2.1 VRP is a Business, NOT a Hobby

WEALTH AS A VACATION

the various vacations you have taken and wish to take in the future, and be laser-focused on your short-, medium-, and long-term goals.

2.1 VRP is a Business, NOT a Hobby

Investing in vacation rental property isn’t a decision made overnight. There are many variables to consider, and many skills to master. Learning more about all of these will help infl uence your fi nal decision on whether to start a business in this growing industry. I am genuinely enthusiastic about every aspect of owning vacation rental property. I love the fact that investing in VRP off ers your family fi nancial returns combined with quality time in beautiful locales around the world. VRP is my business and my passion.

But here is what is it not: my hobby.

You cannot treat a VRP investment like a little side hustle that you’re just doing for fun. You also cannot embark on a VRP purchase thinking, “This is a no-brainer!”

To illustrate what I mean, let’s take a look at a Canadian VRP investor named Richard. Richard loved to get out on the water, so he and his family spent every year at a fi shing lodge in the summer. They rented it, year after year. It was a really nice lodge with about a dozen standalone homes on the property and gorgeous views of a pristine lake.

One year, that fi shing lodge converted and merged with a bigger property on the same lake. This new entity had about 50 homes altogether, and they were all put up for sale.

Richard thought, “This is great! We’ll do this.”

Before he chose to buy this property, the rental operation was completely hands-off . There were no services—you just got a code to a keypad on the door of your little home, and you were on your own. After it was converted, the managers put in a central check-in location, with someone at a counter. Unfortunately, this was done without a lot of forethought. Basically, someone had tried to create a VRP community but didn’t go all the way. They just said, “Eh, here. We’ll

CHAPTER 2

treat all of these little lakes houses like hotel rooms and sell them. It’ll be fi ne.”

Richard bought two of the homes. He was able to get residential fi nancing on them, which meant he had about an 85 percent loan-tovalue ratio on both of the properties. He bought them at the peak of the market, because to him it was an emotional decision.

Worse yet, the company that took over these properties didn’t know how to market itself in the hospitality space. They tried to use a DIY site, and all the owners in the development undercut one another on pricing. So, the amount Richard was renting his lake home for prior to buying is what he thought he’d be able to charge others. He did not plan on a bunch of new property owners undercutting one another.

He didn’t really look at his two new homes as a business.

The numbers—in terms of what Richard could charge vacationers per week—plummeted to about 40% of what they were when he was renting.

He couldn’t pay his debt service and ended up selling both homes at a loss.

By treating this purchase as a hobby, as a “no-brainer,” this VRP owner had a bad experience. He didn’t do any marketing. He didn’t manage the manager of the development; in fact, he didn’t know anything about the manager at all. He put his two homes on one of the DIY sites like a hobbyist, instead of getting together with the other owners, creating a homeowners’ association, and putting strict guidelines in place on how they would price their homes. The owners in this development also failed to create a reserve for replacement, so there was no fund to pull from when common areas needed maintenance. And they always need maintenance.

Yes, this is a cautionary tale. But the interesting thing about Richard is he didn’t completely sour on the concept of VRP. When I talked to him and asked, “What did you do to ensure this investment would succeed? How could you expect this business to be profi table if you were not managing it?” he actually took a hard look at himself and recognized the mistakes.