership without the inconveniences and liabilities typically associated with it.
To offset the cost of operating its properties, Equity Residences rents out its vacation homes when its partners do not occupy them. Since the company does not take commissions on rentals, all rental income goes toward covering operating expenses.
Benefit-cost analysis of private equity real estate funds
Mirroring the $168,600 you would spend on vacations through Inspirato for ten years, let’s say you invested the slightly lower sum of $150,000 with Equity Residences. As with the Inspirato membership, you decide to hold onto this investment for ten years.
Unlike an Inspirato membership, however, you pay the entire investment sum upfront. Equity Residences takes your investment and places it in its unlevered fund, which lowers the risk on your investment. It then uses the fund to buy luxury vacation homes for members to use.
As long as you stay invested with the company, Equity Residences gives you the option to vacation at its properties for two weeks each year. For this privilege, investors pay $2,988 annually. The company also charges a $695 visit fee for each week of stay to cover operating expenses. If, however, you decide only to use one of the two weeks allotted to you, Equity Residences waives the annual fee.
By taking these costs into account, investors spend only $313 per night if they use all 14 nights available to them. If they only use one week of their two-week annual allotment, this drops down even further to just $100 per night. This compares very favorably against the $1,200 per night that Inspirato members spend.
Despite the lower per-night costs, Equity Residences provides accommodations, services, and amenities that rival its direct competitors. Investors still get to stay in $1,000-per-night residences while enjoying all the benefits of a luxury vacation. They also enjoy vacation privileges through THIRDHOME and Elite Alliance.
The true value of investing with Equity Residences doesn’t become apparent, however, until you opt to liquidate your investment. Because the hard assets the company buys appreciate in value over time, investors also earn a portion of that value through their involvement. To boost this effect, the fund buys real estate below its current market value and adds bedrooms and other amenities as part of a well-thought-out upgrade strategy.
For an initial investment of $150,000, you have the potential of walking away with a liquidated value of roughly $200,000 after ten years. This is dependent on global real estate continuing to appreciate at historical levels. During your 10-year investment, however, you may enjoy vacations worth anywhere between $100,000 and $150,000. After factoring in those gains, the estimated cost per night works out to a credit of about $500, which means, best case, you are paid to visit great destinations around the world! This is assuming the real estate market does very well for 10+ years. Also, this does not factor in any opportunity cost of investing the Inspirato or Equity Residences initial capital expense in a CD, money market fund, or other investment.
This appreciation potential is the primary reason why investors choose equity funds such as Equity Residences over expensive vacation clubs. They not only significantly buy down nightly rates, but they also provide a return on investment over time and positively impact investor equity the moment they invest.
Platinum Fund from Equity Residences
Equity Residences Platinum Fund has the potential of providing better value than vacation clubs while also offering an attractive alternative to luxury vacation home ownership. The latter is especially true when considering research that shows families underutilize their vacation properties. Partner families that vacation two to six weeks each year spend far less, therefore, if they invest in Equity Residences instead of owning and maintaining a luxury second home.
Equity Residences provides a downloadable Investment Guide with the pros and cons of the various forms of luxury vacation home ownership to anyone registered on their site.