Destination clubs and private equity real estate funds differ dramatically in their structure and value propositions. To illustrate this, let’s compare the destination club Inspirato to Equity Residences, a private equity luxury real estate fund.
In 2014, Inspirato raised nearly $50 million in funding from DAG Ventures, Millennium Technology Value Partners, Kleiner Perkins, Access Venture Partners and Crunchfund. It subsequently created a marketing partnership with American Express.
Inspirato’s corporate investors reap returns from member initiation fees, ranging from $10,000 to $30,000, and annual dues, currently set at $3,400. Members have the right to rent any of Inspirato’s vacation properties scattered around the world, theoretically at below-market rates. Inspirato’s cash flow benefits from a policy that requires members to pay in full for a rental as soon as they make a reservation.
Inspirato leases its properties and owns no real estate. It claims its members end up saving money long-term because its nightly rates are lower than open market rates. However, a comparison of their nightly rates with what you can find on VRBO may lead you to a different conclusion.
Accredited investors weigh costs against benefits when making financial decisions. So let’s do the vacation math.
Assume you purchase an Inspirato Executive membership and you remain a member for 10 years. (This membership level affords you the same vacation privileges and perks you would receive as an Equity Residences Platinum Fund investor.) You pay a $30,000 initiation fee upfront. With the current promotion that includes your first year’s dues of $3,400, you pay $60,600 during the 10 years whether you vacation or not. When you visit a property you pay a rental rate.
Let’s assume you pay Inspirato $12,000 per year in rent for two weeks use over the 10-year period and you receive your first two (off-season) trips for free. You will spend $108,000 during the term on vacations and at the end of 10 years, you will have spent $168,600 in initiation fees, annual dues, and nightly rental payments. Based on two weeks of vacation per year over the 10 years, the nightly rate equates to $1,200.
As stated, Inspirato leases its properties, rather than owns them. Market conditions in 2011, when the club was launched, made it possible to lease at depressed rates because rental rates and occupancies were down and many owners preferred a long-term lease to an empty house. However, after the market recovery, Inspirato was not able to renew the long-term leases at the same low rates and this adversely affects their value proposition.
Admittedly, the Inspirato properties are gorgeous and of high quality. It appears most people join because membership eliminates the hassle of vetting vacation options from afar. All the properties have similar amenities and meet high standards. But you receive no real estate equity with your Inspirato membership, so there is no investment benefit.
There are no set pre-qualifications for being a destination club member. As long as you have the money to pay for your membership and subsequent stays at chosen vacation spots, you are in.
Equity Residences investors enjoy the benefits of owning vacation homes without the hassles or responsibilities. Our Partners make an upfront real estate investment. They pay no rental fees (only a visit fee that covers housekeeping fees and other minor expenses directly related to the visit) and can opt to pay no annual dues. This is possible because our properties are rented when not being used by Partners. 100% of the rental income is used to offset operating expenses as no commission is ever taken for renting the properties.
Let’s do the math. Over the 10 year period, you invest $150,000, a slightly lower amount than you would spend with Inspirato over the same term, but paid upfront. Your money is then used to buy hard assets in the form of luxury vacation homes. The Fund is unleveraged, so your investment is a low-risk, long-term real estate investment in appreciating assets with minimal carrying costs.
Investors have the option to enjoy two weeks each year (as you would as an Inspirato member) for only a $2,988 annual fee and a $695 per week visit fee to cover operating expense while in residence (varies by residence). If you make one of your weeks available to the Fund for rental, the annual fee is waived, and you enjoy one luxury week for only $695. That equates to either $313 per night (using all 14 nights) or $100 per night (with the one-week rental give back) for a $1,000-per-night residence. Compare that to the $1,200 per night that Inspirato members are paying over the term.
Here’s the real kicker. With Equity Residences, your investment grows in value. We’re acquiring properties that deliver immediate investment returns because we purchase real estate below current market prices and implement strategic upgrades, (adding bedrooms, bonus rooms, etc.). So, Partners realize an immediate bump in their equity the minute they invest.
If your initial investment is $150,000, upon liquidation after 10 years you will receive an estimated $200,000 while having enjoyed vacations worth $100,000 – $150,000. If you factor in the real estate gains, each night you vacation is worth $500 more than your out-of-pocket cost. You are being paid to visit some of the world’s great destinations!
Importantly, Equity Residences’ Equity Platinum Fund properties and services are the equals of those offered by our direct competitors. Unlike our competitors, our Partners can opt to stay in the properties for free, derive dividends from the investment, or use their vacation privileges to stay at luxury vacation accommodations around the world through Elite Alliance and THIRDHOME.
Our pragmatic approach has proven to be more compelling to savvy investors. Expensive destination club memberships, like those offered by Inspirato, are a mechanism to marginally buy down nightly rental rates. They do not provide the value and anticipated ROI that our prudent investors are seeking.
Our Equity Platinum Fund not only makes more financial sense than destinations clubs, it’s a very attractive alternative to owning your own vacation home.
Research shows that few people use their vacation properties as often as they anticipate unless it’s within a short flight or drive from their main residence. A Partner family that travels two to six weeks annually will spend far less through their Equity Residences investment than if they owned and maintained a luxury second home.