1.3 Why Invest in VRP?

WEALTH AS A VACATION

Further on in the book, we will examine the location question more closely. However, I’d like you to remember one very important consideration: you will also be a customer of your VRP. Consider the potential to have a fi nancially profi table business and a vacation home that will enrich you and your family’s and friends’ lives.

To recap, VRP can be found from beaches to mountains, small towns to big cities, around sports arenas, theme parks, entertainment complexes, national monuments . . . anywhere that attracts vacationers. But to get the most out of this investment experience, look to the places that you and your family love fi rst. Sift through the fi nancial models, and balance your strategy between fi nancial profi t and the ultimate “profi t”—the benefi t of time with loved ones.

1.3 Why Invest in VRP?

What other investment can you make where you are able to build wealth, accumulate hard assets, and at the same time utilize those assets for you and your family and friends’ enjoyment? Think hard; there are not many. One of the most compelling aspects of VRP investment is personal fulfi llment. Whether you are single, married, married with children, young, old, self-employed or a part of the workforce, we all need time off .

You may notice that I am merging two diff erent uses for VRP in this book: personal and short-term business travel. As the urban and business short term rental industry grows on the trailing edge of VRP, it needs to be addressed. Now more than ever, business travelers are looking for options. Let’s say an engineer travels to a diff erent city for two weeks. In the past, his options would be hotel or “extended-stay hotel.” Neither off ers the comfort of a single-family home, townhome, or condo. If the family comes along, the engineer can turn his business trip has turned into a vacation. Thus, a new rental channel is born for high-performing real estate: business vacations.

Let’s take a look at vacations and the impact they have on our lives. The dream, a life of vacations, is in reach. But we should fi rst

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understand what even a single vacation can do for our overall wellbeing and relationships.

Among the many debates swirling around the media each year is whether our nation’s leaders should take time off for vacations, and how much time they should take. As it turns out, though it may seem our leaders are being irresponsible when they golf, it is more likely that they are doing the right thing. Everyone needs a vacation.

Not all of us experience stress in the same way, or at the same level in our day-to-day lives. However, we all do experience jobrelated stress. We may face the burden of meeting tight deadlines, making crucial decisions, or managing the complexities of household demands and parenting responsibilities. Our stress may also include the unease of being underemployed or unemployed.

All adults have lives that are fi lled with some form of stress, even if we don’t fully acknowledge this fact.

Stress can manifest itself in many ways. Chronic stress takes its toll, in part, on our body’s ability to resist infection, maintain vital functions, and even avoid injury. When you experience stress or are chronically tired, you are more likely to get sick or remain ill for a longer period of time than you otherwise would. Your cardiovascular health suff ers, and you’re more likely to make errors in judgment. As a result, you are more at risk for having an accident in your car, at work, or even in your own home.

Your sleep quality will deteriorate and you won’t digest your food as well. Even the genetic material in the cells of your body may start to become altered.8 Stress is a huge factor when it comes to our health and longevity.

When you don’t take a break, bad things happen to you, both physically and emotionally. Not only do you become crabbier and more anxious, but your memory gets worse and you make lowerquality decisions. You’ll also be less fun to be around. As your friends

8. https://www.psychologytoday.com/us/blog/fulfi llment-any-age/201006/the-importancevacations-our-physical-and-mental-health?amp Accessed May 15, 2019.

WEALTH AS A VACATION

pull back, you run the risk of becoming lonely and depressed. Stress and overwork create a vicious cycle, one that needs to be regularly broken.

Of course, in the right amount, stress can build strength and discipline. The goal should not be a life completely devoid of all stress. However, continued high levels of stress without a break is not a good thing. Even people who claim to love a busy lifestyle will admit there are times when they just want to get away from it all, if only for a short time.

Is this you?

Vacations are the prescription to heal stress-related health issues and to break the stress cycle. We return from a vacation feeling reset and reinvigorated. We gain perspective on our problems, reconnect with our families or with our friends, and get a break from our usual routines. A vacation is a way to wake up and see things in a new way. Canadian researchers Joudrey and Wallace reported that active leisure pursuits (such as golf) and taking vacations helped to buff er or ease the job stress among a sample of almost 900 lawyers.9

What other benefi ts do vacations off er? Plenty:

• Rest and recuperation from work • New experiences leading to learning and intercultural understanding • An inner sense of peace or wellbeing • Personal and social development • Strengthened relationships with friends and relatives • Improved physical and mental health • Increased empathy

Perhaps the most important thing in this list is simply the fact that vacations strengthen our bonds with others. Shared family memories

9. https://www.psychologytoday.com/us/blog/fulfi llment-any-age/201006/the-importancevacations-our-physical-and-mental-health?amp Accessed May 15, 2019.

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and time spent together—apart from ordinary everyday activities— helps to promote positive ties. Our vacations also help us create a stronger foundation for weathering life’s challenges as a team.

The problem is, however, that vacations can be expensive. For most families, the typical approach is to save for months, or even years, for those one or two magical weeks each year. During this vacation, we are expected to heal from our stress-related conditions and release all the tension we have accumulated through the rest of the year. This rarely works as a total solution. Why? Because in the aftermath of two carefree weeks, we are faced with the reality that we have spent a signifi cant amount of money. Sure, we now have beautiful memories (hopefully), but there is no tangible reward or lasting asset.

Now, consider the VRP method. You purchase a vacation home that earns income, pays off its debt over time, and allows you to utilize it for your vacation. In reality, your vacation accommodations are covered, and the income generated from the vacation rental home builds wealth, pays down the mortgage, and pays for your vacation. And, if you place your vacation home in an exchange program, those free vacations are not limited to just one location. You can vacation in hundreds, or perhaps even thousands, of locations worldwide, all covered by your investment in VRP. This is such a great benefi t that it bears repeating: if your VRP is enrolled in a solid exchange program with one of the international exchange companies, your investment allows you to travel the world and stay in other exotic destinations in similar quality homes as your VRP investment.

Generally speaking, the gross income from a vacation rental property will be far higher than a similar property under a traditional long-term rental. Additionally, if it is located in your favorite vacation destination, your investment also allows you free use of your property in a place you want to be, throughout the year.

There are many other reasons for investing in this particular asset, most of which are similar to the benefi ts derived from a traditional real estate investment. A VRP investment is the purchase of a future income stream from property and can off er several advantages

WEALTH AS A VACATION

over other types of investments, including potentially higher returns, stability, infl ation hedging, and diversifi cation.

Here are some more key reasons to consider investing in VRP:

According to a recent Curbed piece, in the United States, 42% of vacation homeowners cover all their costs through rental income, 40% have seen increased booking over the last year, and 28% turn a steady profi t. According to research from the National Association of Realtors, 19% of home purchases in 2018 were purely investment-based.10 VRMB.com data show half of the people who have tried vacation rentals now prefer them to hotels. Because only 11% of travelers have tried vacation rentals, there’s a lot of growth coming.11

Some may argue that the low volatility characteristic of VRP is the result of infrequent real estate sale transactions and property values that are often determined by third-party appraisals, which tend to lag the market. These infrequent transactions and appraisals result in a smoothing of returns. Naysayers will mention that reported property values underestimate market values in an upturn and overestimate market values in a downturn. It is true that the estimates of real estate volatility should probably be adjusted upward—so keep this in mind when you are doing due diligence on a particular property in a particular area.

With that said, however, most investments come with some degree of volatility. Securities markets, as we have seen lately, are certainly vulnerable to sudden, unexpected, and unsettling volatility. One example is the “Flash Crash” of May 2010, when $1 trillion in stock market value was erased in just 15 minutes.

In an environment where market volatility is an ongoing issue, the more stable pricing of real estate looks pretty good.

10. https://www.curbed.com/2018/10/2/17925738/property-airbnb-vacation-home-shortterm-rental Accessed May 15, 2019. 11. https://www.biggerpockets.com/blog/vacation-rentals-high-profi t Accessed May 15, 2019.

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The Value of Real Estate For a quick primer, let’s briefl y examine real estate in general against other types of investments. Unlike stocks and bonds, an investment in real estate is backed by “brick and mortar.” This reduces the confl ict of the fee- or commission-based agent. What I mean by that is when you choose to buy stocks, bonds, or mutual funds, you’re generally at the mercy of the integrity and the competence of advisors and brokers. Even VRP funds, and REITs, which are listed real estate securities, often have regulations that mandate a minimum percentage of profi ts be paid out as dividends.

A signifi cant feature of real estate investment is the proportion of total return accruing from rental income over the long term. According to Investopedia, over a 30-year period from 1977 to 2007, close to 80% of total U.S. real estate return was derived from income fl ows.12

12. https://www.investopedia.com/articles/mortgages-real-estate/11/key-reasons-investreal-estate.asp Accessed May 15, 2019.

WEALTH AS A VACATION

This helps reduce volatility. Why? Because investments that rely more on income return tend to be less up and down than those that rely more on capital value return.

Real estate is also a good option when compared with more traditional sources of income return. The real estate asset class typically trades at a higher return than U.S. Treasuries and looks appealing in an environment where Treasury rates are low.

Another benefi t of investing in residential real estate is it helps you diversify. Real estate has a low correlation with other major asset classes. In some cases, the correlation is negative. This means the addition of real estate to a portfolio of diversifi ed assets can lower overall portfolio volatility. In other words, provide a higher return per unit of risk.

I don’t want to get too complicated here, but the notion of real estate as a hedge against infl ation is worth mentioning. The infl ation hedging capability of real estate is based upon the positive relationship between GDP growth and demand for real estate. As economies expand, the demand for housing drives rents higher and this, in turn, translates into higher capital values. Real estate passes some of the infl ationary pressure on to tenants, thus maintaining the purchasing power of your capital.

However, while real estate has defi nitely become a popular investment vehicle over the last 50 years, buying and owning brick and mortar can be complicated. Real estate as an investment is, of course, as old as the practice of land ownership itself. A person buys a property and rents it out to a tenant. The owner is responsible for paying the mortgage, taxes, and some utilities. They also cover maintenance of the property.

Ideally, the landlord (you) charges enough rent to cover all of the costs. You may also charge more in order to produce a monthly profi t, but the most common strategy is to be patient and only charge enough rent to cover expenses until the mortgage has been paid. At that moment, the bulk of the rent becomes profi t for the owner. The property may also have appreciated in value over the course of the

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mortgage, leaving you with a more and more valuable asset over time. According to the U.S. Census Bureau, real estate in the United States has consistently increased in value from 1940 to 2006. While there was a substantial dip—especially in some locations—during the subprime mortgage meltdown of 2008 to 2010, it has now rebounded and has been increasing again.13

If investing in real estate appeals to you, you must fi rst know the market in which you are searching for property or hire an expert to help. When you are seeking an income stream from rental properties, the most important aspects to consider are property location and market rental rates. As for location, most successful VRPs are located in close proximity to major attractions, both manmade and natural. For example, if you buy a property near Walt Disney World, families are likely to want to rent it year after year. There are many other features of a profi table rental property, and some take time to learn.

There can be, of course, blemishes on the face of what seems like an ideal investment. You can end up with a bad tenant who damages the property or, worse still, no tenant at all. This leaves you with a negative monthly cash fl ow, meaning that you might have to scramble to cover your mortgage payments. There is also the matter of fi nding the right property. You will want to pick an area where people will want to rent.

VRP investing is diff erentiated from general real estate residential investing in that the renter is short term, and pays a much higher ADR (Average Daily Rate). Due to the vacation nature of the rental, the ADR for a residential rental property in the VPR category will be similar, per couple, to the average hotel/resort off erings in the same economic profi le, and in the same area. For instance, if you have Marriott property in the same resort as your VRP with an ADR in the $200 rate, and your VRP home has two adult bedrooms (enough adult

13. https://www.costargroup.com/costar-news/details/composite-price-indices-resume-solidgrowth-boosted-by-strong-net-absorption Accessed May 15, 2019.

WEALTH AS A VACATION

bedrooms to comfortably welcome two couples) your home will generally rent in the $400 per night range.

Therefore, if your VRP home is averaging 50% occupancy, you will have an average income of $6,000 per month. That is $6,000 per month for a home that would perhaps rent for $2,000 per month if it were leased long term (for one year or more).

That is triple the gross income from your investment.

Let’s also remember, and I will remind you of this throughout this book, there is another big benefi t to VRP: PERSONAL AND FAMILY USE AND ENRICHMENT. Say you have a home in a resort located 10 minutes from the gates of Walt Disney World in Orlando, Florida, or close to the Strip in Las Vegas, or on the beach in Costa Rica. If your home is only occupied 50% of the time, earning triple what it would in a long-term rental, you and your friends and family can use the home the other 50%, free and clear.

What other investment can you make where you are able to build wealth, accumulate hard assets, and utilize those assets for you, your family and your friends’ enjoyment? I can’t think of a single one.

Imagine the ways you can utilize this home. Instead of staying in a resort or hotel room, your extended family will enjoy the closeness of staying together in a home, cooking and dining together, even leaving the clothes and items needed for your stay in a locked “owner’s closet” so you only need to show up and start relaxing.

Higher profi ts plus personal enjoyment? Now that is an investment that truly pays dividends.

Let’s go a bit further. Say that after your fi rst VRP investment establishes a good track record, you make a second or a third purchase, or more. As you build your portfolio of VRP, you may fi nd that it becomes your primary source of income. At this point, you are free to spend your time as you wish. This free time allows you to travel, investigate more VRP location opportunities, and grow your business even more.

The possibilities are endless. From beaches to mountains, Vegas to Disney, domestic or international, VRP is the gateway business to a life of wealth building and endless vacationing.