Vacation rentals as an asset class can be influenced by many aspects of the overall economy.
The performance of vacation rentals can be impacted by macroeconomic trends, such as interest rates, home prices, and employment, as well as microeconomic trends, such as incomes and demand for vacation rentals. Additionally, regulatory restrictions can impact how a vacation rental can generate income for its investors.
Below, we'll take a look at how Here addresses each of these concerns:
The Federal Reserve can influence interest rates in our nation's economy. Based on economic conditions, the Federal Reserve can increase or decrease its target Federal Funds rate by using tools available to conduct monetary policy. As a result, all other interest rates across the economy typically adjust as well.
How does this affect us?
Sometimes, the Here team will purchase a new property using debt. This debt we receive from a lender will come with a specified interest rate that we must pay back to the lender. When interest rates increase, this debt becomes more expensive for us and can lower overall rental income for our investors. Because of this, we will use some of the tools available to us to mitigate the issue of expensive debt. Some properties, as you've seen recently, are purchased with no debt at all. These acquisitions allow us to fundraise 100% of the capital from investors and purchase the property without having to pay back a lender with high-interest rate debt.
Here's flexibility with our capital structure allows us to mitigate some of the risks of changing interest rates.
Fluctuating home prices can also impact the total return of a vacation rental. Your vacation rental investment returns both rental income returns (cash flow) and appreciation returns (realized when sold). Therefore, decreasing home prices will impact the total return of your Here property investment.
The Here team uses two main levers to help mitigate some risks involved with decreasing home prices.
Our acquisition team looks for potential homes in markets that are known to appreciation slow and stable over time. Rather than chasing short-term, outsized appreciation returns in markets, we look for homes that are best optimized when held for a long-term time horizon.
When we enter into a new acquisition, we do so with a projected holding period of 5-15 years. We believe that the best way to build wealth through real estate is to hold the asset for a longer period of time. Additionally, our time horizon allows us to weather the ups and downs of the business cycle and, eventually, sell the asset when we believe it is best for our investors.
Lastly, employment levels matter significantly for a person's spending on discretionary goods, in this case, travel. For this reason, part of our acquisition criteria is to look for new acquisitions in markets with both economic growth and population growth.
Microeconomics is all about household economics - how much income is earned by the household, how does that impact demand for certain goods and services, and how a change in income impacts the demand for goods and services (see: income elasticity of demand).
How does this affect us?
The study of economics would consider 'travel' to be a 'luxury good.' This means that as a household's income rises, spending on travel increases proportionally more (great!). Conversely, as household income decreases (or an individual is laid off), spending on travel is generally first to be cut.
We address this risk in a couple of different ways:
Our portfolio of properties uses dynamic ADR pricing to optimize for maximum revenue generation relative to nearby rentals and seasonality. All Here properties generally sit at varying price points based on the size of the home, property features, and the market. Therefore, our portfolio of homes can accommodate all types of guests based on their travel budget and the size of their group.
In uncertain economic times, we generally see travel remain strong. However, some aspects of travel shift as budget-conscious travelers adjust their plans to fit their unique needs. At Here, we look to acquire new properties that are within a short drive from populated metro areas. This strategy is more accommodating to travelers who may drive rather than fly on their next adventure. By purchasing homes only a short drive from more populated metro areas, our properties also cast a wider net for prospective guests to take their upcoming getaway in uncertain economic times.
The third pillar of risk that the Here team manages across our portfolio is Regulatory risk. Regulatory risk is often implemented on a local government level for a specific city or county where the vacation rental sits. Vacation rental regulation can come in many different forms, from requiring the necessary business license or short-term rental permitting to restrictions on the number of rentals in an area via lotteries or quotas.
At Here, we take regulatory risks very seriously and do our best to mitigate some of the potential negative outcomes of failing to address these issues. Below are some of the steps that we take to mitigate the negative impacts of regulation:
As part of our onboarding period, when we prepare a new property to go live for bookings, the Here team pays meticulous attention to all of the regulatory requirements associated with operating a short-term rental in the local area. These requirements commonly look like a business permit, operating under the right tax code, acquiring a specific hospitality/short-term rental license, and more.
As part of the acquisition process, our team considers the regulatory environment in each local market today and how we expect the regulatory environment to evolve over the next ten years. We want to make sure that not only are vacation rentals welcomed in the area today but that we can continue to grow our Here portfolio in the area in the future.
For each potential acquisition, we underwrite the property using a number of conservative estimations and worst-case scenario outcomes. In the extremely unlikely chance that future regulation would require us to terminate the operations of a vacation rental, our underwriting expects the property to perform well as a long-term rental. In this unlikely event, our team would have the discretion to sell the asset and return investor capital to our investors or continue operating the asset as a long-term rental, given that our underwriting criteria support the pivot.
All investments come with their own unique set of risks. Vacation rentals are no exception to that rule.
At Here, we take our duty seriously in preserving your hard-earned capital and doing our best to grow that capital over time. Although we cannot eliminate risks involved with your investments in a Here property, we work hard to mitigate the level of negative risk involved with economic, regulatory, and many other variables that can impact a vacation rental's performance.
*The securities herein offered by this issuer as herein above mentioned are highly speculative, investing in such securities involves significant risk, including possible loss of the principal amount of investment. The list above is not exhaustive of the risks involved. There are many risks associated with Here Investments Inc., any specific Offering, the real estate market in general, and many other factors that can impact an investor's investment on the Here platform. For a more complete list of associated risks, please view a recent offering statement here. Risks start on page 6.