Get a Multi-Million Dollar Mansion for $300K?

Question

Interesting concept from the founder of Zillow where there is fractional ownership and flexible use of previously pipe dream homes. While this currently isn't primed for investors, the financing aspect of proportional shares is interesting. The unique financing of being able to go 50% LTV on 1/8 of a $2M to $10M mansion and use 1/8 of the time (while still owning the home as opposed to a time share) is a gamechanger. Now you pay a premium in fees and sale price on these fractions.

Let me know what you guys think of the concept and how it could be improved? I have some ideas. By the way, I am not affiliated with Pacaso. Found it interesting and worth discussing. Cheers!

https://www.pacaso.com/?utm_so...

Let me know what you guys think of the concept and how it could be improved? I have some ideas. By the way, I am not affiliated with Pacaso. Found it interesting and worth discussing. Cheers!

https://www.pacaso.com/?utm_so...

John Underwood · Answer

I'd rather buy something 100% rent it on Vrbo and have it free to use some plus make money off it.

Asset instead of a liability.

Greg Scott · Answer

Interesting idea.  Thanks for sharing.

I'm skeptical that it will go far. I don't see much benefit in having an ownership stake.  I can rent a fantastic house through AirBNB for a lot less than the cost of owning it.  In this model, since I'm sharing ownership with others, its not like I'm going to be able to redecorate or leave a lot of my own things there.  So, it basically becomes an expensive AirBNB, with the downside that I'm stuck going to the same place every year and if I want to get out, I have to sell.  Some might argue for appreciation but that would be purely speculative.

I see it could have been a popular idea in a pandemic-stricken world of 2020, but I'd place bigger bets on traditional residential real estate.

Michael Baum · Answer

Not exactly @Jeffery Wilen. In the case I mentioned, you just partner up with others. It is not quite like a timeshare. You just have a deeded portion of a single property. As far as staying the same dates, you just work it out with the other owners.

There is often a contract that lays out the process. If you just want a place to go every year it isn't a bad plan. Like @John Underwood said, I would buy it outright and build my equity and cash flow.

David Luu · Answer

Thanks for sharing. FYI, there's a small player with similar but different concept, with AirBnb type model, called CloudCastles.io. You invest shares in properties that are offered to the public as AirBnb rentals. With your ownership you can: get a fraction of the rental income each month (that there is income made), use the profits to earn more shares of the property over time, and/or get discounted rates to the property as/via AirBnb rental. As these are furnished AirBnb rentals, you won't be furnishing yourself, and is more like a timeshare if you were to use it, unless getting it just for the rental income. Currently limited market & properties, but interesting concept as they expand. Obviously, these properties however are not multimillion dollar mansions.

David Luu · Answer

FYI, I relayed Jonathan's comments on Cloud Castle to them. They gave some response:

For those more interested in talking to the Cloud Castle team, you can probably find their contact info from the website or through the mobile app after creating an account. Otherwise, DM me and I can either pass on your feedback or give you their emails to reach out to them.

Jonathan Dempsey · Answer

I totally agree @David Luu.  Pacaso could open itself with a broader market if they were to expand the amount of shares.  Surprisingly it seems like they aren't having much trouble gaining traction with their current model.   It would be easy to flex the days available for rental by buying shares or just paying for additional nights.  Pacaso's main incentives are a markup on the sale price when creating the fractional shares, a furnishing fee, and ongoing management fee.  Alot of dimes here and there.  I don't see it being difficult for them to break down the share amount.

Cloud Castle is much more up the alley of investing.  The investor dream version of Pacaso.   However, like you said it is limited.  They seem to be at a point where they need to scale quick and gain momentum.  I also don't like how there are no projected returns or explanations of the equity.   The concept is incredible, and they did an amazing job with the development and clarity throughout their process.   Which makes it more frustrating that they are vague on projections and equity purchasing.   My assumption with their lack of disclosure is that they are leveraging and then having investors pay in at a different equity LTV, ultimately consuming more leverage and upside for themselves.  Hard to say.

David Luu · Answer

Reading up on Pacaso (the FAQs) and thinking about it, these are my thoughts on their offering as an average investor, evaluating them like a timeshare. But my way of thinking may not be their current target demographic.

I think they can open up to more of the market if they split up the share equity more/further. It looks like from reading some of the FAQs they don't specifically fix the ownership to 1/8 share of the home, however, their current listings are offered at 1/8 share of the home. In terms of home value (actual total cost vs share cost) and actual usage of home if considered like a timeshare, it makes more sense to offer the home to more investors for less equity per investor and less usage of the property.

Unless timeshare model has changed, I believe historically, usage was for 1-2 week max allotments per year per timeshare owner? At 1/8 share, that's about a 45 days or a month and a half max factoring in 365 days in a year. For something like that, either the property is close by for weekend getaways, the owner has a lot of time to stay at this second/vacation home, or just has money to spend. Most people don't vacation over a month every year. So it seems more reasonable to divided up the property at somewhere between 26-52 shares, although that may make the mathematics harder to work out in equity cost distributions for the owners. Dividing it up that way maps it closer to max of 1-2 week stay per year per owner (for average typical timeshare convention) and makes the ownership cost more affordable than it is now at 1/8 share, especially the more pricier listings for the multimillion dollar homes. And supposedly perhaps one could still stay beyond the 1-2 week max, depending on availability by paying a premium fee on the duration over the max. The current FAQs indicate one can stay over their max allotment of 44 nights provided there is scheduling availability but there is a premium fee to pay to do so (sample fee cost not provided).

But I assume Pacaso doesn't do such offering as it probably makes the management and mathematics a pain to support the scheduling and ownership with so many owners for one property (26-52). Having 8 keeps things simple. But long term if they want to grow, beyond just wealthy/wealthier investors, they'd probably want to support more than 1/8 share ownership.

With the current model and pricing, it doesn't make sense to me to make that kind of investment unless I had excess money to spend. I'd rather do something else with that kind of money. Or only if I really loved a particular property for some reason.

Cloud Castles that I mentioned earlier would seem like a more interesting model to me if they supported multi-million dollar homes in the future.

David Luu · Answer

Jonathan, what do you mean involved in their syndication? Do you mean someone who has invested in their platform, or someone involved with the company? FYI, I'm not affiliated with the company.

I came across the company in a free multi-presentation webinar where they were one presenter of several, presenting their offerings to attendees.

I've personally invested a small amount in them to try, roughly on the order of 1% equity share per property which is around $1500 per property. From that I made $24 rent one month, $10 another - I've only invested 2 months ago. Rental income is not guaranteed and varies based on actual rental income coming from AirBnb rentals on the property, then divided up by your share percentage. Unless they change their business model, they are targeting non-wealthy average person investor so their equity shares are priced at $15/share (or less during special promos). You can purchase just 1 share minimum all the way to the current # of shares left/available to purchase. Here's an AirBnb listing of their showcase property to give you an idea what you're investing in. It's obviously likely a different target demographic than the listings at Pacaso.

https://www.airbnb.com/rooms/4...

One caveat to their offering is it's early stage so their are some bugs to the platform's app, which is iOS only, Android app on the roadmap, and it's not web-based so you can only participate using the mobile app. And they only have 2 properties on the market for investment, 1 of them is in process (available for investing but not yet listed on AirBnb for rental income production). More properties are to come in the future. The company owners/reps however, at the moment, are quite responsive to questions/comments & resolving issues.

David Luu · Answer

Jeffery, can you elaborate on that comment. It sounds like there is something that already exists that you're describing that is similar to Pacaso but different. I'd like to know what company/service/program that is from/called.

Get a Multi-Million Dollar Mansion for $300K?

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