Now you can invest in vacation rental properties for as little as $ 250
I’ve always dreamed of owning a vacation rental property. It combines two of my favorite things: going on vacation and making money.
Unfortunately, there were a few drawbacks associated with owning a short-term rental property that prevented me from making this dream come true. Two of the biggest are the cost of buying a property and the hassle of short-term tenants.
However, I recently came across a new property investment opportunity on Republic that allows anyone to enter the vacation rental market for as low as $ 250. Here’s a closer look.
Dig into the case
Republic is a marketplace that allows unaccredited investors (i.e. those with no income or high net worth) to invest in highly controlled opportunities in start-ups, l ‘real estate, video games, and cryptocurrency. Republic’s real estate platform regularly offers the opportunity to invest in different types of real estate transactions, including non-traded real estate investment trusts (fix-and-flips) (REIT) and condos. I participated in several trades, which overall generated decent returns.
One of its latest offerings is a rental portfolio of North Carolina beaches. The fund will focus exclusively on owning single family beach vacation rentals in North Carolina. It allows anyone to own North Carolina beach real estate, no matter where they live, for as little as $ 250. Investors also don’t have to worry about property management, as an experienced management team takes care of everything.
Investors in the fund can earn passive income from vacation rentals. They could also benefit from the appreciation in home prices during a possible sale of the portfolio. The fund plans to acquire and manage properties for three to five years and then liquidate the portfolio. Its objective is to generate an internal rate of return of between 12 and 18%. As an added bonus, those who invest more than $ 10,000 in the fund can get free accommodation at one of the properties.
The advantages and disadvantages of short-term rental investment
The North Carolina Beach Rental Portfolio offering has many advantages over traditional short-term rental real estate investing, the most important of which is cost. The $ 250 minimum is a fraction of what it would cost to buy a vacation rental on a North Carolina beach.
For example, the cost of an average beach house in the fund’s target markets ranges between $ 400,000 and $ 650,000. Assuming a 20% down payment, you would need over $ 80,000 to get started. On top of that, you would need money for closing costs and a cushion for vacations and repairs. This is a sizable initial investment, which makes it beyond the reach of most novice real estate investors.
Other benefits of investing in a fund like this include:
- Diversification: The portfolio will own more than one beach house, which will help reduce risk.
- Experienced management: The fund managers have years of experience owning and successfully operating vacation rental properties on North Carolina beaches. They take care of the marketing of the property, management of short-term tenants and repairs.
However, there are some downsides to investing in this fund, such as:
- A blind swimming pool: You don’t know which vacation rental properties the fund will own. However, it plans to target housing with high rental demand and with competitive equipment, such as a swimming pool.
- High fees: Investors pay for the ease of investment with Republic and its experienced managers overseeing the portfolio. While investing is free on Republic, it charges a 6% fee to companies raising capital on its platform and takes 2% of the equity. It’s less of your money to buy vacation rental properties. During this time, the managers will take 10% of the gross income, a profit share of 20% of the annual rental income (after investors receive a preferential return of 8%) and 50% of the profits from the eventual sale of the properties of the wallet.
- Illiquidity: You can’t sell your investment if you need cash – you’ll have to wait for the managers to liquidate the portfolio.
These fees are a bit steep and seem to create some misalignment with investors. The manager is paid 10% of the income, which means he could make money even if the investors don’t. Additionally, the combined management fee (10% of income and 20% of rental income) is at the high end of the vacation industry average of 10-30% of rental income. Meanwhile, the 50% reduction in profits on the eventual sale of vacation rental properties prompts the manager to sell when it might not be in the best interests of investors. These high fees eat away at investors’ returns.
And there are other risks to investing in vacation rentals. A resurgence of the pandemic could lead to an increase in vacancies and cancellations, which would have an impact on rental income. Meanwhile, the risk of climate change is higher with beach houses.
An interesting option, if you can afford the costs
North Carolina Beach’s rental portfolio allows the average investor to build a vacation rental portfolio at a fraction of the cost. However, with this comes a different cost in the form of a high management fee.
Nonetheless, if you have dreams of owning a vacation rental property, this could be a good alternative as you can start very small. Republic has a good track record of attractive real estate offerings in its market, which is worth a closer look.