May 10, 2019
Two HBCU Grads Share Why Vacation Rental Properties are Good Investments
After reaching his breaking point, Carrington Carter, a then pharmaceutical marketing manager, decided to leave the industry to make money off of something he loved, travel. Carter partnered with his former college friend Calvin Butts Jr., and the two turned their passion into profit. The HBCU grads shared how they made traveling profitable through their venture Getaway Society and why other African Americans should consider vacation rental properties to be a solid investment.
How did you create Getaway Society?
The founders say that Getaway Society was initially started as a luxury group travel company that creates amazingly memorable experiences, but we decided to pivot out of that industry for a variety of reasons. A year or so later, it was [my] turn to lead the organization of an annual group ski trip in the Poconos. After identifying a house to rent, collecting everyone’s money, and then working with the homeowner to secure the house, he started running the numbers and thought to himself, “Wait a minute, I think I can do this. Why not buy a house and have people pay me to rent it instead of the other way around?”
This was in 2013, so Airbnb, HomeAway, and Vrbo were around, but not nearly as popular as they are now. Shortly after the trip was over, Carrington developed a plan, involved Calvin Butts, Jr. and Jeremiah Myers, two of his colleagues from Hampton University, and Getaway Society was reborn. Our love for travel, exploring the world, and social and family gatherings served as the catalyst to acquiring a network of vacation rental homes to share with like-minded people.
Calvin Butts Jr.: After starting construction on a brand new vacation rental home in the Pocono Mountains in September of 2014, and acquiring another vacation rental home on Martha’s Vineyard in December of 2014, Getaway Society evolved to a premium vacation rental home company, still creating those same amazingly memorable experiences. Now with approximately $5 million in properties we own and manage: one home in the Poconos, three on Martha’s Vineyard, and now one in Hilton Head with our acquisition this year, we are excited about the opportunities for growth in this $170 billion global vacation rental home market. Our ownership plus management model enables us to provide a consistent, luxury VIP concierge approach to all our homes.
Carter: With Getaway Society, we combined a few things that were exciting and important to us. We’re capitalizing on our growing interest in real estate, in a fun and engaging way. It provides multiple revenue streams and builds wealth, with the ultimate goal of financial freedom for ourselves and generations after we’re gone. It also touches on our interest in traveling and creating new experiences.
Butts: Think about it, many of us have been on a group trip with friends/family and experienced issues or did not know what to expect. At Getaway Society, we try to take the friction out of group travel and obsess over making our guests’ vacation seamless and enjoyable. At every single moment, whether answering questions before their stay, sending check-in/check-out instructions, or responding to any needs during their stay, we are eager to exceed expectations.
Carter: We also take the time to build local connections and relationships with private chefs, restaurants, and golf courses, etc. We have a diverse set of partners, contractors, and vendors, and we also make it a point to help black business owners to scale their business, not just through financial support, but also through teaching and mentoring.
Why should other black investors consider investing in the vacation rental space?
Carter: By owning a vacation rental home, investors can realize rental income, which pays down the mortgage and builds equity in the home. Often homes in resort-type communities appreciate faster than traditional neighborhoods, which builds wealth and increases net worth. Investors can realize capital gains upon sale of the home. Also, investors can use the home as much as they like (preferably in the offseason so rental income isn’t impacted). What a great investment!
Butts: Our favorite part is the “soft ROI” as we like to call it. The home can instantly become a valuable asset that can be leveraged and shared with friends, family, colleagues, and also clients… building better relationships in the process. It’s truly priceless.
How can homeowners use home equity to invest in vacation rentals?
Carter: There are three primary ways that homeowners can use home equity to invest in vacation rentals: cash out refinance; home equity loan; [and] home equity line of credit (HELOC)
Most banks will allow homeowners to tap up to 90% of the value, commonly referred to as 90% LTV (loan-to-value) of a primary residence. However, for an investment property (single/multifamily, commercial property, etc.), most banks will only allow 65%-80% LTV. Example: If your house (primary residence) is worth $500,000 and your remaining mortgage balance is $250,000, the bank will allow you to borrow up to 90% of the value (90% of $500,000 is $450,000). Therefore, after subtracting the remaining mortgage balance, you can tap up to $200,000 in equity ($450,000 – $250,000) to buy a vacation rental home, so long as the higher mortgage payment still fits within your DTI (debt-to-income) ratio.
In the above example, in a cash-out refinance, you would convert the home equity into $200,000 cash and have a new mortgage balance of $450,000, usually at a fixed rate. Using a home equity loan, you would have two mortgages/loans: (1) One with the remaining mortgage balance of $250,000, and (2) The other for $200,000, which is the amount of home equity you tapped, both likely at fixed rates. In a home equity line of credit (HELOC), the $200,000 in equity you converted would essentially work like a credit card with a variable interest rate (probably at least twice the fixed rate). You would have a $200,000 limit and could use it and pay it back as needed. There’s typically a draw (borrow) period for 5-10 years in which you’re responsible for interest only or 1% of the balance, then there’s a repayment period of 10-20 years in which you’re responsible for principal and interest.
We have successfully used cash-out refinances, home equity loans, home equity lines of credit, and private equity from investors to fund the expansion of our real estate portfolio starting with one single-family rental and growing to over $5 million in real estate in the past seven years.
Butts: Also, we won’t expound on it here, but aside from home equity, there are also ways to leverage one’s IRA (called a self-directed IRA) to invest in alternative asset classes, such as real estate.