With the rise of vacation rental platforms like Airbnb and Vrbo, investing in vacation rental properties has become an increasingly popular way to generate rental income. However, managing a vacation rental property can be time-consuming. An alternative is to invest in a vacation rental fund, which pools money from multiple investors to purchase and operate a portfolio of rental properties. But with many funds available, it can be challenging to evaluate and choose the right one. In this article, we will provide tips on how to pick the best vacation rental investment fund by comparing factors like fees, experience, location diversity, property types, and past performance.
Compare the fund’s fees carefully
The fees charged by a vacation rental fund can significantly eat into your returns over time. Typical fees include an annual management fee (usually 1-2% of assets) and a performance fee if the fund exceeds a certain benchmark. Some funds also charge acquisition fees when properties are purchased and disposition fees when they are sold. Carefully calculating the total fee load and comparing it across different funds is essential.
Look for an experienced fund manager with a track record
An experienced fund manager that has been operating vacation rentals for many years will likely have the expertise to run a fund more effectively. Try to find funds with managers that have weathered multiple up and down cycles in the vacation rental industry. Also research the fund’s track record of returns over the past 5-10 years if possible.
Seek broad location diversification
The top vacation rental funds invest in properties across multiple geographic regions to diversify risk. For example, a fund with vacation homes in both warm and cold weather destinations can balance demand across high and low seasons. And investing across urban and rural locations spreads exposure. Look for funds that provide granular disclosure on property locations.
Mix property types and sizes
The best funds invest in a mix of small and large vacation rental properties, from condos to luxury homes. This provides diversification across price points. Some funds also balance properties that cater to different group sizes, from couple retreats to family reunions. This casts a wider guest demographic net.
Research past performance data
If available, analyze the fund’s past annualized returns over 5-10 years after fees. Higher is generally better, but the returns should also be evaluated in the context of the level of risk taken. For example, a fund generating 10% returns while taking minimal risk is likely a better investment than one aiming for 20% returns while taking substantial risk.
In summary, strong vacation rental investment funds can provide diversified exposure to the vacation property market without the hassles of direct ownership. But it is critical to research factors like fees, manager expertise, location strategy, property mix, and historical returns when selecting a fund.