I get approached by people selling all kinds of different investments all the time, mostly hoping I will publicize it to blog and/or newsletter readers. Some deals are attractive, some are not. Most I simply don't have the time or expertise to evaluate properly. Many are quite clearly what I call “Doctor Deals,” i.e. deals that can only be sold to doctors, because they're the only ones with the money and the lack of financial sense to buy them. One of these is a company called Equity Estates that emailed me a few months back. I asked a few follow-up questions and asked for some more information. As (some of it) came back, it became pretty clear to me that this a fairly classic “Doctor Deal.” I'm not going to pretend I've done anywhere near all the due diligence an “investment” like this requires, but I've certainly done enough to know I'm not interested!
How It Works
This particular investment was for the Equity Estates Luxury Residence Fund II. It was pitched as a smart alternative for international vacations that also provides a sound investment. Yes, that's right, a luxury time share program.
“Of course, ownership in Equity Estates has its privileges – everything is taken care of for you. And this is a major selling point for investors who want to own, but not worry about the hassle and upkeep that comes with vacation home ownership. Property management and maintenance are included, and accommodations are luxurious with five-star concierge services.”
Not only do you get to enjoy 70+, $2-4M properties located in 30 countries, but after a period of 9 years or so, the properties are liquidated and you get to profit. The brochures are full of beautiful pictures of beautiful places you get to go to as an owner. What's not to like? Well, for one I don't like “combination” products, such as combining insurance and investing. But if mixing insurance and investing gives you the worst of both worlds, imagine what combining investing and vacation gives you?
Well, as you might imagine, it didn't take much digging to find the downsides. For example, the $217,500 minimum investment. Now, I'm a fairly well-paid physician and based on the surveys I've seen, I have an income and net worth well above the average physician. But this represents the equivalent of a year's gross income for the average physician. Even for a physician with a large portfolio of $1-2M, $218K represents 10-20% of it. You've got to have a really large portfolio to be able to diversify this sort of a minimum investment.
Another downside is the fees. For example, at the standard “membership level” (30 nights) you pay $19,500 a year. Yes, that's right. You own the place by virtue of paying $217,500 to get in, but then you pay ANOTHER $19,500 each year (at best $650 a night) in order to use your place. Now, I don't know about you, but for $650 a night I can have a heck of a hotel room, and if I decide I only want to use the hotel room for 24 days, I get to save four grand rather than being committed to the entire $19,500 a year. Now, maybe that is a heck of a deal to rent these primo properties, I don't know, but I kind of doubt it. We rented a very nice home on a golf course in Vegas a couple of years ago with a pool that rivaled any hotel pool for $1500 for 5 days or so. And we didn't even have to invest a couple hundred grand. But wait, that's not the only fee. There is also a 1% asset management fee. It was unclear to me whether that was assessed on your equity (so $2,175 more) or on the entire value of the properties (if so, multiply that by 3 or 4.) Oh, and the managers will keep 20% of the appreciation (but don't expect them to eat 20% of the losses.)
Yet another downside is the returns on this “investment.” I asked for the company to provide some past returns. They did not provide any, probably because they don't actually have any to provide. This investment is their second fund, but the first one doesn't liquidate until 2021, so as near as I can tell, this company has never gone full circle on a real estate investment. While past returns are no indication of future returns, some kind of past return seems worth seeing prior to investing, no? They do give some rather hilarious projected returns, however. They compare taking $2.1M and using it to either buy a second home (seriously, a $2.1M second home,) paying for luxury vacation rentals each year ($52,500) and investing the rest in stocks, or investing $395K in the fund, and $1.7M in the stock market. Then they show how their investment comes out on top with a 5.4% return AFTER paying for all your fancy vacations. Seriously, $52K a year on “luxury vacations.” Maybe there is someone out there who can afford this stuff, but those people probably don't need much of a return on their money. At any rate, who projects returns for their investment by combining them with another investment? And did I mention that they are assuming the appreciation on these properties will be equal to the return of the stock market?
Like most syndicated real estate deals, there is very limited liquidity. You are allowed to sell after 12 months, but you have to find a buyer yourself (good luck finding someone with $217,500 sitting around who makes as bad of investment decisions as you do).
I don't want to bash on this investment too much. For all I know, the properties really will appreciate at 7.5% and you'll get your 5% returns after taking 40 really expensive vacations. But I thought this was a particularly clear example of the classic “Doctor Deal” purchased by those without much financial savvy who are more interested in prestige than returns. Experienced real estate investors know that the return they can count on is the income from the property, not the appreciation, and especially not at rates like 7.5% a year. Yet this sort of investment has no income. In fact, the income is NEGATIVE since you are basically paying it each year. When a person with money meets a person with experience, the person with the experience gets the money and the person with the money gets the experience.
What do you think? Do you own a timeshare? Have you owned a “luxury residency fund” like this one? How has it turned out for you? What's the most bizarre “Doctor Deal” you have been pitched? Comment below!