Pacaso is a startup that gained notoriety after becoming a “unicorn” in record time. Such an impressive rise to prominence cannot be overlooked in the sharing community, so we decided to take a deeper look at the model that has attracted so much attention in the last year.
Pacaso acquires single-family residences and then creates an LLC for each to sell a piece of ownership to multiple buyers. This model most closely resembles fractional ownership, which we covered in depth already. However, a major difference is Pacaso buys single-family homes in residential communities without vacation infrastructure and fractionalizes them, whereas most fractional ownership projects are multi-family developments at resorts where this type of ownership is permitted. This difference, albeit small for some, is key to Pacaso’s business model and a root cause for some of their problems with local residents who push back on short-term use by Pacaso owners.
Unlike in the investment fund model, you may not recoup your initial investment (let alone receive any investment gains) and are locked into a single location. The goal of Pacaso is to provide ownership of a luxury vacation home at a lower price by assembling eight partners per home.
The Pacaso business model centers around selling memberships in limited liability companies, each of which owns a house.. This, on paper, makes second homeownership a lot more attractive for high-net-worth individuals interested in paying lower prices for a residence they won’t use for more than 4-6 weeks while offering deeded ownership via the LLC membership.
Having worked at Zillow for years, both Austin Allison and Spencer Rascoff, the co-founders of Pacaso, know that many Zillow users desire a luxury vacation home but can’t justify the cost. Hence, the main idea behind Pacaso is making these properties available to a much larger market by selling fractions.
The co-ownership model has been common as an alternative path toward vacation homeownership for years now, yet Pacaso’s structures them different enough to warrant a second look.
Right now, you’re probably wondering, “how does Pacaso work?” and whether the practicality of fractional ownership will outweigh the limitations of sharing a home instead of owning it entirely.
The Pacaso business model is, in essence, one in which ownership is a three-step process that helps second-home buyers get the property they want without having to shoulder the full cost themselves.
The first step is to browse through Pacaso’s catalog of single-family homes in many locations across the US and a growing number of them abroad.
After choosing a home and the number of shares you’d like to own in the property, the Pacaso team takes the reins of the operation by creating an LLC for each property and vetting potential co-owners.
Pacaso does succeed in streamlining the buying process by taking care of all the paperwork. Upon closing, the co-owners will collectively hold 100% of the property, with Pacaso retaining none of the shares at all, acting from then on as a property manager instead.
If you’re wondering how Pacaso makes money, they state that they charge a 12% fee on the initial transaction and also add any preparation expenses incurred to arrive at the final sale price of the property. This bundle of add-ons results in a markup on the market value of the properties they offer and also on the upgrades, furnishings, taxes, and closing costs.
The appeal is similar to a fractional, since you’re unlikely to spend a lot of time in the second property you own.
Pacaso’s leadership state that they “try to democratize access to second homeownership so that it can be something that is not just a luxury available to the 1%, but hopefully it can be available to many tens of millions of other people around the world.”
But are they really making luxury more accessible to someone who is not in the top 1% of wealth distribution? Let’s take a deeper look.
Since Pacaso uses an LLC ownership model, everyone participating in the co-ownership is an LLC member. This gives them direct and tangible ownership over the single-family home acquired through Pacaso.
What is an LLC? Well, the standard LLC definition is a limited liability company. In essence, it’s a business structure where personal liability is minimized. LLCs are popular because they offer business regulation benefits similar to corporations but are easier and cheaper to form and to operate.
Like in any LLC, each individual owner is insulated from liability. Pacaso extends its homeowners’ liability protection, flexible management structure, and certain tax advantages.
As you may know, the IRS does not consider an LLC as a separate entity from its owners for tax purposes. Instead, it is what’s called a “pass-through entity,” meaning that business income passes through the managing business (the LLC that owns the home) to the LLC members, who each report their individual income tax returns and other dues.
A property owner, in the true sense of the word, is someone that has both equity in the house as well as deeded ownership. If an individual purchases real estate in the traditional manner, that’s sole ownership.
Someone with a timeshare merely owns the right to use the property at certain times rather than the house itself. Owning a home with Pacaso does come with ownership interest both in equity and on the deed, but other fractional ownership models offer you greater freedom by providing access to multiple residences within the same development and allowing you use your equity to travel to other destinations.
Shared ownership generates skepticism and concern, like whether or not the other shareholders would cause problems or damage the property — and what the structure would be like when it comes to property taxes.
In the overwhelming majority of shared ownership ventures, it’s in the best interest of all shareholders to keep the property well-maintained and coordinate their schedules ahead of time. This is true of all fractional ownership models, not just Pacaso. Traditional fractional though, differ from Pacaso for having a centralized staff, front desk, and concierge that run the property on behalf of the owners.
It’s also worth noting that Pacaso handles the property taxes for co-owners. Taxes are paid pro-rata by co-owners as a part of their monthly cost.
Each owner in an LLC has independent control over their share of ownership in the property, allowing them to sell at any time after 12 months of ownership or for any price they deem fair. Finding a buyer might not prove as easy, however. At the time of this writing, the resale of an LLC is an unproven concept as the first resales are starting to hit the market. However, the Pacaso website states that “On average, Pacaso listings resell in 12 days for a 12% gain.”
Pacaso is also prepared to advise you on what a good price would be and provide comparative market analysis data from your local market to help you make an informed decision.
You should also keep in mind that your ownership is locked for the first 12 months, meaning you’ll have to wait one year from the time the sale was finalized before putting your share on the open market. On top of that, other owners will have a right of first refusal when it comes to who you’re selling your share to.
This is a situation where every buyer decides for themselves how much of a risk they willing to take when they enter into a contract with multiple co-owners who have their own financial interests and personal situations which may affect everyone around them.
The biggest upfront benefit of Pacaso is acquiring a vacation home while paying only 1/8th of the total cost. But they also offer property management services that assist with maintaining the LLC, property tax payments, and advising during share resales.
Their app is also available, which can streamline the scheduling process for all the co-owners in the property, minimizing contact between them. In a sense, it works like an Airbnb but with only one destination. This is similar to more traditional fractionals but without the benefit of a centralized staff that does most of the maintenance and scheduling work for the co-owners, even though Pacaso charges maintenance fees just like fractionals.
While the ease of access makes the user experience good overall, being limited to one location can hurt the value of your investment when there are options out there that allow you to travel to many different locations while growing your equity.
All scheduling is done through the Pacaso proprietary app. Some flexibility to accommodate spontaneous trips is also provided, but that is dependent on the other members in your LLC and their schedules. Their system also factors in peak seasons making sure that holidays are evenly distributed between all the co-owners. Every co-owner has access to 2 peak weeks, 2 off – peak weeks, and, in the mountain homes, to 2 weeks during a shoulder season.
The main difference between Pacaso and fractionals is that the property is treated as an LLC with Pacaso acting as a property manager, and ownership of the home is essentially the same as buying shares, with a minimum investment of 1/8th of the property.
This combination of real ownership, smaller groups of owners, and property management assistance make Pacaso sound good on paper, but is it really a game-changer?
Let’s compare it with other popular options for luxury vacations.
Private residence clubs are high–end fractionals. You get access to a full staff that takes care of maintenance, repairs, and even general housekeeping as long as you keep paying your annual fees. Some private residence clubs operate under famous hotel brands such as Four Seasons, Ritz Carlton, and Rosewood. They are in the prestigious destinations and resorts such as Deer Valley, Utah, Papagayo, Costa Rica, and Jackson Hole, Wyoming.
Private residence clubs are also deeded real estate, meaning you’ll be eligible for various tax benefits that you’d get with a second home. In this sense, PRCs and Pacaso come with a few of the same perks, although the value of the former might outweigh the latter if you crave variety with your vacation time.
Finally, you only pay a purchase price proportional to your personal use. You don’t have to worry about any ownership responsibilities since the club takes care of everything. You can trade your vacation time with owners at other clubs around the world through Elite Alliance Exchange or through a fractional network,
Private Residence Club Pros
Private Residence Club Cons
If traveling is your only goal, then destination clubs may be something you’ve considered in the past. After all, members of destination clubs will get access to the destination club amenities, which could range from golf, exercise equipment, and other luxury perks.
Most destination clubs also choose top tourism destinations like the Caribbean, European Alps, and various beachfront locations. Furthermore, the club also assists with other aspects of your trip like flight arrangement and ground transportation.
That being said, there are quite a few cons that you need to be aware of before you sign up for a pricey destination club membership. First of all, there’s no chance of recouping your buy-in price since these are effectively right-to-use clubs where you don’t get any ownership.
You’re essentially paying for a luxury vacation home subscription, so there’s no ROI even in the picture outside of enjoying your time during these trips. Quite a few destination club costs are also hidden fees that could quickly add up over time. We covered the Inspirato model in detail on our blog.
Destination Club Pros
Destination Club Cons
While Pacaso’s LLC co-ownership does essentially increase your buying power to get a more luxurious home in a better area; it also limits your freedom as a co-owner. Scheduling might be more flexible with other models, and while being tied to a single location is not a bad thing per se (and the monthly fees are affordable for some), you are also missing some of the benefits offered by many of the other fractional ownership models as we’ll see further down.
On the contrary, a model that allows you access to multiple vacation residences in a variety of destinations year-round — like Equity Residences — while also building upon your initial investment, has bigger potential in virtually all areas.
The Pacaso ownership model focuses on acquiring single-family properties in residential neighborhoods that feel more like a home than a “timeshare hotel,” although local laws have challenged this.
As we mentioned earlier, Pacaso offers tangible ownership of the property. This is one of the qualities of Pacaso that does stand in stark contrast to timeshare offerings, where you only hold the right to use the property through a legal contract.
The eight owners of any Pacaso-acquired property can sell on their own terms, which is a unique benefit. However, it’s no secret that similar business models show it can be difficult to sell your share if you’re no longer interested in holding it.
This can be made even harder because the other co-owners might make you jump through hoops before getting rid of your share, and you need to find like-minded co-owners who want access to your home on a limited basis.
Moreover, one of LLC members might decide to sell their share to someone not in tune with the rest of the shareholders, causing conflict down the line.
Pacaso fees and a markup on the property’s market value are actually how the company turns a profit. Your co-owner group will be paying for property management in the long run, as with any other high-end vacation home. You do get access to Pacaso’s tech infrastructure and LLC oversight, but these services are better when you’re using a property for more than 40 days per year.
One example of this markup is a Pacaso home located in Aspen. The list price for it on an MLS (multiple listing service) is $17,995,000, and with Pacaso selling an eighth share for $2,638,000, the property’s aggregate price comes out at $21,104,000. That’s a difference of $3,109,000 between the list price and Pacaso’s, or 17.277%. What is included in the $3M markup: Pacaso’s 12% service fee, furnishings, taxes and closing costs for the house.
Pacaso lists “home expenses” for the house at $2,197 a month. This comes up to $26,364 per year in maintenance costs for 44 nights a year, provided you don’t finance the purchase and pay all cash for your share. If you stay at your home for all the 44 nights, this comes up to $600 a night. Also at closing, Pacaso requires 6 months prepayment of maintenance costs, per a real estate agent we interviewed for this article.
By comparison, maintenance at a private residence club of a comparable size comes up to $16,800 for 6 weeks, or $400 a night, according to the Ragatz Associates Report.
By Pacaso’s own calculation, if you put 30% down on this Aspen home, your monthly cash outlay can be up to $9,876 a month in mortgage rate, principle, and monthly maintenance costs.
Pacaso offers co-owners the chance to cancel the management agreement with them (if all the co-owners agree to it in writing, that is), but that still leaves you with the need for additional property management and no mediator to turn to if a problem arises between any of the parties involved.
There are many Pacaso destinations available in the U.S. You could spend hours going through all the Pacaso listings. At the time of this writing, Pacaso has homes in 10 US states, in Spain, in UK, and in Mexico. And they continue to expand.
If you want a second home that you can live in for half or even the majority of the year, then Pacaso likely isn’t a fit for you. At the end of the day, co-ownership is all about sharing a property with other shareholders so you can all get joy out of the home and share the expenses of purchasing and running such a home.
In that sense, Pacaso falls into a niche between all the major industry models: It’s not as convenient as just renting an Airbnb, but it is above the price tag of the majority of other luxury vacation home ownership models out there. It is touted as akin to buying shares, but you do not generate money on your investment through rentals as with other fractional ownership business models.
Many of the Pacaso houses are very nice, the locations are usually stunning, and if you don’t mind being locked into just one location, then Pacaso could be the best option for you. But suppose you want to get even more value for your money without dealing with a group of co-owners or actually getting a return on your investment while visiting truly luxurious destinations. In that case, Equity Residences funds are by far the best option.
After a protracted battle with residents of the Old Winery Court neighborhood in Sonoma, CA, Pacaso delisted their property from their website. This move came as a result of the residence being listed as a “vacation home” by Pacaso, leading to months of campaigning against the company by residents.
The residents quickly organized around a simple idea: To get Pacaso out of their neighborhood. They went so far as to create a website to warn other communities in vacation areas around the country. And they’re not alone. Pacaso does its best to define itself as something different, but many cities see little difference between their business model and a timeshare, which puts Pacaso squarely on the no-go list for residents of many upscale resort communities. Traditional fractionals make sure their developments are in areas zoned for short-term use and, therefore, fractional owners get no pushback from their neighbors.
While there is nothing illegal in the way Pacaso conducts its business and it might be seen as nothing more than the growing pains of a new industry (similar to what happened with Uber), it would be wise to consider the long-term implications of vacationing in an area where the residents are hotly contesting your right to be there, especially if the local government agrees with them. With Pacaso, your neighbors are other homeowners who might end up fighting the Pacaso business model.
Knowing all this, is Pacaso a good vacation home investment? Well, the Pacaso co-ownership model is a good option if you want to have tangible ownership and control over the property. However, it is no bargain. Even for 1/8th of the cost, the houses are expensive and come with hefty monthly maintenance fees and obvious Pacaso price markups.
At the time of this writing, vacation properties are still experiencing a surge in values. Some believe (we don’t share their views but nonetheless bring them up here) that Pacaso overpays for the homes and that cost is often passed down to the buyers in the LLC. All in all, while certainly not as costly as some other luxury options, Pacaso only makes sense for top earners willing to spend money on a vacation home.
Compared to the Pacaso model, Equity Residences is an investment fund. Our goal is to pool investor’s money to buy homes with cash, create appreciation from Day 1 and use rental income to offset operating costs. Our investors enjoy the entire portfolio of homes during the investment period. At the end of the investment period (approximately 10 years) we sell the homes, return the investment amount and distribute appreciation proceeds.
Since we started the company in 2012, local zoning regulations addressing short–term vacation rentals have evolved significantly. To avoid conflicts with local residents over the use of the funds’ homes by investors and renters, we buy residences in resorts and in areas zoned for short-term use.
Our team is composed of experts from the real estate, hospitality, and finance industries with a proven track record. In terms of ROI, our first fund, the Equity Villa Fund with over 100 investors, has seen asset appreciation of 80% at the time of writing.
This strong portfolio continues to grow as our third fund, the Equity Platinum Fund 2, is raising $50 million to acquire 16 luxury vacation properties. Investors have the option of paying no annual fees and receiving dividends from rental income in exchange for reduced personal use of the homes.
|Ownership structure||Investors collectively own a portfolio of homes||1/8th ownership of one home|
|Financial upside||Investors share in portfolio appreciation and portfolio rental income||Not clearly defined|
|Annual fees||$0 – $18,810||$12,000+|
|Initial Investment||$218,500+||$450,000-$3M at the time of writing (inventory changes)|
|Selection of residences||Multiple residences available to investors||One residence|
|Accredited investor status||Only accepts accredited investors||None required|
|Financing options||All-cash investment. No financing options||Financing is possible|
|Rental option||Rents weeks not used by investors thereby generating income to cover operating expenses (can reduce annual operating fees to $0 at investor’s choosing)||Rentals to third parties are strictly prohibited|
Equity Residences creates private equity funds that carefully evaluates and then invests in luxury vacation real estate. Our investors share in home appreciation and benefit from the rental of our homes. Rent-free enjoyment of very valuable vacations is the icing on the investment cake.
Equity Villa Fund, the first fund launched by Equity Residences, has appreciated 80% in value at the time of this writing. We are currently liquidating some of the underlying assets due to favorable local market conditions and will return the harvested appreciation to our investors. Some Equity Villa investors opt for monetary dividends in lieu of valuable vacations to better fit their investment goals. For these investors, financial returns are realized during the funds’ hold period.
As previously mentioned, Equity Residences rents its homes to generate cash flow to cover operating expenses, a feature that our investors highly value. However, our investors are not competing with renters for prime vacation time because they can reserve the homes prior to availability being offered to renters.