It has always been my dream to own a vacation rental property. It combines two of my favorite things: going on vacation and making money.
Unfortunately, a few drawbacks to owning a short-term rental property have kept me from fulfilling that dream. Two of the biggest ones are the cost of buying a property and the hassles of dealing with short-term renters.
However, I recently came across a new real estate investment opportunity on Republic that enables anyone to get into the vacation rental market for as little as $250. Here's a closer look.
Digging into the deal
Republic is a marketplace that allows non-accredited investors (i.e., those without a high income or a high net worth) to invest in highly vetted opportunities in start-ups, real estate, video games, and cryptocurrency. Republic's real estate platform routinely offers the chance to invest in different types of real estate deals, including fix-and-flips, nontraded real estate investment trusts (REITs), and condos. I've participated in several deals, which have delivered decent returns overall.
One of its latest offerings is a North Carolina Beach Rental Portfolio. The fund will focus exclusively on owning single-family beach vacation rentals in North Carolina. It enables anyone to own a piece of North Carolina beach real estate, no matter where they live, for as little as $250. Investors also don't need to worry about managing the properties, since an experienced management team takes care of everything.
Investors in the fund can earn passive income from vacation rentals. They could also gain from home price appreciation upon an eventual sale of the portfolio. The fund expects to acquire and manage properties for three to five years and then liquidate the portfolio. It's targeting to generate an internal rate of return in the 12% to 18% range. As a bonus, those who invest more than $10,000 into the fund can get free lodging at one of the properties.
The pros and cons of short-term vacation rental investing
The North Carolina Beach Rental Portfolio offering has many benefits over traditional short-term rental property investing, the biggest being the cost. The $250 minimum is a fraction of what it would cost to purchase a vacation rental on a North Carolina beach.
For example, the cost of the average beach house in the fund's target markets ranges between $400,000 and $650,000. Assuming a 20% down payment, you'd need more than $80,000 to get started. On top of that, you'd need cash for closing costs and a cushion for vacancies and repairs. That's a hefty upfront investment, putting it out of reach for most beginning real estate investors.
Other benefits to 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's managers have years of experience owning and successfully operating vacation rental properties on North Carolina beaches. They handle marketing the property, managing short-term renters, and any repairs.
However, there are some drawbacks to investing in this fund, such as:
- A blind pool: You don't know what vacation rental properties the fund will own. However, it plans to target homes with strong rental demand and competitive amenities, like a swimming pool.
- High fees: Investors pay for the ease of investing 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. That's less of your money going to buy vacation rental properties. Meanwhile, the managers will take 10% of the gross revenues, a 20% profit share of the annual rental income (after investors receive an 8% preferred return), and 50% of the profit from the eventual sale of properties in the portfolio.
- Illiquidity: You can't sell your investment if you need cash -- you'll have to wait until the managers liquidate the portfolio.
Those fees are a bit high and seem to create some misalignment with investors. The manager gets paid 10% of the revenue, which means they could make money even if investors don't. In addition, the combined management fees (10% of the revenue and 20% of the rental income) are toward the top end of the vacation industry's average of 10% to 30% of rental income. Meanwhile, the 50% cut of the profits on the eventual sale of the vacation rental properties incentivizes the manager to sell when that might not be in investors' best interest. Those high fees eat into investors' returns.
And there are other risks to investing in vacation rentals. A resurgent pandemic could cause increased vacancies and cancellations, impacting rental income. Meanwhile, there's a higher climate change risk with beach houses.
An interesting option, if you can stomach the fees
The North Carolina Beach Rental Portfolio allows the average investor to build a vacation rental portfolio for a fraction of the cost. However, it comes with a different cost in the form of high management fees.
Still, if you dream of owning a vacation rental property, this might be a good alternative, since you can start very small. Republic has a decent track record of bringing attractive real estate deals to its marketplace, making this one worth a closer look.