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How Investors Can Use The Emerging Capital Asset Pricing Models For Vacation Rentals

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Clark Twiddy is the President of Twiddy & Company, a hospitality and asset management firm along North Carolina’s Outer Banks.

Ever wonder how people come up with a price for a vacation rental? Well, the answer is changing rapidly as the industry overall is impacted by a wide range of forces all driven by new levels of visibility, awareness and access.

The soaring popularity of vacation rental homes located in drive-to destinations surpasses most any proxy model in memory. This is in part thanks to the pandemic’s impact on vacation rental homes as a viable investment platform — look no further than Airbnb’s IPO for a verdict on this trend. With these factors at play, the vacation rental home market entered a new phase entirely.

Notable both for annual revenue and also, with increasing demand, a viable pathway to overall asset appreciation, rental homes have taken on a few identifiers. In many communities across America, they have become not only vacation homes but self-contained operating companies that compare in many ways to other equities in their performance, structure and investment intentionality.

By extension, this popularity and subsequent financial attractiveness are related to many other topics. These include affordable housing, workforce development and student head-count trends. In short, it’s a hot topic and at its core is the surprising financial capacity of vacation homes — in the right places.

As with any investment, every number tells a story. The vacation rental community is only now beginning to see more structured financial interactions between, for example, annual rental revenue to overall home prices. It’s this ratio-driven interaction that in many resort areas is quietly fueling home prices in a way that more conventional supply-and-demand forces can’t fully explain as they do in other more purely residential areas. These structured interactions are attracting professional investment interest at a jaw-dropping rate. As with any financial interest, it comes with expectations for a sustainable return on investment.

Look no further than the exploding technology around home pricing tools in the industry overall for evidence of this interest. Pricing finite time in a given vacation home has become a cutting-edge collision between data science, performance marketing, pricing agility and speed-to-market. This combination is based on the idea that time is worth different amounts to different people at different points in their lives. For example, a regular soccer Friday to one person may actually be an only daughter’s wedding day to another. More broadly, in a world defined in many ways by uncertainty, the gaps between uncertainty in the minds of consumers and our pricing reactions have become key differentiators in terms of speed to close the gap sustainably.

In practice, pricing any given vacation week used to be, only a few years ago, largely a bell curve exercise around the high point of a vacation season. It might be the Fourth of July in coastal areas or the height of the ski season in others. Now, however, with the very idea of seasonality being pushed to new boundaries, complex RUCA pricing equations are emerging. In this scenario, “R” is the risk associated with the pursuit of a given return in the market, and “U” is the uncertainty around predicting the conditions around even a short-term future. “C” is the complexity around specific home variables such as amenities, location and headcount, and “A” is the ambiguity around complex systems interacting. For example, the Outer Banks bridge closure last year essentially brought all business on the island to a standstill.

Pair that expression with a relationship to a potential sales price and now you have not only a dividend concept but an appreciation concept as well. The higher and more consistent the dividend, of course, the more it drives value to investors. There stands the key insight — home pricing in many coastal and resort areas is now being driven in part by rental performance measures. This drive, in some ways, has never been done before.

If you’re thinking about buying a home and renting it, you’re entering a space that is rapidly gaining in complexity and technology — probably not unlike your day job. To help fully understand your potential for annual income and an eventual sales price, it’s worth thinking about what tools can map out the interactions between annual and sales pricing. For example, imagine a 10x ratio of annual revenue to the sales price. A home that rents for $100 a year sells for $1000. Think about how an incremental annual increase drives a much larger sales return via the multiplier. Now you’re thinking like a professional investor.

If you’re wondering about prices, just a few years ago that price was probably calculated on an Excel bell curve and done once a year. Now, the price you’re seeing most likely changes quickly based on a wide range of factors. Chances are it’s less individually driven and more market-driven than ever before.

For potential investors and, even more broadly, stakeholders in the vacation rental ecosystem, a key takeaway of this larger emerging model is that a new form of valuation is emerging beyond the traditional real estate comparisons of location, quality and scarcity. The predictability and scale of annually recurring revenue in the rental market is a critical pricing facet in this new operating class. While related to quality and scarcity, it’s largely a new idea that should inform purchase and sale decisions at an equal, if not greater, level than more traditional barometers of value.

No matter what, many vacation homes today aren’t what they once were. The days of going up to the grandparents’ lake house, for example, has in many ways become a remarkably luxurious lake experience funded by names you read in Forbes. For real estate investors of all experience levels, there’s more room than ever to include rental desirability in eventual sales price. It’s a great new chapter in the history of the great American vacation.


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13 Tips For Real Estate Investors Crafting An Exit Strategy

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Real estate investors know that not every purchase they make is going to be a win. In a few cases, you’ll end up with a dud, where a property that looked good at first ends up being more trouble than it’s worth once you’ve bought it.

This is why no investor should go into a property purchase agreement without having at least one clear exit strategy defined. To help avoid a bad purchase before it’s too late, 13 experts from Forbes Real Estate Council share critical steps all real estate investors should consider to craft their exit strategy from the moment they start scoping a property out.

1. Understand The Current Financials

It’s important to understand the current financials of the property. From this you can model a multiyear pro forma focusing on the value enhancements you plan for the property. Based upon that model, you can project a valuation for the property at some point in the future. This process should help clarify the investment potential for the property. – Mark Tiefel, Capital Equity Group, Inc.

2. Set Clear Objectives Before Investing

Know your objective before investing in a property and establish your goals for any property you’re considering. This helps identify what success looks like for a property you want to invest in, which will help map out your exit strategy. Committing to a property without a clear objective and “winging it” after you commit to it typically ends up costing a lot of money and time. – Jim Brooks, The Brooks Team – EXP Realty


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3. Consider The Future Buyer Persona 

Know your buyer. Always have the future buyer persona in mind when you are buying an asset. If you know your asset will attract syndicators, for example, then make sure to renovate no more than 50% of the property so you can leave meat on the bone. If you buy a larger asset, you can renovate 100% of it and then sell it to an institutional buyer who normally doesn’t like to execute a value-add plan. – Ellie Perlman, Blue Lake Capital LLC

4. Check Tenant Laws And Sale History

I believe that when purchasing any property, investment or not, you should buy with an exit strategy. Real estate is an investment that is used to create wealth. Look at local tenant laws, development in the area and rental rate history. If new inventory is coming, then rents will decrease. Check sale history for the last five years for trends. – Steven Minchen, Minchen Team/Elevated Living Network, Inc

5. Stress-Test The Deal At Purchase

Any good exit plan starts with stress-testing the deal at purchase. There are many factors in stress-testing a deal but here are a few to consider: 1. Never run out of money, so plan accordingly; 2. Increase the vacancy to at least 25% for the duration of hold and verify that the expenses can still be paid; 3. Increase the exit cap rate by at least 10 basis points per year of hold. – Chris Roberts, Sterling Rhino Capital

6. Plan For The Worst-Case Scenario

Always plan for the worst-case scenario when trying to exit. It’s really that simple. After proper planning and extensive research, determine what the worst-case exit strategy is. If you can stomach the worst-case scenario, then move forward and commit to the property. – Ben Grise, InvestWithBen.com

7. Buy A Property That’s Easy To Sell

Buy a property that will be easy to sell. I prefer single family homes over condos because there is more buyer demand. Homeowners Association dues can also go up as condos get older and/or there can be special assessments for repairs which can make a property harder to sell. Assess the location—does it back to a commercial property or a railroad that may make it hard to sell? Does it have a good floor plan? Be picky! – Kristee Leonard, The Leaders Realty, LLC

8. Have A Multipronged Exit Strategy

Commercial real estate is evolving quickly before our eyes. Having a multipronged exit strategy approach to real estate investment is necessary. Don’t follow the headlines but look for the trend lines. Underwrite an asset traditionally but also underwrite the property in a nontraditional way. Look for one to two scenario analyses considering what happens if a market, sector or demand trend changes quickly. – Jacob Bates, CommonGrounds Workplace

9. Have At Least One ‘Weasel’ Clause

A “weasel” clause is a clause that allows you to exit, even when you’ve made the mistake! Resist the temptation to overdue. You need one. My personal favorite is “subject to the approval of the hard money lender.” Only once in 20+ years have I had to exercise this weasel clause to get out of a deal, but when I did, it was literally 10 minutes before closing. – Sherman Ragland, The Realinvestors®️ Academy, LLC

10. Have Multiple Exit Strategies

Having multiple exit strategies helps protect you from losing money on a deal. If you buy a house to flip but cannot get the price you anticipated to make a profit, if you’re able to rent it out instead, you’ll protect your investment. Unfortunately, if you get in a deal with only one exit strategy and that strategy does not work out, you will find yourself in a risky situation. – Chris Bounds, Invested Agents

11. Check Out Average Days On Market

Find out what the average days on market are for comparable properties throughout the year prior to your purchase. You will then have a good indication of when would be the best month of the year to resell the property for its highest and best price and for the shortest amount of time for an effective emergency exit strategy. – Mor Zucker, Team Denver Homes – RE/MAX Professionals

12. Hire A Home Inspector

Hire an excellent home inspector. These professionals are priceless! Sure, they can alert you to big red flags but they can also point out a lot of “minor issues” to consider. An itemized list will let you know exactly when to exit if a particular task takes more resources than you expected. Feedback from a professional inspector can help you “exit well,” minimizing losses and maximizing gains. – Michael McMullen, Prominence Homes and Communities

13. Remove Emotion From The Equation

Always remove emotion from the equation and perform unbiased, clear-headed due diligence without a lot of rosy scenarios. Be conservative with your valuation and repair estimating—often, investors value too high and underestimate renovation costs. Sometimes the best strategy is to walk away from a deal rather than spending the next several months wasting time and resources on a low-margin deal. – Nick Ron, House Buyers of America

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Digital Mortgage Lender Announces Softbank-Backed SPAC And $7 Billion Valuation

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SoftBank founder and Chief Executive Masayoshi Son invested in Better during his search for 'fast-growing pre-IPO companies'.

The Softbank-backed digital mortgage lender Better announced yesterday its intention to join a SPAC with The Aurora Acquisition Corp., in order to take Better public. The transaction is expected to close in the latter part of 2021. This merger gives Better an implied equity value of approximately $6.9 billion and a post-money equity value of approximately $7.7 billion, as stated in the announcement. 

A subsidiary of SoftBank Group Corp., SB Management Limited, will bring $1.5 billion private investment in public equity (PIPE) and Novator Capital, the sponsor of Aurora Corp, will invest $200 million through the same method. Activant Capital, an existing investor in Better, will also participate in the PIPE for an undisclosed sum. 

Only a month ago Softbank invested $500 million in Better, leading to a valuation of $6 billion.

Better’s strong financial footing is no doubt a direct consequence of its success due to the covid pandemic’s double influence of sustained low interest rates over the past year and the need for consumers to be able to close on transactions without having to meet in-person. Last March, when the pandemic’s impact began, Better had a 200% increase in applications compared to February and a total of over $1 billion in closed loans during the month, which is more than the four-year-old company closed for both 2017 and 2018 combined. In all of 2020 they funded $24.2 billion in volume, according to the press release announcing the SPAC. 

Better, which has not been without some controversy, was founded in 2016 by Vishal Garg who was frustrated with the mortgage application process after losing out to a cash buyer when he made an offer on a home. He built the all-digital, multi-product platform to lower costs and speed up the process for buyers. Company marketing materials say their online process allows qualified customers to close in as little as two weeks.

The biggest takeaway from this news is how large the demand will be going forward for real estate transactions to take place in a fully digital manner. The pandemic has shown us that the market can continue with limited need for in-person contact and mortgage lenders of every size will have to improve their digital platforms if they want to stay competitive. The news about Better is only the beginning of a much larger trend.

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How Consolidated, Bundled Real Estate Offers Can Serve Homebuyers

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Close up hand of man signing signature loan document to home ownership. Mortgage and real estate property investment

Amit Haller is the Co-Founder & CEO of Reali, a high-tech, high-touch real estate company founded in 2016. 

When homebuyers make the largest financial decision of their lives, they want the best options that take the pain out of the real estate process. They’re ready to focus on the details that matter most to them — such as settling into their new home — and desire a simplified and streamlined process to get them there. In recent years, that’s come in the form of bundled real estate products, where consumers are eager to combine several steps into one.

At Reali, we’ve also seen this trend emerge across several industries, not just real estate. Bundles have become highly appealing to customers regardless of the complexity of the buying process, including purchase decisions around insurance, home appliances and video game systems. Bundling often means financial savings for consumers, but it also means less stress and time-consuming interactions with nuanced details. Essentially, bundles save time, money, and stress, and that’s exactly what real estate companies should do for customers.

Here are the top trends we’re seeing in 2021:

1. Consumers want to keep it simple.

Complex decisions take more time, and right now, most of us are stretched too thin to think through all of the details. The pandemic, as well as other personal and social concerns, have stretched our capacity to do everything we want to do, including daily activities such as working or running our household. At the same time, people are eager to move into the next phase of their lives, and we’re seeing them begin to move forward by holding their delayed weddings, buying new appliances or investing in a new home. Anything that makes the process simpler will help that transition.

In real estate, homebuying can be one of the most stressful transactions that people complete. They have to worry about real estate brokers, a mortgage, insurance, escrow, inspection and warranties, and all of that can require different companies and experiences to complete the final tasks. Consumers may get lost along the way or miss a critical detail right now as they begin to move toward a “new normal.” 

In an experiment by our partner agency, Next Step, consumers who saw real estate as complex were nearly three times as likely to say that they wanted a bundled experience. They wanted more ease in the process and a smoother experience to get to their end goal. Essentially, bundling can help people to make a decision sooner rather than later, experience less risk and stress — and actually enjoy the decision-making process of buying a home. Any bundled options that real estate companies can provide to free up customers’ time and stress could reduce the barriers for making a decision.

2. Bundling can increase the perceived value.

Homebuyers want the best purchase for their hard-earned dollars, which has become even more prominent in the past year. People have faced tough financial decisions, and many families are rethinking the priorities that they need in a home-work-school space. They’re looking for more value and an all-in-one solution that makes the financial decisions easier and more transparent.

In the Next Step study, people said that, compared to individual product offers, consolidated bundles seemed more valuable, more popular and more preferred than other options, which plays to our psychological needs for belonging and smart decision-making.

Bundles also decreased costs. On average, people can save nearly 16% by bundling homeowners and automotive insurance policies, according to a 2015 Insurance Quotes study. Those who combined condo and car insurance saved about 11%, and those who bundled car and renters insurance had an 8% discount.

Overall, bundling complementary products can lead to a cost-savings of about 8% for consumers, according to a marketing study from Fordham University. In addition, the researchers found, offers that make sense together can create greater consumer happiness, which is the ultimate goal. For real estate companies, this could mean pairing mortgage options with insurance options or legal services.

3. Consolidated offers can facilitate the decision-making process.

Customers have told us that the decision-making process seems more complex than ever. People have easy access to products and services across the country — even across the world — and that can lead to analysis paralysis when deciding on the best option. We’ve found that bundles can help people make those decisions, particularly in complex service industries.

For instance, in a 2019 Accenture survey of 47,000 consumers, half said they were interested in bundled services in healthcare, home security, car care, personal finance management and homebuying. In real estate in particular, they voiced a need for end-to-end homebuying services, including advice on finding a new home, securing a mortgage, using legal services, buying insurance, and getting help with the moving process.

Ongoing survey data show that this trend has been increasing in recent years and became more popular throughout last year in particular. In the insurance industry, for example, consumers said they were seeking bundles so they could make better decisions and experience greater value from their options.

In fact, a 2020 survey by Deloitte found that consumers said offering non-insurance products was the most important factor when choosing an insurance provider. They said it added value and created an extension of the core products, so consumers wanted to buy them. In real estate, this requires rethinking the conventions around what products to include and creating innovative options.

Ultimately, we need to keep consumers in mind when considering the best ways to serve them in the homebuying experience. Their concerns come out loud and clear, with a need for simpler decisions, a smoother decision-making process and bundled packages that increase the value of their purchasing power. Real estate leaders should step up to provide these consolidated offers to clients and guide them along the successful path to homeownership.


Forbes Real Estate Council is an invitation-only community for executives in the real estate industry. Do I qualify?


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