Ultimate guide to vacation properties and second home ownership

TL;DR: If you’re operating on a tight budget or don’t vacation much, then your best bet is simply to rent whenever you travel. But, if you’re vacationing at least 2-3 weeks per year, and value a higher quality experience with greater consistency, then you should consider ownership alternatives that might offer a better product at a lower overall cost per night. In particular, consider fractional property ownership, which will let you buy a share of a property, and its use throughout the year. In many cases, fractional ownership can get you access to luxury properties at an overall cost per night that is half or a third of what you might otherwise pay when renting or owning.

Growing up in Canada my family owned a lake-house a few hours outside of the city. Having a place to get away from the grind, and into nature, has always been something I envisioned for myself and my family. Of course, making that a reality is easier said than done, particularly when living in a high cost location like the Bay Area. It’s hard enough to reach Ramen Retirement, let alone pull together the funds to afford a multi-million dollar vacation property in Sonoma or Tahoe. Nonetheless, a few years ago I started researching my options. What I learned is that owning a piece of paradise was within reach, just not in the conventional way I was familiar with growing up.

What do you actually want?

When considering a second home, there are a range of options. But before getting to those options it’s important to understand what you really want. It’s nice to say ‘I want to have a place where I can get away’, but stop thinking in generalities and start getting very specific about what you want. Try to have a very clear answer to the question: ‘What would my ideal lifestyle look like?’:

  • How often do you ‘get away’ or go on vacation? How often would you like to?
  • How many people will typically be with you when you do? Do you have kids?
  • Do you like to go back to the same places, or are you looking for variety?
  • What sort of amenities are important to you? Awesome kitchen? Hot tub? Nature?
  • What sort of activities do you enjoy? Swimming? Hiking? Biking? Skiing?
  • How far (time, distance, cost) are you willing to go to ‘get away’?

Once you’ve answered some of those questions, you will be much better prepared to figure out the right option for you.

The menu of options

There are a whole host of options when it comes to vacation properties and second homes that range from pure rental to 100% ownership, and everything in between:

  • Rental
    • Resort or hotel
    • Vacation rental (Airbnb, VRBO, Homeaway)
    • Vacation club (pay for access to rent premium vacation properties)
  • Fractional ownership
    • Fractional single property (buy part of a single home)
    • Vacation fund (buy part of an investment fund that owns many homes)
  • 100% ownership

When you consider these options, the major dimensions you’ll be trading off are a mix of cost, quality and variety:

  • Cost – total cost of vacationing, both direct and indirect costs
  • Quality – size and quality of property; calibre of concierge services; how much influence and customization you can have on the property
  • Variety – different locations, different times of year; where you want, when you want

Rentals: These options are the most expensive on a ‘per night’ basis, and are paid entirely with after tax dollars. You have only indirect control over the quality and consistency of the property, depending on what you book. The main benefit is maximum variety and flexibility, giving you optionality on where and when you vacation.

Fractional ownership: The goldilocks of these options is fractional ownership – you can own a piece of a single property, or a portfolio of properties through a vacation fund. This allows you to buy as little as 2-3 weeks of use from a property in a given year, minimizing the commitment and cost of owning, while preserving the benefits of being an owner (quality, consistency etc.). Moreover, you maintain significant flexibility, as you can often trade your fractional time in one property for time in another property through networks like 3rd Home and Elite Alliance. If you’re likely to use at least 2-3 weeks of vacation time a year, and you will need larger 3+ bedroom properties for your activities, then this is definitely the right choice. It will minimize your cost per night, maintain flexibility, and ensure a great experience that is up to your standards wherever you go.

100% ownership: With 100% direct ownership, you maximize control & consistency. This can be great to ensure you get exactly what you want. Of course, the cost will be highest. Even after renting out your place when you’re not using it, it will still be much more expensive than fractional ownership, and likely more expensive than just renting… AND you’ll have to worry about managing the property. Lastly, with this option you have the least variety and flexibility, as you’ll feel obligated to use your property as much as possible to spread out the major fixed cost you’re incurring as an owner.

See a summary of this overview here:

Vacation Ownership Comparison (1).png

So really, it all comes down to your preferences and financial capacity. In my opinion, anyone in their 20’s should probably maintain maximum flexibility and optionality by simply renting. You’re likely ‘pre-kids’ and have an active, diverse social life, so you don’t know whether you’ll be going on a small trip for 2, or a group trip for 10, and preserving the option value is pretty useful. Moreover, it’s unlikely folks in their 20’s will be in a financial position to buy. But once you hit your 30’s you start to figure out what you like in your vacation experience, you might have kids, and you probably have a little money. In that context, owning in one form or another starts to make more sense. When you travel, you’re more likely to be doing it with family members or friends (so you’ll want the larger places!), and quality / consistency becomes a priority. Of course, owning 100% is a big pain in the ass, and an expensive one at that. If I think about the amount of use my family got from our lake-house, the total cost per night was astronomical. Not to mention the mental burden of maintaining the property, and the sense of obligation that we should be spending time at our lake-house. All of those things combined suggest that once you want a little higher quality, and a little more consistency, you should consider some form of fractional ownership.

The economics of fractional ownership

Given cost is one of the main benefits of fractional ownership, let’s take a minute to compare what the options look like:

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The simple analysis above looks at the cost to rent compared to the annual cost of owning, including the opportunity cost of tying up your capital. For the rentals, the cost per night is simply the rental price. For the ownership options we include annual cash dues that cover property expenses, spread over the number of days of use, and then include an implicit cost for the capital that is tied up in the down payment (using a 5% annualized opportunity cost for that money).

You can see that resorts, hotels and vacation rentals are expensive ($1,250-2,000 / night). Fractional ownership comes in a range. Many of the vacation funds (~$1,000+ / night) are also expensive. You might save a little when compared with renting, but not that much, so what you’re really banking on is quality, convenience, and consistency. The best option, as far as I can tell, is to purchase a fractional vacation property directly (~$500-600 / night). I ran the numbers on what this would look like, and the math is compelling:

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View this analysis here. If you want a copy of your own to play with, email me at ramen@ramenretirement.com.

In the above example, we assume a $3M vacation home is purchased and split into 12 fractional shares. Each fractional owner pays $250K upfront, and ~$6K in expenses per year (net of rental revenues). In exchange they get 4 weeks of use from the property. I compare this with owning the property outright, and renting it when not in use.

The result is that if the 100% owner only uses the property for 28 nights, it will cost them $2,610 per night compared to the $227 per night for the fractional owner. Even if the 100% owner uses every single available night (beyond the nights they rent out), their cost per night will still be higher at $334. This doesn’t even account yet for the fact that the 100% ownership option also required a down payment of $1M vs. the $250K investment for the fractional. That opportunity cost adds ~$1,800 / night to the cost of 100% ownership vs. ~$450 / night for the fractional, bringing the comparison closer to $2,100 per night vs. $660. Any way you cut it, owning the fractional is the better deal.

The other way of looking at this analysis is to evaluate the internal rate of return (IRR) for the fractional property owner – this is similar to the expected annualized return from using the vacation days and then selling the property in the future for a profit. If we assume that the fractional owners use all their days every year, and we use the implied rental rates as the value of using those days, the simple IRR nets out to ~14%. That’s a pretty good return (at least 2X better than the long term S&P 500 gains). But to get a true idea of the comparable IRR needed to fund that level of vacation enjoyment, you need to consider the fact that the ‘usage’ that is consumed by the owners is in effect an after-tax return… they don’t pay any taxes on usage of the property they own. So if we adjust the value of that consumption for a marginal tax rate of 45%, the implied pre-tax IRR jumps to ~22%. That’s an incredible return, often only available from some of the better private real estate investments and syndicates.

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So that last bit of analysis might be a bit complex, but if you invest in real estate, you’ll probably understand that a return like that is pretty compelling. But even the simple analysis of cost per night is pretty compelling. You can own a piece of a $3M home for a fraction of the upfront investment, and the lowest all in cost per night – roughly half the price of fractional vacation funds, or comparable vacation rentals.

If money ain’t a thing for you – i.e. you got hit with the money truck at some point in life – then by all means, go ahead and buy a place outright. Own it 100%, pay the higher cost per night and enjoy the added flexibility, freedom, and control that entails. But for the rest of you out there trying to make your dollars work harder, fractional ownership seems like the way to go if you decide you want to own.

How to find a fractional property?

So now that you’re convinced fractional ownership makes sense, how do you find something like this? Today, there isn’t any great single resource for this. The Luxury Fractional Guide offers a search capability that will help you review fractional properties available across different vacation areas. What you’ll find is that most properties on offer as fractional come from developers…


This can be a good place to start when researching fractional options, but often times those fractional shares are more expensive as developers layer on various fees and costs, which tend to increase the price per night closer to the levels seen with the Vacation clubs mentioned above (i.e. $1,000+ / night). In addition, the developers often impose strict control over the fractional ownership, and in some cases, it’s not clear what you’re actually getting a share of. I don’t love the options offered by developers, because I feel like the property is still under their control.

Vacation funds

I talked a little about vacation funds above, but it’s worth mentioning here again. The three funds that really matter include Equity Estates (most expensive), Equity Residences (more reasonable prices), and Destination M (best value from what I’ve seen). All of them own a portfolio of properties across a number of geographies. You buy an equity share of the overall portfolio and pay in annual dues to cover costs, then you get access to use any of the properties they own. It’s not a bad option, but from what I can tell, they seem to be more expensive than what I would expect. I suspect this is because they are layering on additional cost to support running the fund. There is a slight benefit in that you have more variety in where you vacation, but as mentioned above, you can get access to greater variety by joining some of the luxury property exchanges like 3rd Home and Elite Alliance, so at the end of the day I’m left wondering whether this adds a lot of value. The one thing to note is that they do offer a greater level of service through their vacation concierge programs, but it’s worth questioning how much you truly value something like that.

Self organized

The other way people purchase fractional properties is by self-organizing. Friends or acquaintances who are both looking for the same sort of vacation experience will get together and purchase a home, then work out how to handle ownership decisions, management of the property, payment of expenses etc. This is great if you know some folks who you want to go in with, but it’s pretty hard to find ~4-12 other people who share your similar interests. And, even once you find a group of folks, it can be a pain to work through the details of:

  • Property search & diligence
  • Property purchase & close
  • Creation of legal and operating agreements
  • Hiring and oversight of property management
  • Allocation of property usage
  • Annual budgeting & expense management
  • Miscellaneous other items that come up in the purchase and management of a property…

Fractional purchase platform

This is why a few friends and I are developing a platform to facilitate the creation and management of fractional share properties. Our goal is to help you own your piece of paradise, offering the ultimate vacation experience at the lowest all-in cost of ownership and use. Our goal is to enable single property fractional ownership by:

  • Pooling groups of buyers with shared interests
  • Sourcing and acquiring premium properties at compelling prices
  • Taking care of all the fractional ownership details (agreements, dues, budgeting, property management, property allocation etc.)
  • Handling fractional share and property level resale to ensure investment liquidity

We’re currently focused on markets and properties in and around the San Francisco Bay Area – specifically:

  • Tahoe mountain retreats (lakeside or mountain views)
  • Napa / Sonoma wine country villas
  • Russian River waterfront properties

If you’re interested in learning more about any of these markets, or this approach to fractional ownership, drop me a line at ramen@ramenretirement.com – we are always looking for additional investors who are interested in this uniquely valuable approach to vacation home ownership.

Bringing it together

So I hope you can see why I’m so excited by fractional property ownership. It’s the ultimate Ramen Retirement approach to second property ownership – all the benefits of owning – familiarity, consistency and quality control. The flexibility of vacationing anywhere in the world. All with the lowest all-in cost per night across all options of vacationing. But ultimately, this is about creating something more valuable than just a financial return – it’s really about creating priceless lifetime memories. You work hard, and it only makes sense to truly enjoy the vacation time you take. Making an investment in these sort of life experiences is unlikely to be a bad investment, and if you do it wisely through fractional ownership, it doesn’t have to break the bank. Everyone can own their piece of paradise.

Hope that helps – as always, reach out if you want to discuss any of this further!

There are a few other resources out there to help you think about the world of luxury vacation properties and fractional ownership. The top two are the Sherpa Report, and the Luxury Fractional Guide. See below for more.

Relevant resources

Top vacation funds:

Vacation property exchange services:

Key resources:

Interesting articles:

Interesting analysis & comparisons

Comparison of investment and costs for different vacation club options:

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Source: SherpaReport

Overview of tradeoffs in second home market:

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Source: SherpaReport

Detailed economics of various vacation club offerings:

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Source: SherpaReport

Summary of top vacation clubs:

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Source: SherpaReport

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Source: Equity Residences

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Source: Equity Residences

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