Naturally, a luxury vacation rental that generates seven-figure returns is quite rare.
It’s rare because most housing markets don’t have the characteristics to support generating this level of returns.
It’s also rare because the vast majority of luxury vacation homes on the rental market are owned or purchased by HNW and UHNW individuals, who naturally prioritize personal taste and sanctuary over operating a consumer-focused for-profit asset class.
And so, most managers in the space are built to service the individual wants of a demanding clientele of owners, where creating value and generating profits is not, nor ever will be part of the management mandate.
And it’s rare because most traditional strategies that work well for investing in other segments of real estate, like those that thrive with uniformity and rapid capital injection for scalability, simply don’t work with this asset class.
Now, to a savvy investor, this means that there is a genuine, bankable opportunity, ripe for the picking.
The problem is that creating true value in luxury real estate isn’t done from a spreadsheet.
It’s done with proper execution at the asset level, which naturally requires tact, exceptionalism, rarity, scarcity, etc… — with asset management and marketing strategies that most investors and managers can't execute (or don't even know exists).
And for a select few, the luxury segment of the vacation rental industry is a surprisingly lucrative sector.
At VRP, we know this because we prove its profitability day in and day out for our owner partners.
The assets we operate in the segment outperform 99% of all highest-grossing luxury vacation rentals, globally — generating up to 10x more profit per property than local managers and notable larger firms.
An asset with a base CMV of $4M, operating at a 6X GRM and 50%+ operating margin will generate a seven figure gain in just 3 years from cash flows alone.
And that doesn’t even include the bonus market appreciation of the asset itself through the hold (which can be above 7% CAGR in the strongest luxury markets), or the value add accelerated by any minimally-invasive high-yield property improvements, or the value-add premium from having a multi-six-figure profit operation on top of the asset.
All of which can turn a base CMV of $4M into $5M+ throughout a relatively short hold period.
There is no perfect timing to start investing in luxury vacation rentals.
Just like most other stable, long-term investment plays, compounding profits over time is what generates the highest returns. And the more strategic you are about your reinvestments, the faster your equity will compound within the asset.
Waiting for a market downturn can be tempting, but it’s unlikely to be that long or that big, and the competition for the few fire sale opportunities can be fierce. Which could delay your entry, and maybe even cause you to miss the downturn altogether.
Ultimately, the luxury vacation rental industry is still in its infancy as an emerging asset class.
And the number of operators with a proven track record of generating strong yields at the asset level is rare.
Which is enough to keep the segment well protected… at least for now.