As new clubs continue to come online (we’ve heard rumors of three more in the works), it makes you wonder how easy it is to start your destination club instead of joining one. Some of the latest entrants were founded by small groups of investors who thought it’d be more fun to pool their capital and acquire homes themselves.

How does the math work?

Let’s review an over-simplified example. Most clubs operate on a 6:1 member ratio—6 members for each home. Assuming a $300,000 initial fee, then every six members contribute a collective $1.8MM in capital. The funds are used to purchase a luxury resort home, typically with a 50% down payment, which buys a $3.6MM residence.

Annual dues of $25,000 each generates $150,000 a year to cover debt service on the borrowed portion. If a bank provides a 6% interest only loan on the $1.8MM mortage, the club has $42,000 a year remaining to pay for maintenance and operating expenses ($150K less $108K annual loan payments). Not bad when you consider homes are usually planned for 50% occupancy and services such as site concierges and housekeeping are variable costs. In addition, some clubs charge a daily fee, which provides another source of revenue to offset expenses.

The destination club needs to set aside funds on their balance sheet to ensure they can return an 80-100% deposit if a member decides to leave. The funds can be in the form of real estate equity (appraised annually), bonds, or cash. In most cases, destination clubs are formed with a pool of investor capital to get them started – anywhere from $5 to 10MM – which provides enough cash to launch marketing campaigns and hire a sales team.

The basic math omits several expensive factors such as furnishings, property taxes, association dues, and a capital reserve for major repairs, but gives a general sense of how destination clubs leverage the initial fee and annual dues to provide access to multiple luxury homes.

The math may sound easy – and many firms went through the same math thinking it’d be simple to launch a club. The simple part of the equation is creating the funds to build the real estate portfolio – the real challenge is delivering on the five-star service you’ve promised in your marketing brochures. As we speak to club executives, we’re asking them about their hospitality experience…and not just how well they can perform some simple math to buy homes.