How does investing in airbnb startup Here.co actually work?
How does Here.co investing work?
It is a common belief that investing in vacation rentals is only for the wealthy. What if you could invest in a vacation home for as little as $100? The hospitality startup Here.co lets you do just that.
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So, why should you invest in vacation rentals? How does investing in Here.co work? Should you invest in Here.co? Let's find out.
What are vacation rentals?
When you are planning a vacation with your family, a hotel room may feel cramped and uncomfortable. You could book a second room or maybe more. Or, you could stay in a vacation rental instead.
Typically, a vacation rental is a large villa or multi-bedroom apartment. It offers ample space for families and large groups. Besides multiple bedrooms and bathrooms, a vacation rental may also offer separate living areas, a fully functional kitchen, and so much more.
Vacation rentals are becoming more and more popular because they offer more informality, more comfort, more privacy, and a more personalized experience compared to hotels.
Why should you invest in vacation rentals?
A second home at a beautiful destination is a dream for many. Real estate investors don't just buy a vacation rental for enjoyment but also to generate income. They rent it out when not in use, and market appreciation also adds to the property's value.
Here are a few reasons why you should invest in vacation rentals:
According to a report by AirDNA, in 2021, the average annual revenue for short-term rentals reached the highest level ever, growing to $56,000. The average daily rate grew from $213 in 2019 to $260 in 2021. If you are looking to generate some extra income while having a place to go to during your vacations, a vacation rental is a worthwhile investment.
The market for vacation rentals is huge in the US. You can find them everywhere, from large metros to small towns and villages. As of 2021, there were 1.98 million professionally-managed vacation rentals in the US. The number is expected to grow even more in the coming years.
Historically, real estate has been known to appreciate faster than inflation. Therefore, investing in real estate is viewed as a hedge against inflation and profitable investment. According to the National Association of Realtors, the housing market performed better in 2021 compared to the previous years, despite the global pandemic.
When you buy a long-term rental, you rent it out to a tenant on a 12-month lease. There is no way that you can use the property in between. However, vacation rentals are only leased for a few days or weeks. Your tenants in a vacation rental would be families on a trip, couples on a weekend getaway, or business travelers who are in town only for a few days. If you want to spend your summer vacation at your holiday home, you can easily do so.
Besides appreciating in value, vacation rentals also have the potential to resist recession. Buying a vacation rental at a picturesque location near major metros can be a profitable investment. People living in the cities are always on the lookout for budget-friendly travel options. During a recession, people are more inclined to travel domestically instead of going on international trips.
How does investing in Here.co work?
Here.co is a platform that allows you to invest and own fractional ownership of vacation rental properties. Fractional ownership in real estate refers to a model where a group of investors pools their funds to buy a property. Instead of owning the entire property, they own a percentage of it and share usage rights.
Here lets you invest in vacation rentals with stakes as low as $100. The founder and CEO of this Florida-based startup is Corey Ashton Walters. Here has so far raised $7 million in funding, with investors such as Mucker Capital, Liquid 2 Ventures, Cooley, and Basecamp Ventures backing it.
However, since Here is not a timeshare, you do not get free time in the vacation rental that you invest in, unlike other fractional ownerships. You invest in a property, and in return, you earn dividends from other renters or property sales. Another difference is that you need to invest thousands of dollars in other fractional ownership companies. But with Here, you can invest for as little as $100. Since it is not cost-prohibitive, it is accessible to almost anyone. We say almost because there are some restrictions here that are not widely advertised that we will get into later.
Here works by acquiring property and turning it into a vacation rental using its own investments. Then it lists the rental in an IPO to investors for a price that includes all the expenses they put into the rental. All properties follow the rule of $1=1 stock of the property. When all the shares are sold out, Here lists the property on various vacation rental platforms like Booking.com, Homeaway, and Airbnb. Investors are paid quarterly dividends from the profits that the property earns during that period.
The company aims to keep a vacation rental on the market for about five to seven years, and then sell it off. Shareholders will receive payouts according to their stake in the property. Here deducts maintenance costs from the dividends and final appreciation before paying their investors.
How does Here make money?
According to the CEO Corey Walters, it collects 1% to 10% sourcing fees depending on the acquisition price of a property. You can think of it as real-estate agent's fees when you list a house for investment. Investors are also charged a 1% asset management fee yearly on the property. The company also holds a 1% stake in all the vacation rental properties it operates.
The startup has gone public this year and has listed three properties so far in Gatlinburg, Tennessee, Clearwater, Florida, and Bear, California. There are more than 30,000 registered users of the platform with over 1,000 active investors. Before putting up any property for investment on Here, it is acquired and submitted to SEC for approval. Each property is held under LLC. Doing so safeguards investors against personal liability in case there is a loan default or if the bank repossesses a property.
When acquiring vacation rental properties Here uses both debt financing and equity. It buys some properties outright, while others are bought on a mortgage.
Should you invest in Here.co vacation rentals?
Owning a piece of a vacation rental for just $100 seems like an amazing investment opportunity. However, is it a good idea to invest? The company is relatively new, which is why there aren't many Here.co reviews or Here investment reviews.
At Level on Demand, we reviewed the "subscription agreement" and the "offering circular" that investors must sign. Here's what we found. (This was for Here's "series 3" which now owns a property in Tennessee.)
The minimum investment is $100, which sounds great for beginners or those on a tight budget. But what if you are a serious real estate investor? How much can you invest? According to the subscription agreement, unless you're accredited, your investment cannot exceed 10% of your net worth or annual income. Investing any more than that is prohibited.
Property Manager Conflict of Interest
Will Here be responsible for the maintenance of the vacation rental that you invest in? According to the offering circular, the answer is No. "Here PM", which is a subsidiary company of Here, will be responsible for maintaining the property held by you. So, there is always a risk of transparency or accounting issues.
Here.co will be paying Here PM, its subsidiary, on average 25% of all gross revenues in exchange for property management services. This means that Here will essentially be paying itself 25% of all the revenue the vacation rental property earns. This is not an uncommon rate for management companies in the short-term rental space to charge. However, using a subsidiary to manage properties typically means employee and staff overlap and a lack of transparency on true costs and benefits. As a potential investor, it is very important that you set the right expectations for yourself, understanding that not all companies function this way.
According to the offering circular, Here.co also has complete discretion to hold onto all funds as "reserve" if they deem appropriate,.
Failure to sell assets
The offering circular states that Here.co has the right to hold onto its properties indefinitely. Although they aim to sell off the properties in five to seven years and distribute the payouts, that may not be the case always. If Here.co decides to hold on to the property you have invested in, it also means that it is holding on to your investment as well. What if market conditions change? Would you be able to take advantage of it?
There is not much mention of a secondary market being made available through a network run by Here.co. This means we have to assume that liquidating your shares will not be a quick and painless process.
The first property launched by Here.co for its investors suffered losses for the first two quarters of operation. Although it is not an indication of poor management, it does raise questions around whether funds were properly allocated or not. Are the rest of the properties going to be profitable or would they too run into losses?
These are a few issues we caught. Our analysis revealed many other "red flag" clauses in their agreements.
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