Vacations are a time to escape the day-to-day grind and relax with your family. But lodging costs can eat up a large part of your vacation budget. As a result, some people have turned to investing money in a second home rather than on vacation homes and timeshares. Although those options work for some, a University of Central Florida study showed that 85% of people regret getting a timeshare.
Pacaso offers a different solution to second home ownership and timeshares by allowing you to buy a share of a property you can use as a vacation home. Here’s what you need to know about Pacaso and whether it’s the right option for you.
What is Pacaso?
Real estate startup Pacaso allows people to buy partial interests in second homes in about 25 second home markets throughout the U.S. Its business model gives customers the convenience of second home ownership without the hassles of owning and managing a home, timeshare, or renting an Airbnb.
Pacaso was founded in late 2020 by co-owners Spencer Rascoff and Austin Allison, both former Zillow executives, and is headquartered in San Francisco, California. The company is backed by venture capital, including SoftBank Vision Fund 2, Fifth Wall, Gaingels, Greycroft, and Global Founders Capital. As of September 2021, Pacaso managed almost $200 million in real estate on its platform.
How does Pacaso work?
Pacaso allows you to vacation in a second home without the hassles of owning, paying for, and maintaining the whole home yourself. This fractional ownership model is also different from real estate crowdfunding sites, such as Fundrise, however.
To achieve their goal of providing second home ownership to a wider audience, Pacaso uses a unique business model. It purchases a home using an LLC and sells one-eighth shares of the property to its customers. Customers can buy one to four shares in a home they want to use.
Pacaso handles all the details for homeowners, including finding properties, professionally decorating them, handling maintenance issues, and managing each owner’s time. This can take the headaches of homeownership out of the equation.
Although this model may feel similar to a timeshare, the difference is that you actually own the home, not the right to use it for a specific period each year. You can also sell your ownership interest after owning it for at least 12 months.
Using your shares
A one-eighth share entitles a shareowner to schedule 44 days in the home per year. You get unlimited short-notice stays booked two to 60 days in advance, and all days count toward your 44 days per share.
There are maximum limits to the maximum number of nights per stay based on your ownership percentage:
- One-eighth share: 14 nights
- One-quarter share: 28 nights
- One-half share: 42 nights
You can also book stays up to two years out. Stays booked between 61 days to two years in advance qualify for up to six general stays (defined as stays of seven nights) per one-eighth share. That means one-half shareholders get up to 24 general stays.
Short-notice stays booked two to 60 days in advance count toward your annual stay nights but not your general stay bookings. Once a stay is within 30 days from the current date, you can book another stay.
Special dates and peak season scheduling limitations also exist. You get one special stay, such as a federal holiday like Thanksgiving or Christmas, per one-eighth share. These require a three-night minimum stay. Peak season bookings are limited to two general stays of up to seven nights per peak season. These limitations may go away as a date nears and is not booked.
Costs of co-ownership
Partial second homeownership isn’t generally less expensive than renting a property for a week. The difference, however, is that you own part of the home, which can appreciate in value.
Pacaso requires a minimum 30% down payment on each share you want to buy. You may be able to finance the rest, but you will have to make principal and interest payments. You will also split the monthly operating costs of your property with other owners based on your share percentage. Finally, Pacaso charges a $99 monthly fee per share you own.
As of February 2022, the cost of a one-eighth share of a property on the Pacaso website ranged from $285,000 to $2,638,000. A minimum 30% down payment for the less expensive of the two would be $85,500. With principal, interest, taxes, operating fees, Pacaso fees, and other costs, you could also end up paying an additional $2,115 per month for ownership of that property.
What happens when I’m done with a property?
As long as you’ve owned the share for at least 12 months, you can sell it to someone else. You choose the price you want for your share. Pacaso can either market the share for you or you can choose local real estate agents to sell it for you.
If your property has appreciated in value, you could make money on the sale. By the same token, if the value of your property has decreased or people aren’t interested in buying a share of a home, you could lose money on the sale. You also have to account for the costs to maintain the home over the time you owned it to determine whether your sale was profitable.
Who can use Pacaso?
Pacaso doesn’t list any restrictions on who can purchase an interest in an LLC. In addition to the 30% down payment minimum to purchase a share, the company also offers preferred financing rates for people who put 30% to 50% down.
Pacaso vets all prospective buyers before they’re allowed to purchase part of an LLC. Part of the process includes agreeing to an owner code of conduct that includes common-sense rules, such as quiet hours from 9 p.m. to 7 a.m. and a restriction from holding parties that could disrupt the neighborhood.
Pacaso may be a more attractive option to buyers who only spend limited time in a second home. By purchasing a share through Pacaso, you only pay for as little as one-eighth of the cost of the home. Additionally, the home is professionally managed when you aren’t using it.
Pacaso could also be more appealing because you generally have more flexibility in terms of when and how long you can stay compared to a timeshare. You also own a portion of an LLC that owns the property. If the property appreciates, your LLC interest could increase in value, as well. Timeshares don’t offer this added financial benefit.
How much can you earn with Pacaso?
Full owners of second homes may be able to sell a portion of their home to Pacaso. You sell the entire property to Pacaso, the company creates an LLC, and allows you to keep up to 50% ownership. If you keep less than 50%, the home sale won’t go through until Pacaso secures owners for at least half of the property. You get the money from the portions you sell and Pacaso finds buyers for the other parts.
Pacaso doesn’t allow you to rent out time from your one-eighth share of the property, however. This means you won’t earn any regular income from owning the LLC interest. Once you’ve owned your share of the LLC for 12 months, you can sell it.
You get to choose the sale price and Pacaso will market your share of the home for you. You will also have to pay a standard commission fee to sell the interest in the home.
Keep in mind that second homes are luxuries, which could result in a steeper decline in price if owners are financially stressed. This could put more pressure on home prices in luxury second home vacation markets.
How is Pacaso different from a timeshare?
Pacaso is not a timeshare, despite sharing a common vacation aspect. Pacaso homes are single-family homes, not hotels. You own a portion of the company that owns the real property, which is different from simply having the right to use a timeshare.
You also have access based on when you can schedule time rather than the generally more limited booking options timeshares offer. Finally, you can sell your LLC interest in the property after one year to anyone that qualifies, unlike timeshares, which are difficult to sell and usually end up getting sold back to the resort.
How does Pacaso ownership work?
Pacaso allows people to buy fractional parts of a second home through an LLC. To purchase a share of a home, you need at least a 30% down payment and may be able to finance the remainder. In addition to the mortgage payment, you must pay other costs to manage and maintain the second home based on the percentage of the home you own.
Once you own a share, you can schedule time in the home, up to 44 days per each one-eighth share you own. After you hold your shares for a year, you can resell them. This could result in a profit if the property appreciates.
How does Pacaso make money?
Pacaso is a company that aims to turn a profit. Unfortunately, it doesn’t clearly disclose exactly how it makes money. However, we can see the many ways in which the company brings in revenue.
First, it charges a 12% fee of the purchase price of the home to the shareholders of the home. Next, Pacaso charges a monthly fee, which is on top of any property management fees you may pay to have the home managed. Finally, the company takes a 6% commission fee when you sell your share through it.
Pacaso offers home buyers a flexible alternative to buying a short-term vacation rental, second home, or timeshare. It also creates an opportunity to make a profit by selling your share when you’re done. As a result, it could be a good way to learn how to invest in real estate.
FinanceBuzz is not an investment advisor. This content is for informational purposes only, you should not construe any such information as legal, tax, investment, financial, or other advice.
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