1.4 Who Invests in VRP?

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1.4 Who Invests in VRP?

Investing in real estate is a long-term strategy, regardless of whether you’re buying a home to live in or a vacation investment property. Life has changed for vacation property owners because it’s easier to turn a profi t from vacation rentals than it has ever been before, but it is still a long-term proposition. Ideally, vacation rentals should be bought with disposable income—money you might have spent on hotels can now be invested into a rental property.

A Tale of Two VRP Owners We can learn a lot from the mistakes—and successes—of VRP owners who have gone before us. I’d like to tell you a story about two gentlemen who happened to buy properties right next door to each other, yet got a vastly diff erent return on their investment. It begins in 2007.

The fi rst VRP owner was the CFO of a Fortune 1,000 company, a well-known retail brand. He visited a property developer’s offi ce one day and bought four homes cash, for an average of $2.2 to $2.6 million each. (Please note, this price point isn’t standard in the industry; he was shopping at one of the highest-end VRP developments in the country at the time.)

This executive’s goal was to use one of the homes and put the other three into a rental pool. Unfortunately, he did no negotiation at the time of purchase—he paid full sticker, as they say. He also looked at nothing in the homes prior to close. He didn’t see how they were built. He didn’t know about property management, or maintenance, or any of those things, and he didn’t take the time to learn. Another problem: this CFO didn’t do any of the marketing he needed to do to fi ll these homes once they became available for short-term rental. Instead, he just left it up to the nearby hotel that was part of the overall development, because the hotel had told him they would keep his properties rented.

This unfortunate VRP investor bought at the top of the market in 2007 when all of the high-end homes on the coasts were going for

WEALTH AS A VACATION

$990 to $995 per square foot. The homes he had purchased were built for only about $190 per square foot. As a result, they survived about three months of wear and tear. Everything went to pieces. The exterior of the homes didn’t hold up because they were located right on the Pacifi c Ocean and the salt attacked.

Inside, the HVAC had problems. The compressors blew; they were overworking due to high humidity levels. The homes had big sliding doors that opened up the whole wall, and, of course, his renters would leave them open overnight. The interior would go hot, cold, hot, cold. The compressors turned on and off , on and off . They were blowing out like crazy.

He should have had about 12% expenses in his fi rst year of operation. Instead, he had about 78% expenses of his income in that fi rst year. He had to pour money into the houses because you can’t rent a home if the HVAC isn’t working. You can’t rent it if the siding is falling off . You can’t rent it if it’s got pest-control problems because the whole thing was built out of local wood instead of concrete block or steel.

Compound these issues with the fact that he bought during a period of time when the rents did not continue to increase. What happened in luxury during that crisis period is rents didn’t go backward, but they didn’t increase every year at three or four percent, either. In the end, the CFO had three properties that were simply not making it—not paying the bills. In the end, he ended up selling the homes for about 60 cents on the dollar.

Now, he was a wealthy individual going into all of this, so he could ultimately absorb it. I’m sure he’s still wealthy. But the takeaway here is if this series of events would’ve happened to anyone else, it would have bankrupted that person.

At the end of the day, our CFO didn’t make one mistake as a VRP owner. He made a whole series of mistakes because he was used to having other people do things for him. He thought, “I’ll just keep throwing money at it.” Most VRP owners would not have that option.

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A Better Approach A second guy, a tenured English professor, bought in the same neighborhood around the same time. He negotiated his purchase deal down to about $1.8 million for the same type of home as those in the CFO’s collection. He put about 50 percent down on the property, and before he closed on it, he went all over it himself.

As construction progressed, this second investor brought in an engineer. Yes, he spent a little bit of extra money to do so, but it was worth it because the engineer saw to it that all of the design fl aws in the home were fi xed. This investor had done his homework and knew what he was doing. He knew he wanted block construction on the fi rst fl oor and steel on the second. He knew what kind of HVAC system would keep up with the climate. These changes did tack on an extra 10% to the purchase price, but again, it was worth it.

The impact of this approach? His operating expenses were around 25% as opposed to 78% his fi rst year.

The second investor ended up buying two additional houses in the development from the CFO. He bought them for 60 cents on the dollar, put in about another $200,000 in them to fi x the design fl aws, and probably still owns them today.

The second guy didn’t have nearly the fi re power in terms of money that the CFO had. So, he said to himself, “I’m going to have to use my brain.” He paid close attention to detail and it made all the difference. He said, “I better know what the heck I’m doing here because this could take me down.”

A few key takeaways from our tale:

• Spend the money sooner rather than later on your VRP to prevent problems instead of reacting to them. • Negotiate a better deal when you buy a VRP property. • Look for construction or design fl aws ahead of closing—we’ll discuss this in more detail in Chapter 4. • Consider where your property is being built and how the climate will aff ect wear and tear.

WEALTH AS A VACATION

• Think in terms of how renters will treat your property. Those enormous glass doors that open up to the ocean view? You better put alarms on them to bother renters after a minute or two so they have to close them. • This is not a hobby; it’s a business. Your business.

In my 15 years in the vacation home industry, I have seen dozens of buyer profi les, from the active startup business people who may lack sophisticated investment experience, to the accredited high-networth investor with investments across multiple asset classes, and all the various types of investors in between.

The wonderful thing about VRP is that it is truly an even playing fi eld. With the maturing of this industry comes the wide range of property types, price ranges, locations and amenity mixes. Also, the vacation home booking and management component becomes ever more sophisticated. The reality today is that the services provided to VRP owners from some of the best vacation rental management companies in the world rival the fi nest hotels when it comes to customer handling, retention, and management of the physical asset.

This is not luck. Growth and sophistication of industry sectors will typically follow the growth of a customer base. VRP usage by vacationers has exploded in the last fi ve years, and this is only the tip of the iceberg.

Following on the heels of the maturing of the VRP management industry comes the developers, with years of research and a product and community that is built specifi cally for the VRP owner as well as for vacationers. These “ready-made” developments are fertile ground for all types of investors, as the developer builds an array of home sizes and price points to cover the marketplace.

With all of this growth, and the maturing of the industry, the opportunities are endless. Who is entering the VRP business?

• The beginner buyer who is simply looking for a vacation home to utilize with family, and rent out when not in use to “cover costs”

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• The investor who is full-time in the business and has the dream of an array of VRP in favorite locations. This owner wants the dream of “Life as a Vacation” • The high-net-worth sophisticated investor adding another asset class to her investment array • The corporation looking to purchase a “retreat” property for its own usage, while renting it out when not in use

These are just a few of the investor types embracing this growth industry. If you fi t one of these, or fall into multiple categories, or have your own reasons, the door is open. You need only walk through armed with knowledge and a plan.