Why real estate investment models like Inspirato are becoming obsolete

There are a full range of options for vacation home use and/or investment and it’s interesting how much the market for vacation properties has changed over the past decade. On one end of the spectrum you have luxury destination clubs such as Inspirato.

Inspirato has raised nearly $50 million in funding from DAG Ventures, Millennium Technology Value Partners, Kleiner Perkins, Access Venture Partners and Crunchfund and has partnered with American Express (AXP). These private equity investors hope to reap big returns from members paying $17,500 in initiation fees plus annual dues of $3,000, which gives them the right to rent any of their vacation properties scattered around the world. Inspirato’s cash flow benefits from a policy that requires members to pay for a rental in full, as soon as they make a reservation.

Inspirato leases its properties, rather than owns them. This is a lot of money just for the right to pay still more money on nightly fees, but Inspirato says its members end up saving money in the long run because its nightly rates are less than members would pay on the open market.

Let’s do the math, over a period of 10 years you’ve spent $47,500 in initiation fees and annual dues before spending a night in a property. Now let’s assume you spend $5,000 per year in rent for two weeks use per year over the same 10 years. That adds up to a total of $97,500 over 10 years. At the end of 10 years, that $97,500 investment has no residual value. You’re not buying, so you don’t build equity.

Inspirato leases its properties, rather than owns them. Current market conditions make this is possible because the vacation property market has been hurting; many owners prefer a long term lease to an empty house. However, given a market recovery, will Inspirato still be able to renew these long-term leases? Costs of higher lease rates will be passed along to someone! That $97,500 could easily become a much bigger number as the market rebounds.

We will say that these are gorgeous high end properties, and most people seem to join because membership eliminates the hassle of vetting vacation options from afar. All the properties have similar amenities, and all meet high standards.

Now compare that to a new model that has emerged as exemplified by Equity Residences. Equity Residences provides the benefits of owning a vacation home without the hassles. Partners do not pay large initiation fees or annual dues. This is made possible because the properties are rented out when not being used by Partners. The rental income is used to offset operating fees.

Let’s do the math, over the same 10 year period, you invest $99,000 which is used to buy hard assets in the form of luxury high-end vacation homes. You enjoy free vacation use for the same two weeks each year in proprieties that rent for $10,000 to $20,000 for two weeks use. That adds up to more than $100,000 in value received over 10 years in the form of vacation use.

And here’s the real value kicker. With Equity Residences, your investment has a residual value. We’re buying these properties as low as 30 cents on the dollar from the peak, which is sometimes below construction cost!

Because most are purchased below current market prices and we strategically upgrade these properties (adding bedrooms, bonus rooms, etc), Partners see an immediate bump in their equity. The properties are held as they appreciate through the real estate cycle with a planned liquidation within ten years.

Those profits are not going to the big private equity funds. Those profits are going to our Partners who share in the equity appreciation of a real estate portfolio.

Importantly, Equity Residences properties are also stunning and high end, meeting high standards. Here’s the kicker, Partners have the option to stay in the properties for free, derive rental income from the properties or trade the property access to use 50 luxury properties around the world through Elite Alliance.

We find that this pragmatic investment is more compelling to a savvy and affluent consumer. Expensive time share models aren’t providing the value and anticipated ROI that investors are seeking.

With an investment in the Equity Residences Villa Fund, affluent vacationers are finding a value proposition that makes sense. They have many destination choices around the world. Assuming a Partner travels 2-6 weeks annually, they’ll spend far less through their Equity Residences investment than if they owned and maintained a nice second home. Research shows that few people use their vacation properties as often as they’d initially anticipated unless it’s within a short flight or drive from their main residence.

We encourage you to take a closer look at the Equity Residences model. Luxury real estate private equity. Done the right way.