Passive Investing in Vacation Rentals: Your Options

The three options at a glance

The right choice depends on how much money you have, how much control you want and how long you can leave the money in.

None of these options removes the basic risks of a rental: bookings can fall, costs can rise, local rules can change and the home can lose value. Passive means someone else does more of the work. It does not mean less risk.

Option 1: own the home and hire a manager

This is the most common route for an investor who wants the property but not the daily work. You buy the home, a manager runs it, and you keep the decisions that matter: the budget, big repairs, pricing strategy and whether to sell.

What the manager does. A full-service manager handles listings, pricing, guest messages, cleaning, maintenance and reviews. Our guide on what a vacation rental manager does goes through the duties line by line.

What stays with you. The mortgage, insurance, property tax, permits, large repairs and the reserves to pay for them. If the air conditioning fails in July, the manager arranges the repair and you pay for it. You also carry the result if a year comes in below plan.

The cost. Managers charge in different ways, usually a share of booking revenue or a package fee. Our guide to vacation rental management fees compares the models. We offer two packages for owners, Essential and Premium, set out on our owner pricing page.

The downsides.

• You still need the full down payment, closing costs and cash reserves.
• A manager's fee comes off the top every month, in good months and bad.
• A weak manager can cost you more than the fee in lost bookings and bad reviews, so check who owns the listing, photos and reviews if you leave.
• You are still the owner on the permit, the insurance policy and usually the loan.

If you are weighing whether to hire at all, see self-manage or hire a vacation rental manager.

Option 2: co-own with partners

Co-owning means two or more people buy one home together, usually through an entity they form for it. It lowers the cash each person needs and spreads the work, but it adds a new risk: the other owners.

How it usually works. Partners agree on shares, put in their part of the down payment and reserves, and either run the home together or hire a manager. Profits, losses and costs are split by share.

What your written agreement has to cover:

1. Each partner's share, and what happens if someone cannot meet a capital call.
2. Who makes day-to-day decisions and which decisions need everyone's vote.
3. How profits are paid out and how much stays in reserve.
4. How personal-use time is shared, especially holidays.
5. How a partner sells out: notice period, how the price is set, and whether the others get first refusal.
6. What happens on a death, divorce or bankruptcy of a partner.
7. How disputes are settled.

The downsides.

• Lenders often want every partner to sign or guarantee the loan, so one partner's problem can become everyone's.
• Selling a share in a single home is hard. There is rarely an outside buyer, so an exit usually depends on the other partners.
• Friendships and family relationships carry the strain when money is tight or plans change.
• Decisions take longer with more voices.

Co-owning works best with a small number of partners who agree on the goal, the timeline and the budget before they buy, and who put all of it in writing with an attorney.

Option 3: invest in a syndication

A syndication pools money from many investors to buy one or more properties, and a sponsor finds the deal, arranges the loan and runs it. Investors usually hold a passive interest in the entity that owns the property. It is the most hands-off of the three options, and it gives up the most.

What you are buying. In most cases, a private security sold under Regulation D, not a piece of a house. Our guide to real estate syndication under 506(b) and 506(c) explains the two rules most sponsors use and who can invest under each.

What the SEC tells investors. The SEC's investor bulletin on private placements says: "Unlike an investment purchased on a stock exchange, an investment in a private placement is highly illiquid." It asks investors to consider whether they are "comfortable holding it indefinitely" and whether, if the company failed, they "could afford to lose most or all" of the investment. It also notes that when a sponsor sells only to accredited investors, it has discretion over what to disclose.

What to check before you invest:

• The private placement memorandum and operating agreement, read in full.
• The sponsor's track record on past deals, including the ones that went badly.
• How the sponsor is paid: acquisition fees, asset management fees and its share of profits.
• How much debt the deal uses and when the loan comes due.
• Whether there is a Form D filing on the SEC's EDGAR system, which the bulletin suggests looking up for offerings with prior sales.
• What happens if the plan does not work: capital calls, a delayed sale, or a sale at a loss.

The downsides.

• You cannot sell when you want to. Your money is usually in until the sponsor sells or refinances.
• You have little say in decisions.
• Fees are layered, and they reduce what reaches investors.
• Projections are projections. Real deals can return less than planned, or lose money.

If you are interested in investing with JekkyStay, see our investors page. This guide is not an offer of any investment.

How to choose

Most investors decide by answering four questions honestly.

A few more points that often decide it:

• Time horizon. All three are long-term holdings. If you may need the money in a year or two, none of them is a good fit.
• Liability. As an owner or co-owner you are close to the property's risks. Talk to an attorney and an insurance agent about how the home is held and insured.
• Taxes. Each route is taxed differently, and personal use, depreciation and losses all depend on your facts. See a CPA.
• Diversification. One home in one market is a concentrated bet. Some investors spread money across more than one home or market instead.

Run the numbers first

Before you commit to any route, run the deal yourself. Our free investor tools include a deal analyzer, a cap rate calculator and a cash-on-cash return calculator. Our guides to how to analyze a short-term rental deal and cap rate vs cash-on-cash return walk through the math.

If you already own a home and want someone else to run it, see how our management works for owners.

The bottom line

Passive investing in vacation rentals comes in three forms. Owning with a manager keeps your control and your risk. Co-owning shares the cost and the work, and needs a solid written agreement. A syndication is the most hands-off and the least liquid, and it depends on the sponsor. Pick the route that fits your money, your timeline and how much control you want, read every document, and get a CPA and an attorney to review it before you sign.