Luxury Vacation Rental Economics

Our team analyzes over $2B+ in luxury single family real estate, and $100M+ in booking activity per quarter.

We also see our fair share of pitches come across our advisory offering—and inflated projections are rampant.

Every time we evaluate a new asset acquisition, we’re presented with ‘rental estimates’ from local PMs and agents, who have absolutely no track record of producing the Gross Booking Volume, or operating GRMs, or occupancy rates they project. Not even close.

As an investor, it is essential for you to know the difference between an operator’s ability to syphon money from this asset class, and their ability to create it.

The brutal truth is that most locally based PMs in the luxury SFL space have a great deal of experience siphoning value from the assets they oversee, with very little to no track record of actually creating it. Learn more — The end of a confusion: Decoding The Luxury SFL Asset Class

This is where things start to get dicey. 

Many SFL funds, ownership/travel clubs, and REITs market double-digit “target” returns—but often without disclosing these are gross returns for the partnership.

In other words, these figures are often deceiving, as they typically imply the total returns generated by the partnership before any deductions, such as management fees, performance fees, or profit splits among partners, which significantly reduce the actual returns to capital partners (LPs).

What’s more, combining low-cost debt with overly optimistic (inflated) projections on future sales prices can paint a misleadingly attractive picture of returns, especially when the bulk of the return exists only on paper, tied property appraisals rather than cash flows.

Investors should critically assess these factors to ensure the projections align more closely with realistic market conditions. And when stripped of management fees, performance cuts, and partner splits, these “target” returns often fall into low-yield speculation, potentially even negative cash yields.

Bottom line: “Target” returns should always be highly scrutinized.

Like ‘target returns’, past returns are usually presented as gross partnership figures and warrant the same level of scrutiny.

I’ve seen funds report 14% total returns during years when home prices in their market segment grew by over 20%…

Enough said.

Unit economics are likely the most overlooked metrics in the SFL space.

They often don’t hold up in mid to lower segments due to unsustainable returns, with properties rarely covering fixed costs or generating consistent profitable cash flows.

And what’s more, even if property-level unit economics look viable, sustaining profits over time can be unsustainable for managers, which poses serious risks risks for long-term investments.

Consider a $500,000 4-bed, 4-bath single family home with a heated pool in the Phoenix-Scottsdale, AZ area:

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Assumptions:
Operating on a 10x Gross Rent Multiplier (GRM) with $50,000 in annual gross bookings, a 50% occupancy rate, and an ADR of $275.

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Cash Flows:
In this setup, gross bookings likely won’t cover all the operating and holding costs without cutting important cuts on maintenance or implementing reactive management (not a great long term strategy).

Even, that’s before covering debt or hiring a property manager or paying for any unforeseen major repairs.

Adding a traditional manager, who typically takes 35%-45%+of gross bookings (with firms like Vacasa on the higher end), will quickly flip the property into the red.

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Market Reality and Impact:
The brutal truth is that most vacation rentals don’t generate $50,000 annually—even those in segments above the mid-market. The vast majority actually operate around a 15x+ GRM with occupancy rates well below 50%.

If we were to take the average home value of the vacation rentals on market in the Scottsdale area, it would be closer to $800,000. And if we were to look at the true recorded revenues — because most macro data supplied by industry (as well as non-industry) aggregators does not take into account fluctuations in asset values, and is highly inaccurate with regards to true ADRs booked and occupancy rates — it’s actually closer to $25,000 than it is $50,000.

According to Vacasa’s own shareholder reports, their average is around $50,000/yr per property in gross bookings volume. And with management fees near 50% of gross revenue, the economics would point to a majority of their properties operating cash-flow negative.

This tight margin is not unique to Vacasa, with similar patterns being common among most high-volume SFL management companies.

Full-service managers who charge 35%+ must cover transaction fees on the full $50,000 in gross bookings, with housekeeping often taking the majority their $17,500 share. This leaves very little, or simply not enough to fund essential infrastructure for operating at a high level, such as staffing booking managers, local PMs, office space, technology, marketing, guest/owner support, etc… without massive scale.

International presence in second and third world countries where vendor and labour costs can be significantly less than in North America and many European Countries can certainly help margins as the portfolio scales.

However, scaling the same portfolio across multiple value segments under a single brand and in the same market is going to cause the highly conflicting marketing and operating strategies disproportionately inflate costs and strain essential resources, resulting in unavoidable dilution and cannibalization at the asset level, and thus, further diminishing revenue production.

Additionally, the mid to lower markets face obvious over-saturation due to lower barriers to entry.

In other words, a management operation scaling a portfolio of properties at an average of $50,000/yr per property is only scaling losses for their owners and razor thin (if not negative) margins itself.

It’s a catch 22, and unsustainable over the long term. It’s also a big reason why we are now starting to see venture backed managers pivot to leaner service based offerings. 

Ultimately, as the SFL asset class continues to mature, management models that produce negative cash flows will eventually die out, and it would be a very risky bet to entrust a $1,000,000+ asset to one.

You can read more about this here — The end of a confusion: Decoding The Luxury SFL Asset Class

Fortunately, the higher segments of the SFL space offer a solid foundation for sustainable returns, but it’s still not a walk in the park.

Healthy operating margins typically begin at the $150,000/yr range in gross booking volume, but 95% of properties in most markets around the globe don’t come close to it. In some places, it’s even more rare.

And for the overall investment to make sense we must still take into account the total asset value and its holding costs.

For instance, in a market like Paradise Valley AZ, where the median home price exceeds $3.5M+, $150,000 in bookings is extremely low after you factor in the higher holding and maintenance costs for properties in that zip code, and can lead to sustainability issues. And in reality, the average bookings generated per property here actually falls below $100,000 per year, even though it represents just 3%-4% of overall inventory in the Phoenix-Scottsdale area (according to our internal calculations).

Finding operators who consistently generate over $150,000 in revenue for vacation rental assets is already rare.

And identifying operators with a proven track record of achieving revenues exceeding $600,000, while maintaining Gross Rent Multipliers (GRMs) as low as 4x and Gross Margins above 50% for properties valued at $3 million or more—like we do—is even more uncommon.

All this to say, the numbers on deals in the space can look great on paper, but as you look closer, most of them don’t pass the pen test.

Sustainability is also a critical factor in long-term investing, but is largely absent from much of the market. 

At Jack Laurier, our operating model consistently delivers institutional-level performance and tangible returns for property investors, ensuring that our clients not only see the potential on paper but also realize it in practice.

As you consider your investment options, prioritize transparency and sustainability to safeguard your financial future.

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