SherpaReport spoke with Greg Salley, Managing Director of Equity Residences, about how they select real estate investment opportunities and add value to their luxury real estate investment funds. The discussion talked through their purchase strategy and value-added upgrades.
Q: How Do You Pick a Destination for the Best Return on Investment?
A: We start by researching the overall demand, flight access, level of luxury and potential return when buying a home. This is exactly what I did when we chose Turks and Caicos as an investment destination. By asking current investors for input, we found that Turks and Caicos was in high demand with the most beautiful turquoise water! Rental rates and occupancy levels were attractive with some of the highest ADR’s (Average Daily Rates) in the Caribbean. Because of this, not only did we select the perfect location on a marine reserve, but also have enhanced the home by adding a 5th bedroom. This addition added more space and sleeping capacity, increased the cap rate (operating income divided by invested capital) of the home, and raised the value of the home and investment fund as a whole. We prefer homes with cap rates of 7%+, however we have some homes with slightly lower cap rates and perhaps higher appreciation potential.
We also like to select destinations that provide a variety of scenery, architectural styles, ambiance, and activities. For example, if an investor wants a ski trip one month, they can visit Tahoe, Vail or Park City or switch it up with a beach trip to the Caribbean, Hawaii, or Florida the next month. With a wide selection of homes to choose from, we feel our investors can enjoy a variety of experiences. This applies to international travel as well. Our investors wanted a home in Tuscany, and we acquired a home in Siena, Italy, where we have a modern penthouse in a UNESCO protected building with a rich history located within an ancient walled city.
Q: Give An Example of One of Those Purchases?
A: St. John in the US Virgin Islands is a special place with a national park on two-thirds of the island. The inventory of luxury waterfront homes is extremely limited. We identified multiple homes that could work for the fund and made aggressive offers to see who was motivated to sell. We ended up acquiring a gorgeous waterfront home designed by the architect Michael Milne, and featured in the New York Times, for just under $2.5 million. Based on our analysis this was below market value, which has since been confirmed by an unsolicited offer well above the purchase price.
Q: Are There Examples of Homes That Were Opportunistic Purchases?
A: The vacation home that we purchased in Rosemary Beach is a great example of an opportunistic purchase. The home was under contract and the buyer could not perform. The seller was at risk of losing a home they had under contract as part of a 1031 tax deferred exchange. We stepped in with an all-cash purchase and a 9-day close in exchange for a $200K price reduction versus the current contract. We negotiated the deal at 7PM and boarded a flight to Florida at 7AM the next morning. The home is in a great location 100 steps to the white sand beach and close to restaurants, shops, and bike paths. We immediately remodeled the home and had it ready for use before the high season.
Q: What Amenities Do You Include in The Homes?
A: We have homes that are rich in amenities that investors enjoy while on vacation. Our home in Tahoe is a good example of a home that has luxury amenities onsite, which provides an added value to investors. For example, this ski-in, ski-out home has boot warmers, a hot tub, fire pit, home theater, pool table, and much more!
In addition, the home is next to a private club called the Treehouse with an Olympic sized pool, hot tub, basketball court, gym, game room, media room and bar. Several of our homes have access to private clubs and resort amenities such as a beach club. At this destination, guests get full access to the Northstar Resort -- an amazing place to enjoy a night of fine-dining, hiking, or day of skiing.
Q: What Enhancements To Homes Are You Planning in 2021?
A: We’re planning to add a two-bedroom guest house to the large estate lot in St. John later this year. This will create additional space and sleeping capacity boosting the long-term value and cap rates.
Q: Why Should an Investor Choose a Professional Fund Manager for International Homes?
A: The international real estate process involves multiple pitfalls such as language barriers, lack of local property knowledge, the potential for poor construction, and banking issues. This is why investing with Equity Residences reduces risk as we apply our expertise and manage every step of the process. Investors get all the benefit of our homes in multiple destinations, without the steep learning curve that comes with investing in international homes.
For example, as with most international destinations, investing in Central America can be complicated and confusing. Unlike the United States, Costa Rica has no MLS and it can be very difficult identifying the homes for sale, especially with local land restrictions and regulations.
Over 97% of oceanfront land in Costa Rica is leasehold, making it very hard to find deeded land on the water. We purchased deeded beachfront land, which we felt would make a better long-term investment.
We carefully research investment opportunities and work with trusted local experts. I learned about this Costa Rica home through word-of-mouth and put the home under contract just after a local marina was approved, but before construction of the home was completed which also allowed us to customize the home. This improved the fund’s return on investment.
In addition, we take care of interior design, sourcing furniture, upgrades, and appliances so that you can just show up and enjoy your vacation.