This week I came across an interesting company that is taking a unique approach to second home ownership.

There are many people who want to own a second home but can’t. This is either due to affordability or because they can’t justify owning 100% of something they only use a few times a year.

Pacaso is addressing this challenge by creating a marketplace for fractional ownership of second homes.

The concept of fractional ownership is not new. However, Pacaso takes a different approach in that buyers own the underlying property rather than buying a “block of time” or a “right to use” a property.

Managing a second home is another pain point and often a reason not to own a second home. Things like furnishing, repairs, utilities and property management all need to be taken care of. Part of Pacaso’s value proposition is to do this on behalf of the owners.

Pacaso lowers the barrier to entry for second homeownership by making it more affordable. It does this by enabling people to share both the cost of purchase and ongoing maintenance with other owners.

How does Pacaso make money?

This is an interesting question. Almost all of the content on their website is geared towards their customers and their product.

One thing to note is that Pacaso doesn’t own the homes. The homes are acquired by an LLC and the owners then purchase a share in the LLC. Pacaso does not retain any ownership. The LLC is then divided into shares with the minimum ownership being 1/8.

Pacaso wants to be the agent, property manager and own the online marketplace. They do not want to own the underlying assets.

One thing I’d be interested to know is what happens if not all 8 shares of an LLC are purchased? How does the LLC acquire the home if it doesn’t have enough buyers? Does Pacaso arrange the acquisition in the LLC upfront and is therefore required to fund the purchase from its own balance sheet?

A Bloomberg article I read on the company mentions that the company was recently able to raise $1 billion in debt financing. I can only assume this will be used for home acquisitions, rather than working capital, so this answers one of my questions.

It is rare that a lender would provide unsecured debt funding to a startup company. Growth is usually funded by equity capital. Debt funding would be used to finance assets, in this example the homes.

Another article I read mentioned that Pacaso earns a 12% fee on the sale of ownership. So this is one source of their revenue. I would expect that this is a cost charged to each owner and earned on initial and any subsequent purchases.

The company also earns an ongoing management fee for the management services it provides to homeowners.

Overall, this is a good combination of upfront fees and recurring revenue. One can think of this company as a real estate broker and property management company for second homes.

Liquidity risk for homeowners

As a buyer, the one thing I would be most concerned about is the liquidity of the marketplace and the property values themselves. Buying a second home is not just about having a holiday/vacation destination but it should also be a good investment.

The ability to realise this investment through sale is important and having enough liquidity to encourage buyers and sellers is something that the company will need to consider.

One way to ensure this is to focus on markets where there is a lot of demand in the property market. If you take a look at the areas in which Pacaso operates, particularly in the US, you’ll notice that these markets are on the high end. Places where real estate is likely to maintain its value and will always have a demand for people wanting to have a second home.

The properties listed are in some of the most sought after destinations in the US: Park City, Vail, Palm Springs, Malibu, Napa, Tahoe, Miami. I suggest you visit the website to take a look at what is on offer.

The majority of the shares are currently priced from $250,000 to $1,000,000. That is still a lot of money for most people. I would expect that the company will also need to target shares for slightly lower amounts, between $100,000 and $400,000, to attract a potentially larger group of buyers.

Company Outlook

Real estate and second homeownership is such a big market globally that this company doesn’t have to own a huge percentage of the market for this to be a massive company. It will be interesting to see how it does going forward and whether it unlocks a large demand for second home ownership.

I also think this company benefits from the shift to remote work. As more people are able to work from where ever they want, the ability to work from a second home will become a more attractive concept. A second home will become a place for vacation and remote work.

If I had to summarise Pacas’s business into a few sentences it would be this:

• Pacaso acquires properties in an LLC and sells shares (minimum 1/8) to owners.
• Owners use of the property is proporational to the shares held.
• Pacaso earns a fee (12%) on sales of these ownership shares.
• Pacaso provides property management services and earns a monthly management fee.
• By offering fractional ownership, Pacaso lowers the barrier to entry for many people wanting to own a second home.

I look forward to seeing how this company grows over the coming years.