The following is an excerpt from LIFE AS A VACATION: 2020 Edition, now available at Amazon.com.
By Craig Shawn Williamson
The most exciting development for today’s VRP owner is an entirely new product offering, an innovation that I’m excited to see emerging at the forefront of the vacation property industry. Let’s get into it.
First, some background: people tend to confuse fractional property ownership, timeshare, and other vacation rental property products. Fractional investment actually is investment in a hard asset and has been available on the VRP market for years. Here is how it works: you take a vacation home and divide it into fractions and have multiple owners. Everyone has to schedule how they will use the home every year. Or, they can take their weeks and rent them out to others and make money. It provides you with a fraction of home ownership backed by a hard asset.
I am much more positive on fractional ownership as a concept than on timeshare, but it does still have some issues. If the developer is not trying to price-gouge on converting a single home to a fractional model, and is reasonable about the profit that they are pulling out, fractional ownership situations are a very potent use of the best of everything. You have a hard asset that does appreciate as the value of the home appreciates. It can be rented out for income, and it can be used.
Depending upon the ownership entity, whether it is a trust or some other legal agreement, there are some limitations regarding who you can sell it to and how you sell it. As with any VRP, it requires due diligence. But if it’s done right, fractional is a portion of ownership of a piece of property that you can use, rent, or sell to anybody you want. However, as I mentioned, there are some issues with both fractional ownership shares and timeshares.
The two biggest problems faced by timeshare owners and fractional owners:
- Paying something every single month just for the right to have a cheaper vacation once or twice per year. The value isn’t there.
- You can’t resell. If you do, it’ll be at a deep discount.
Fortunately, there is now a new and better option. The innovators behind Income Producing Residence Clubs wanted to make a new kind of vacation product: one in which the product is profitably liquid.
The Residence Club: A New Model for VRP
As I explained above, the fractional product, as a vacation property option, has been out there for years. It’s a product that offers you usage time of a property, somewhat similar to the timeshare model. Traditionally, the developer takes a condo or a home and divides it into 10 or 12 fractions. The family that buys the fraction gets 2-4 weeks of use time per year in some sort of rotating system. One year, the family may get Christmas, but then for the next 11 years, they don’t get it. Sometimes they can enter an exchange program and enjoy those weeks someplace else. There are all kinds of formulas for putting together the use of these vacation home fractions.
To the developer, it’s a great model. A developer makes a lot of money offering fractional ownership. If you’ve built a $500,000 condo and charge ten fractional owners $75,000, you get $750,000.
There is a fairly substantial benefit to the fractional purchaser as well. After all, you wouldn’t want to spend $500,000 on a condo you’re only planning to use one month out of the year. There are no headaches, and then there is an incredible reduction in what you would have to pay on an overnight basis. As an example, for a fractional ownership stake located at a ski hill, the owner’s costs to enjoy the property, with all expenses paid, works out to about $100 per night. The rack rate on that property during peak season would likely be $650/night.
So, although the revenue for the factional owner may not have been great traditionally, the value of the volume of use time an owner had access to has always been real, and much more substantial than that of a timeshare owner.
With that said, by and large, this historical fractional model has been as much of a loss, financially, as a timeshare. While it is deeded ownership and you can resell a fractional, there’s not a big market for it. So, what you’ve got in the world of fractional property ownership is the same issue you have in the world of timeshare. It’s completely an emotional purchase; it’s not really an investment. You don’t generally make money on it because even though it’s deeded ownership, it’s highly illiquid.
That’s the history of this product offering.
Today, developers of vacation property want to reach a bigger marketplace. Instead of only serving a family who can spend $1.5 million, developers want to reach those interested in vacation rental property who can spend $200,000 or $300,000—because there are a thousand of those families for every $1.5 million investor.
On the buyer side of the equation, for every one person or family who is willing to spend $200,000 for purely emotional reasons, there are ten who are more open to spending the money if it were logical—if there were some real financial gain involved in owning a fractional product. These individuals would be much more apt to participate.
Until now, however, a vacation property product that made sense in this logical way just didn’t exist.
Then, along comes the exploding short-term vacation rental market offering a new income stream to vacation home buyers—including fractional owners and residence club members. If you can take a membership share in a property and tie it to developer financing, you have a viable product for a lot more buyers.
Thus, the entirely new Residence Club model was born.
The Jack Nicklaus Residence Club is the pioneer of this new model. It exists for all the right reasons—because it offers an exceptional experience at an incredible price point to families around the globe. The product is good and fair for members as it is financially sustainable for the long term.
Jack Nicklaus, widely considered to be one of the greatest golfers of all time, built his reputation on excellence. He is a visionary who is known for his character and commitment to family values. His communities around the globe are synonymous with luxury and were created to showcase the very best in golf, dining, and top-tier vacation amenities.
In addition, the Jack Nicklaus Club automatically aligns its members with the Jack Nicklaus Children’s Health Care Foundation, which supports the Nicklaus Children’s Hospital as well as programs focused on the diagnosis, treatment, and prevention of childhood illnesses. A percentage of every membership purchase is donated to this charity on behalf of the member.
An Innovative Income Stream
Members of the new Jack Nicklaus Residence Club will enjoy all the luxury, quality, and service that has long been associated with the Jack Nicklaus brand as well as the completely innovative Income Producing nature of the Residence Club Membership. This is a new development in the industry and differentiates the product from anything that has come before. It represents a leap forward.
Here’s an example of how this works: you get two or three months of control of a property in a Residence Club membership agreement. One month of that is your family’s usage time. The other time is given to the rental management company. Remember, at 60 percent occupancy, these homes in rental pools throw off about a 10 percent capitalization rate. What you’ve got, now, is a product where owners are getting a nice chunk of usage time, as well as a return on investment. At just 30 percent occupancy, bills are covered.
Now, let’s add a piece to that: at the end of 25 years, there is a membership buyback program. You will be able to sell your Residence Club member back to the developer.
What we’re always trying to do as developers is balance an offering to people between the emotional side and the logical, pragmatic side.
We are completely out of whack in this industry, in the vacation world. Everything is always weighted on emotion. The salespeople pitch hot and heavy on family time and memories and don’t offer any information regarding the actual economics of the investment. They do everything but say, “Yeah, you’re going to lose money on this, but your kids will be so happy.” They get people in the heat of the moment and they make the sale.
This new Residence Club membership model is one in which people can take their dollars and really consider what they’re getting. Timeshare is sold in 90-minute sales pitches because they have to pitch so hot and heavy, so emotionally. When people walk away from an emotional sale, they’re like, “What just happened?”
Emotion buys, logic keeps. The Residence Club membership innovators at VRP Equity—of which I am a partner—created a product here that offers both. Yes, there is an emotional side to it. But there is a logical reason to participate as well.
A Pragmatic Approach to VRP
In every family, there is that one person—the one who’s got it all figured out. Think of the uncle you turn to for financial advice. The cousin who hooks you up with the best vacation experience of your life. The niece who knows exactly who to call to get the ultimate dinner reservation—two hours before you want to eat. Today, you are that person because you are the first to learn about the Residence Club vacation ownership product.
As you no doubt understand, when you invest in a timeshare, you receive very little for your money and you can’t get out of it. You own nothing; you control nothing.
Incoming Producing Residence Clubs are a whole new ball game. Instead of getting locked into a timeshare that gives you nothing back, or a fraction of a vacation property deed with very little flexibility or value, a Residence Club membership is the best of everything…the best balance between family fulfillment and financial fulfillment, at a price point that makes actual sense. This model has never been done before, because it’s never been possible before.
The Income Producing Residence Club is an entirely new product offering. It provides rental income generated by a vacation home with downside protection in internationally branded, resort communities in top vacation locations. Members can also enjoy the use of luxury properties in over 200 locations around the world and enjoy hands-off third-party resort style rental management of their homes.
This product is a way to enjoy a luxury property and create an additional income stream for individuals and families to build wealth. The innovative Income Producing Residence Club program is being utilized by major brands worldwide while the Jack Nicklaus Residence Club expands internationally.
Professionally managed by one of the top hospitality management companies in the world, the Income Producing Residence Club program is the perfect balance between family enjoyment and smart economics for its members. VRP Equity is bringing projects in the Bahamas, Belize, Puerto Rico, and the Cayman Islands into its unique Residence Club model into the next 12 months, as well as properties for those who like to ski and fish in Colorado, Maine, and in Canada.
The Uber of VRP
It’s a vacation product for the new decade, for the new millennium. It’s a vacation membership that provides a young and growing family with fun usage of a luxury property for multiple weeks per year. It provides solid and continuous cash flow, and the ability to exchange your membership for stays all over the world. When you purchase an Income Producing Residence Club membership, you’re stepping into a new world of vacations and of possibilities.
The innovators behind Income Producing Residence Clubs wanted to make a new kind of vacation product: one in which the product is profitably liquid. By giving Income Producing Residence Club Members the option to rent out a property on a short-term basis when they are not using it, Residence Clubs are able to show profitability—rental income—over time.
The properties in the membership pool are part of a premier hospitality group’s booking and marketing system, so finding short term renters is never the member’s concern. Unlike other investors in short term vacation rental properties, you’re never going to have one home in your membership pool undercutting others on price. For this reason, you can evaluate a Residence Club membership in the same way you’d look at a piece of commercial property.
None of the existing vacation products on the market today open you up to the opportunity to earn any kind of real income from short-term renters, because your usage is only 2-4 weeks. It’s difficult to make revenue that way.
Residence Club members are entitled to up to 10 weeks of control over one home under a very strong brand name. For example, the first Residence Club is under the Jack Nicklaus brand. Your home is maintained and managed by the very finest luxury hospitality management company, the same company that manages Margaritaville, Encore, and other premier vacation destinations around the globe.
Most families enjoy a 10-week membership. They vacation for three of those weeks, and choose to place seven of the weeks they control into the Residence Club rental program.
At a level of 20-30% occupancy, all the bills get paid. So, owners get usage of the property each year without expenses. What happens when your membership time is rented at just 50% occupancy? That’s when the income generation for your family can be achieved.
The Income Producing Residence Club membership is a significant improvement upon, and hybrid of, all the best vacation property products that have come before it.
Sophisticated investors have known for years that it’s not necessarily ownership of a resource that makes profit; it’s control. And the good news for those who understand this concept is that control can be gained for a lot less of an upfront investment than owning. Everything is headed this way. In fact, you can buy a subscription to a BMW, a Volvo, or a Land Rover right now. And this kind of model is only going to become more and more common as the decade unfolds. You are no longer stuck with timeshare or fractional ownership when it comes to designing the best vacations for your family.
Comparing Residence Clubs to Timeshare
Timeshare is basically the right to purchase some weeks at a discounted rate, along with the option to stay other places around the globe on a discounted basis through exchange programs. It’s really no more than that.
A Residence Club is similarly priced, but it’s a much more equitable, fair, and honorable way of doing things than your traditional timeshare offering.
I’m not saying timeshare is a bad deal. I’m just saying it’s not a good deal. Again, it’s essentially the right to buy discounted use time of a larger hotel room.
Residence Club membership is not about the underlying value of the real estate. Whether or not you buy real estate is going to depend on its price for the income it’s going to generate. Right now, the income is relatively high in Central Florida versus what you’re actually paying. Using that metric, this market is offering a depressed purchase price.
Why do I say that? Well, in New York City, your cap rate is three percent on a residential real estate product. Up here where I am, a cap rate of a commercial building is seven and a half. In Central Florida, you’re talking about a cap rate of 11 percent.
This new vacation home product doesn’t even factor in the underlying appreciation value of the real estate. If a property devalues—if the market drops or there’s a correction in the market—Residence Club members just keep renting and enjoying usage time. We are covering cash and making a positive rate of return. Again, these things break even at around 30 percent occupancy.
Residence Clubs: Born in Florida
There are 75 million tourists visiting Central Florida each year; the overnight rental market there is one of the strongest in the United States. The Disney corridor is immune to off seasons, it chugs along 12 months of the year in some capacity. It’s a good market to establish your first foray into this type of thing as its rental market is, and has been, very stable.
This Residence Club product is just a pragmatic approach to vacation rental property investment. Very simply, it’s a small segment real property participation product that cash flows. Personal usage is there as well. You can take a percentage of your portfolio, tie it up, get an attractive rate of return on it, and have some fun with it.
The intent is to make it investor-driven rather than usage-driven. You want the mentality to be, “Let’s drive the rental income of this thing first.” Because that’s going to ensure that your bills are paid. Forever.
The Final Word on the Residence Club Innovation
This innovative Income Generating Residence Club model allows residents and their families to vacation in ultra-luxury homes with stellar amenities, located in the most popular vacation areas around the globe. It is also smart in terms of family finance. The first Residence Club, the Jack Nicklaus Residence Club, is opening on Jack Nicklaus golf courses across the globe, providing families and golf groups many beautiful, exciting, and exotic locations to explore.
To learn more about VRP innovation, visit Amazon.com and check out LIFE AS A VACATION: The Ultimate Buyer’s Guide to Vacation Rental Property.