Property

There’s More To Holiday Homes Than Just Earning Rental Yields

There’s More To Holiday Homes Than Just Earning Rental YieldsInvestment gurus often talk about making your money work for you. While those may be wealth management words to live by, it’s not always quite as simple as buying bonds, trading currencies or leasing out a home. Apartments in major cities are easy to lease out — it’s why they’re purchased for investment to begin with — but holiday homes are another beast. Since 2009, there’s been an alternative way to add value to a spectacular vacation spread for investors, one that gives them a third home as it were.

Membership’s Privileges
“If you own a beautiful second home somewhere you shouldn’t have to pay rent when you travel. There’s lots of grey value in your own home,” explains Giles Adams, partner and president of 3RD Home, a reciprocal travel club for luxury vacation homeowners. “If you give other members access to your house you get value from that, which you turn around to use in other places.”

For most of us, the phrase “travel club” conjures images of dodgy time-shares in Florida. That is not 3RD Home. Adams, a former advertising executive with time at M&C Saatchi and Young & Rubicam in Manhattan and Australia as well as a stint as the only Brit at the NFL, came up with the idea after the bottom fell out of the global economy in 2008. He and his partners were brainstorming ideas on how to leverage that and came up with the idea of a club for the owners of luxury assets to trade the downtime between themselves. “It’s an exchange but not necessarily a direct exchange. I might love a place in Italy and I want to stay there, but you have no interest in my penthouse in London for example. But you’d love to stay at that ski lodge in Vail or that beach house in Mexico. You put your property into the club and deposit weeks for other members to use and then cherry-pick the weeks you like in other homes.”

Adams initially founded Utopia Exchange in the UK, but soon merged it with the existing US-based 3RD Home and launched in 2010. The mechanics are simple enough. The club has 1,000 and 1,500 weeks available at any time. Members book online and pay a flat exchange fee (after a US$2,500 one time initiation fee, currently being waived) at the point of booking. That fee ranges between US$400 to $1,000 depending on the value of the property and time of year, for 7-day blocks. So a $50 million chalet in St Moritz at New Year would be a top rated property. An apartment at the same time would less, but the chalet would cost less at a non-peak season and so on. 3RD Home started with 120 owners. In four years it’s grown to count 3,000 members and properties in 73 countries.

Keys to the Castles
Adams had what he calls his “Eureka!” moment working in Sydney while still in advertising. “My team and my client’s team were in this beautiful long office overlooking Sydney Opera House and the Sydney Harbour. We spent half an hour discussing the size of a logo at the bottom of an ad. I thought, ‘There’s got to be more to life than this.’ That was it.” When the GFC hit, it spurred on the idea of a way to maximise non-traditional revenue for holiday homeowners. 3RD Home isn’t exclusive; owners are free to rent out properties the old-fashioned way if they choose. But the banking crisis made the shaky nature of rentals clear. In addition, maintenance, taxes, services and other fees take quite a chunk of revenue. “It makes no sense to rent your home out for two-and-a-half weeks to pay for one week somewhere else,” notes Adams.

Properties in 3RD Home’s pool are given a key rating based on its value. Properties up to $1 million get one key and so on up to five keys for anything over $4 million. Owners earn that number of key credits for their use each time the property is rented in a shoulder week. Double keys are earned for granting peak season availability and triple for holiday weeks. 3RD Home has properties in diverse locations such as Aspen, Buenos Aires, Sicily, Madrid, Kenya, Cape Town and the Galapagos (among others) as well as stalwarts New York, Paris, San Francisco, Whistler and London. Adams is aware that $10 million gets vastly different product in different markets, so the first step in key rating is simply judging at a property for its “Wow” factor.

“Say you’ve got a $2 million property that’s been recently re-done to the nines, it’s got a full staff and a bunch of bells and whistles. That could be a three- or four-key property because of the experience,” Adams states. “We allow our members to suggest what their key rating should be. If we think it’s overinflated or underinflated we compare it to other properties within the club and offer a rating. Then it’s their choice whether or not to continue.”

Right now the selection leans heavily on American locations, as Adams and Co. wanted to make sure the idea would work. The club is currently actively looking for new members in more locations in Europe, Australia and Asia. “There are enough affluent people who’ve acquired these luxury discretionary assets and who didn’t want to sell them [in 2008],” Adams concludes. “But they needed to add value to their lifestyles. Nobody minds having a beautiful second home sitting empty for 4/5ths of the year when disposable income and capital appreciation are on the up and up. After the crash, people naturally started to look at what they own through different glasses asking themselves, ‘Am I truly getting the most value out of this second home that I own?’"