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ADISA Video: Vacation Homes are Now Institutional

In strong housing markets and weak housing markets, Overmoon’s chief executive officer Joe Fraiman says vacation homes consistently do well.

In an interview with ADISA board member Greg Mausz, the CEO claims people don’t stop traveling but instead, seek more affordable travel locations during recessions. However, the market for vacations homes doesn’t stop.

Overmoon is a vacation home institutional platform in which Fraiman says he has seen how vacation homes have some of the best risk adjustment returns in real estate.

“You have a single-family asset, which has forever been one of the most stable types of real estate one could own, but you have a hospitality like return which is one of the highest returning asset classes within real estate,” Fraiman said. “That combination of single-family downside and hospitality-upside delivers great results for investors.”

Video Transcript

Greg Mausz   00:10

Welcome to another episode of Focus on Alternatives brought to you by ADISA, the Alternative and Direct Investment Securities Association. For more information about alternative investments, please visit adisa.org. Once there check out the resource library for lots of quality content. My name is Greg Mausz, today I’m joined by Joe Fraiman the CEO of Overmoon. Joe let’s start talking about vacation homes, this is probably the most common way that US investors invest in real estate, they have their primary residence and then they extend to a vacation home. Can you walk us through the dynamics of vacation homes.

Joe Fraiman   00:52

Greg, it’s a good question… vacation homes Simply put have some of the best risk adjusted returns in real estate. You have a single-family asset which is you know forever been one of the most stable types of real estate one could own. But you have a hospitality like return which is one of the highest returning asset classes within real estate. That combination of single-family downside and hospitality upside just delivers great results for investors.

Greg Mausz   01:19

OK so let’s unpack that a little bit more. How do vacation homes as a sector perform can in all market cycles boom bust you know rising interest rates or inflation? Walk me through that.

Joe Fraiman   01:32

Yup, so let’s take those one on one. So, in boom times and actually let me back up. With a vacation you have two ways to make money, you have the appreciation of the asset and then you also have the cash flow. So, in boom times and we’ve seen this over the last couple of years vacation numbers do very well right, people rent them you have high occupancy you can run a great nightly rate and you see a very very strong cash flow and that translates to the returns for investors. You also have a high asset appreciation which of course is great. In recessionary times paradoxically the returns are actually still very good. Now we’ve looked at the last several recessions you know COVID the GFC et cetera and travel doesn’t decline that much, declines maybe 10 or 15%. And what we typically see actually is people don’t stop traveling they just seek more value-oriented options.

So instead of going to Europe, they’ll go to Florida. Instead of staying you know at a high-end resort they might seek a more affordable option. Vacations homes are great for that because you can bring up big group a whole family two families stay in one house and save a lot of money versus a hotel. And so, what we’ve seen you know the last several recessions is people flocked to vacation homes even during these downtimes. The last question I think you asked was for inflation…

Again if you think about other forms of real estate inflation could be very deadly because if you have like for example an office building, you have a 10 year lease suddenly inflation comes in that’s going to erode the the income you’re getting in real terms. With vacation homes you can reprice the home every single day. And so, if there is inflation, as it rises up you can reprice it in real time and actually benefit from it.

Greg Mausz   03:06

Ok so made a great case for vacation homes. So what should investors do should they go in do it on their own or find some type of vacation home institutional investment to invest in what do you think?

Joe Fraiman   03:20

I’m probably biased as I run in a vacation home institutional platform. But I’d say it’s personal preference if you own a single home there’s a lot of hassle, right. First of all, you have concentrated asset risk like if something happens to that home like you know that that’s that’s your whole investment. But you’ve got to manage it right. You got all the kind of like you know details of of managing any kind of real estate asset. Most folks don’t want to do that, so they hint to a third-party meeting company, that typically comes very high cost. Also, an individual can is never gonna monetize the asset the way that institutional player could. And then finally I think the other case for for investment institution is diversification, right. Why would you own one house when you could own a piece of you know hundreds of homes, so you diversify geographically and for all those reasons higher returns less hassle more diversification you know we like investing institutionally.

Greg Mausz   04:14

That makes a lot of sense, especially the diversification point. But you said, “Institutions will have a better job at monetizing the asset.” What do you mean by that?

Joe Fraiman   04:24

Ultimately to derive the best returns off of vacation home. You want to keep it full all the time, you want to earn as much revenue over and above the rental rate as you can, and you want to operate it efficiently. And so, you know for example for us or any other you know institutional player in the market we have teams of people, custom software, you know high quality operations, add on services, you know private chefs, massage, all these things we offer. An individual is not going to have the infrastructure do those things, and so they learn to return but they will not earn the return that they could if the institution was managing the asset.

Greg Mausz   04:57

… good makes a lot of sense there. So, let’s break this down vacation homes, but then that sounds a lot like like the SFR the single-family rental business. Can you compare and contrast here?

Joe Fraiman   05:10

It’s a good question, so both sectors fundamentally own single family homes, that that’s the kind of commonality. The SFR category they’re renting homes unfurnished for a year two years or longer right. And so, they earn a a much more modest return because it’s a you know it’s a longer term lease. For us we furnish the homes we operate them and then our guests are staying with us typically for about a week. And so we can make more on the asset right so our returns are typically about twice with SFR we get.

Yeah, significantly higher. Just like any other asset where you know longer ration versus short duration you know at least you can make more in short duration. So you know vacation homes have like the security of SFR but at a much much higher return profile.

Greg Mausz   05:54

OK so you’ve made a great case for vacation homes. If investors wanted to include this in their overall investment allocation part of their net worth, what are the ways that they can engage?

Joe Fraiman   06:07

Yeah, so as mentioned they could just buy a home themselves, and that comes with a lot of hassle of risks. Probably the better way is to invest you know invest through a company that owns a portfolio these homes. I’d say probably one of the biggest distinctions you wanna evaluate if you’re if investor is looking at this, is are they investing with the company that just owns the assets and doesn’t actually do the management or add any value and they’re just looking at like a real estate arbitrage play.

Or are they investing with the company that’s actually building a hospitality brand and able to like drive value over and above just the home itself. So, I think that that’s probably the key distinction that anyone investing in the asset class should probably ask. And then probably the last thing I’d add there is you know any in this in this industry as within any business there are some companies where this is like one line of business, they do a lot of things.

There’re other companies where this is all they do and they eat sleep and breathe it. And I say in this industry just like any other industry the the latter the folks who this is all they do are probably going to deliver higher returns.

Greg Mausz   07:06

Those are several great points for people to kind of bake on and think about as they’re evaluating their options. So, Joe thank you for walking us through vacation homes.

Joe Fraiman   07:15

Thanks for having me, Greg.

Greg Mausz   07:16

And thank you for watching another episode of Focus on Alternatives. Again visit adisa.org for more information. Thank you.

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