Kaitlyn Mitchel interviewed Greg Salley and John Long for Real Estate Finance and Investment to understand how Equity Residences makes investments and how a diversified real estate portfolio can mitigate the aftermath of natural disasters like hurricane Irma.
Listen to this 15-minute podcast below or read the transcript below!
My name is Kaitlyn Mitchell, and today I am speaking with Greg Salley and John Long, founders and Managing Directors of a real estate private equity fund that provides investors with travel and lifestyle benefits.
The flexible model allows investors to make a low-risk investment that is immediately available for use at a firm’s luxury vacation properties.
Thank you. Equity Residences was launched in 2012 to really focus on a luxury vacation real estate market from an investment perspective. We have effectively combined the prospect of making a sound long-term investment with a hospitality side of having amazing luxury vacations and we have a defined investment period of 10 years after which we liquidate the fund and distribute the profits to investors.
I think one of the more exciting pieces for me is hearing stories from our investors about the amazing vacations they have with their friends and their families along the way, but also knowing that they are going to get that payoff in the end. It is a huge part of their decision.
I have to concur with that absolutely.
Greg and I launched this fund back in 2012 because we were really looking for a way to make real estate investments in luxury vacation homes that just make financial sense for people. To allow them to enjoy a diversified portfolio of vacation homes with their friends and family with a really smart real estate investment
Our investors are typically families with kids. They are professionals at the point in their lives where they are considering buying their own second home. They have the means to buy their own beach house or their own ski house, and they are looking for other options.
They are looking for a better place to put their capital, make a long-term investment, but a place where they can enjoy priceless vacations with their friends and family and do this through a very smart asset allocation, which is what we create.
The financial profile of our investors is that they are accredited. That is one of the requirements to be a part of our fund. That means that they either have a $1 million in investible assets or, alternatively, they make $300,000 a year if they are married, or $200,000 a year if they are single.
That’s right. And the minimum investment that is asked about right now is $142,500 for a one-unit investment. Our typical investor invests somewhere between $200,000 and $300,000.
Our model offers a lot of flexibility. First and foremost, investors can receive dividends by using the properties rent-free. We will have a portfolio of 20-25 properties in our Platinum Fund. And then they can also have the option to receive dividends during our utilization period.
We also have some partnerships with other firms, Elite Alliance and Third Home, that give them access to a network of hundreds of luxury vacation homes around the world. We also give them access to Club Corp, where they get access to private clubs around the country. So the benefits are quite significant and quite varied.
We offer a lot of flexibility in terms of how you can benefit from your investment.
I want to be clear about our benefits too. There are a lot of models in our market space that are destination clubs, with Exclusive Resorts and Inspirato being the most well-known models.
We are very different in that. Our investors are not paying an initiation fee like they are in a destination club model and then continuing paying $1,200 a night when they take vacations with limited access to most coveted properties. This is a typical model of a destination club.
When Greg and I set out on this model, we wanted to produce significant value to our investors, not from just great long-term real estate play, but from the fact that they get to use these properties rent-free essentially.
There is a small visit fee for covering their operating costs for going to that property. But instead of paying $1,200 a night to visit a property, our investors are paying around $100 a night to stay at properties that have a value of $2,000 per night. It’s pretty exceptional.
John and I originally came at this space from the investment perspective. To balance it out, we brought other folks who come out of the hospitality industry. One of our partners is Steve Dering, and he has years of experience in this space.
We also hired a number of our staff directly out of the hospitality industry from some of the top names out there: Ritz Carlton, Auberge. So our team is able to provide top-notch service, concierge, and great experiences for our investors as they stay at our properties.
Sure, I’ll give you an example. We acquired a property in Seacrest Beach, Florida earlier this year. This was an opportunistic investment where we did a 9-day close all cash in exchange for a $200,000 price concession.
The seller was in a situation where they needed to sell to complete a 1031 exchange that they were about to lose. And we were able to come to a deal that made sense for both sides. That’s an amazing property with the views of the Golf and 100 steps to the beach. If you have ever been there, the white sand beaches are absolutely gorgeous and the water is crystal clear.
We wanted to update that property and make sure it was to our Platinum Fund standards with all the top-notch finishes, furnishings, etc. We planned out that remodel in advance, identified upgrades we wanted to make to get it to the level we wanted it.
A big part of it was kitchens and bathrooms, upgrading flooring and painting, and different things like that. We interviewed some contractors, came to a budget and a plan and completed it on time and on budget.
We were able to bring renters in and the Partners in directly after completing the project, and it’s actually beautiful. See the photos below.
Well, that’s a really great question because it’s a really good proof point of our model. Our first fund closed with 100 investors, and our second fund is already up to 50 investors.
A dozen out of the first hundred decided that they really liked the model we were doing, and doubled down and invested in the second fund. And we still have investors from the first fund who are considering making a follow-on investment.
The diversification helps in a number of ways. It helps an investment upside perspective where we are exposed to a variety of different markets.
It helps from a property usage perspective, where you have the flexibility if you don’t want to go to the same place every year, like you would if you owned your personal home. You can go to different destinations.
It also helps from a risk perspective. In the event a property got hit by a hurricane, it would be one of the 20-25 properties in our portfolio, and therefore, that risk is spread out across the fund. In addition, we fully ensure for wind and water damage in places where we are at risk for hurricanes, or are potentially exposed to hurricanes.
So that combination means that an investor is not going to be in a situation where they are going to pay out for any significant damage on their own, or have to manage through the process of renovations after the hurricane. And it’s a time where it can be really difficult to line up contractors because there are so many people that are trying to repair their properties at the same time.
I am going to give you a specific example because we just lived through that with hurricane Irma that just came through Florida. We have three properties in Florida that were directly under the pass of Irma.
If you individually owned a vacation home, it would be quite a stressful event to watch that hurricane over there. And even though the homes under the hurricane path are fully ensured, they insure these properties at high deductible.
So if somebody decided to buy their own vacation property, they might be exposed to $50,000 – $100,000 in a personal liability. And then, and Greg was alluding to, the amount of work to go down and ensure that your property was safe and secure afterword.
Our model took all of the hustle away from vacation home ownership, and all of that pinpointed monetary risk away.
At the end of the day, after having three homes impacted by a hurricane Irma, we’ve basically come out of that with about $25,000 – $50,000 in total damage. Which, between 100 investors, translates to $500 per investor.
It’s such a trivial amount of money. If somebody has their own vacation home, they would be significantly impacted. Our fund had enough reserves that we did not have to ask each investor for their $500.
It is a big win and a real reason for making this type of investment in a diversified portfolio.
There is a number of locations we are focused on. First of all, within the US, Hawaii, and Florida are key markets. A lot of our investors like to travel there in a wintertime in particular.
Also, ski destinations. In particular, places like Vail and Wyoming, Jackson Hole, and Park City, Utah.
But, also we invest outside of the US. The Caribbean is a place of interest to our investors. We are looking at acquiring properties in Turks and Caicos, in Cap Cana resort in the Dominican Republic, in the Bahamas. In Central America, we are looking at places like Costa Rica and Belize. On the West Coast, in Mexico, in places like Los Cabos. On the East Coast of Mexico, places like Yucatan Peninsula as well.
And then Europe. Europe is an interesting place where several markets are just hitting the bottom of a foreclosure crisis. An example is Tuscany, Italy. They’ve had some bank failures this year. We actually have a property under contract in Italy that we can buy at 15-year lows.
We are looking at similar opportunities in Portugal, Spain, Greece. So we think Europe is an interesting opportunity for us as well.
The important thing is, we look at multiple markets simultaneously and we identify attractive investments. We have cash, we are able to move on investments quickly when we find a right opportunity can provide both good cap rates for investors and a good long-term appreciation potential. But we also balance it to make sure we are providing the right type of luxury vacation destination and feel that our investors expect.
We do look for opportunistic investments. So places like the Florida Keys, like Turks and Caicos that were impacted by a hurricane. We run into situations when folks, rather than doing the repairs, they are interested in exiting the market.
And so, coming in when others are looking to get out and finding opportunistic deals, is part of our investment thesis in how we derive returns for our investors. So, with those markets being important markets for us, we are scouring for opportunities maybe to get a damaged property in the Florida Keys where we can remodel it, upgrade it, add value to it, through value-added upgrades, and make it available for our investors to use.