How STR Regulation Creates Opportunity for Luxury Vacation Rental Investors

Stephen Petasky (00:00)
Regulation for us, we look as a strength. We understand the rules quite well and we know what to look for, what to avoid. And when we were in New York, for example, they’re the first ones to really regulate in a meaningful way. The hotel lobby was very powerful and out of fairness to the hotels, they had to pay massive premiums in taxes, massive premiums in how they built their buildings, fire code. You had full apartments,

buildings are being rented as Airbnb’s with none of the same requirements. regulation was required and it really cuts supply, which is good. Demand for vacation rentals still exists, will always exist, people want it, but supply is being cut in some of these key markets. So if you’re one of the people that owns a short-term rental or has someone like us manage a short-term rental, these key markets, just have a supply-demand, less supply and more demand drives rate, drives your total revenue.

Dylan Silver (02:19)
Hey folks, welcome back to the show. Today we’re joined by Stephen Petasky, entrepreneur and leader at Luxus Group, a company focused on luxury real estate, vacation ownership, and high-end hospitality experiences. Stephen specializes in owning and operating premium short-term rental and resort style properties, blending real estate, hospitality, and experience-driven investing through Luxus Group. He’s built a model that goes beyond traditional rentals, focusing on creating high-end destinations.

that deliver both strong returns and exceptional guest experiences. Welcome to the show today, Stephen.

Stephen Petasky (02:51)
Thanks for having me.

Dylan Silver (02:54)
Great to have you on here. And I had mentioned to you in the green room that I had really cut my teeth working with investors in the short-term rental space specifically. But what led you into STR, hospitality and the luxury space?

Stephen Petasky (03:10)
Yeah, absolutely. So 20 years ago now, ⁓ my wife and I, my wife was pregnant with our first and we were in two totally different careers. She was a journalist. I was in the retail grocery business actually. And one thing we had a common passion for was travel. And we knew that our travels were going to change once we had our first born, but we wanted them to change in a good way. So we thought what would be the perfect

type of company or experience that we’d be looking for as a family. And as new parents, you’re a little bit anxious and worried about kids, you know, in certain places, you know, on the floors of dirty Airbnb’s or this is pre Airbnb days, VRBO hotels are too small. We didn’t have the money to buy our own home. So it’s that wouldn’t be a, it wouldn’t be great if we had a portfolio of vacation homes around the world that we had equity in that we could set up exactly the way we wanted that they were perfect and give us all that variety. And we said, that’d be great. Well,

no one does this, so why don’t we give it a shot? And we went out to about 18 friends and family and syndicated three and a half million dollars. We bought a beach property in ⁓ Maui, a desert home in Scottsdale, and a ski summer home in Western Canada. And that was the start of Luxus. And now it’s grown to become a very, you know, we’re a pretty good sized company now in about six different countries. And we’ve managed and developed, built hundreds of properties. And it’s been a crazy ride the last 20 years. And the kids,

end up getting a great experience along the way. I’m glad that it gave us the motivation to start the company.

Dylan Silver (04:38)
If we go back to the beginning, after you had syndicated, raised the capital, and then you were looking for deals and then investing in those deals, maybe doing some rehabs as well, what was some of the biggest hurdles in those early days?

Stephen Petasky (04:47)
Yep.

Biggest hurdles, the good thing at the time that it was during the Great Recession. we, you know, unknowingly timed it extremely well where there was a lot of inventory, a very good pricing.

And the hurdles came a little bit later. Buying was the easy part early. The hurdles came as Airbnb became a thing, kind of 2010 through 2015, and they started growing so fast that regulation happened. that was back in the old days, the good old days, it was Wild West, anyone can rent their home, unless there was an HOA that prevented it, you’re pretty much free to do whatever you wanted.

Airbnb came, obviously changed forced cities and states and countries to change their policy and how short-term rentals are governed and ⁓ whether they should exist or not and all these things went through. So we had to change some communities, exist some properties and everything else. the early days was easy. We were raising money pretty quickly and buying when everything was on a deal. But the tricky part came from 2010 to 2015 during that regulation time period, which still goes on today, by the way.

Dylan Silver (06:39)
mean, so you were in right at the inception of Airbnb. So for folks who weren’t even in real estate at that time, what was it like being in the short-term rental space when they came on the scene?

Stephen Petasky (06:51)
⁓ Really exciting because the only thing that existed, mean, rentals certainly existed. VRBO was kind of the most popular, but it was really good for us because VRBO really had no standards, no real strong rating system. So people were consistently disappointed with the other rental platforms. Airbnb forced people to do a slightly better job. So we’re kind of excited about that for the industry to see some growth. But as we kind of worked our way through, we weren’t really competing with them. There’s always a platform that we kind of leverage, but…

they just grew so big so fast. And we got forcing these governments to make ⁓ these changes. it was now we fast forward to our current model today, is an important partner for us as we use them for distribution. But it’s amazing to see how they just completely dominated space, from in hotel lobbies had to get involved to try to shut them down. And they’ve found their way through phenomenally well and they’re the biggest company. They’re always gonna be the biggest now in the space for sure.

Dylan Silver (07:41)
Yeah, yeah.

mean, one of the interesting things about it is, you know, they became so powerful. You have cities all across the country. ⁓ And I’m a Texas licensed realtor. So Dallas is what comes to mind where you can’t do ⁓ under 30 days stays because you mentioned the lobby and so many other factors basically said, look, the only way that you can do this is if you stay here for longer than a month so that it’s no longer considered a short term run.

Stephen Petasky (08:06)
Mm-hmm.

Correct.

Yeah, absolutely. It’s kind of a key part of our thesis as our businesses evolve from kind of our version 1.0 to our 2.0 version.

Regulation for us, we look as a strength. We understand the rules quite well and we know what to look for, what to avoid. And when we were in New York, for example, they’re the first ones to really regulate in a meaningful way. The hotel lobby was very powerful and out of fairness to the hotels, they had to pay massive premiums in taxes, massive premiums in how they built their buildings, fire code. You had full apartments,

buildings are being rented as Airbnb’s with none of the same requirements. regulation was required and it really cuts supply, which is good. Demand for vacation rentals still exists, will always exist, people want it, but supply is being cut in some of these key markets. So if you’re one of the people that owns a short-term rental or has someone like us manage a short-term rental, these key markets, just have a supply-demand, less supply and more demand drives rate, drives your total revenue.

So it’s a good story at end of the day, but it’s created a lot of stress and pain along the way for those

that lost listings as a result.

Dylan Silver (09:17)
What was the bridge for you from the short-term space at luxury or single family into high-end hospitality and developing hotels?

Stephen Petasky (09:30)
Yeah, so 2013, so we now grown to about 40 properties. Again, we bought them all in our kind of our first model. Now we just manage other people’s assets, but in the original time, we actually acquired them through various funds. We were growing so quickly, were always buying homes to your point, rehabbing them, trying to get them to fit like the type of guest experience that our clients wanted and desired and came to expect.

And we said, well, geez, if we can just build our own assets, we can build them up below repurchase price. Because now you’re post Great Recession, know, resale values are coming back up. You couldn’t do that during the Great Recession. mean, anything you built is going to cost more than what you’re going to buy it for. But then it started to pencil the other direction. And so we thought, let’s build for ourselves and other industry players that are looking to…

build a moat around short-term rental regulations. So we would specifically target communities that we could create some form of protection against short-term rentals being banned within that particular community. So we have the HOA and the entry rules. We written in stone that you can short-term rent and it can’t be changed. And that was kind of the move into that. Then what has shifted, that was kind of the first seven years of the development side.

The development side has since evolved now where we’ve separated the companies and they run completely independent of one another. And it’s really shifted now into the hotels and luxury residential space where we’ve seen ⁓ pretty big opportunity and deployed a lot of time and resources too.

Dylan Silver (11:30)
What’s a trend or maybe something that’s a disruptor in the hotel space that is happening now or on the horizon that people don’t know about?

Stephen Petasky (11:40)
The

The biggest trend and it’s big dollars, but it’s branded residential. So branded residential is before you build a hotel and maybe then eventually they would start to add some residences. So take it the luxury brands like, know, Mary, ⁓ know, Four Seasons or Ritz, know, Ritz-Carlton or whatever it may be. It was, they would add some kind of bolt on a few residences. Now there’s a really heavy push for branded residential and everyone’s branding. Louis Vuitton’s branding, Ferrari’s branding, everyone. ⁓ then you have your core brands like addition and

⁓

there’s just so many now that exist out there. Belmont, they’re all building these branded residential. So it’s very popular in places like Miami, the big Latin America influence there, all from Latin America buyers and of course Americans. And in Europe, it’s where we also have an office and we’re growing in. ⁓ Branded residential is ⁓ very limited there and has a significant growth opportunity. it’s basically what the brand does is provide, instead of just calling it Stevens

Residences it’s called Four Seasons Residences. Well Four Seasons commands a lot more name brand power than ⁓ my personal name So you see a big and they collect a fee and their brand means something to them So there’s a lot of vetting that goes on with the people building to build the right product But if you can get the right brand behind you and sell residential it helps with sell through and it helps with financing and helps with profitability because it generates a higher premium

Dylan Silver (13:05)
That’s something that’s new to me. So have these national brands, I mean, you mentioned the Four Seasons. Is this their first time getting into what would be the residential space?

Stephen Petasky (13:17)
Well, not first time but a strategic focus towards it before it was kind of an afterthought It was it was very much all of the companies a hotel first strategy. So you build a hotel

And if there’s room for some residences, let’s throw some in there. Now it’s shifted a bit where it’s, I wouldn’t say it’s equal footing, but if you can’t have a hotel, you can go all in on residential. So I’ll use Vegas as an example, because we’re building the Four Seasons private residences, Las Vegas. There’s already a hotel on the strip. It’s a very large 500 key Four Seasons hotel, but there’s no residential attached to it. So we’re building a standalone 171 unit luxury condo buildings, two of them towers, and it’s 100 % residential.

So there’s no short term rentals, there’s no transient uses for people that trust the brand in a place that they ultimately want to live. And so you’re starting to see this with a lot of the hotel brands saying, wow,

I can have now two flags in one city. I can have a hotel flag and I can have a residential flag. consumers are gravitating towards the brand power, knowing that, you know, Four Seasons or pick any luxury brand, they’ve attached their name to it, it must be great. And I’m willing to pay a premium for that to have that type of experience to live in. Some of the brands quickly also allow you to rent your properties, but a lot of them are just like full-time residences living there.

Dylan Silver (14:36)
Now, for folks who are considering getting into the investment space and specifically looking at development, I think that there’s been in the last five years, seemingly an explosion of syndicators and people looking at getting into multifamily and commercial residential apartment complexes throughout the country. At the same point in time, that has made it so that there is more competition. I know in places like Austin, Texas, where I’m licensed, there’s a surplus, right?

Stephen Petasky (14:44)
Yep.

Mm-hmm.

Dylan Silver (15:06)
For

folks that are getting in right now, and they’re looking at all of this and they’re saying, looks tricky, what advice would you have for syndicators and for folks getting into multifamily development right now?

Stephen Petasky (15:58)
It’s a great question. We know the hospitality and luxury residential space very well. We’re not very familiar. I have a lot of friends that are in the multifamily, commercial, industrial, and I couldn’t tell you which asset class is giving better performance than the next. All I think if you’re a sponsor and you’re the one leading it, like in the person I’m thinking of developing a something, multifamily in Texas, it really just comes down to having a deep, deep understanding of the market fundamentals. What is the supply line?

like what’s the demand, what’s the growth. In every market we look at, we spend disproportionate amount of time. And I know that a lot of people want to be fast in the deals because brokers will push all this is the best deal, best deal. I’m not knocking brokers. Sometimes it could be the best deal, but sometimes the best deals are the ones you don’t do. So it’s really taking a time to understand whatever your real estate asset class is. What is the trend of that particular market? And what is the, you know, the supply that’s coming online in that market? Because you could have the best product, but if 20 other guys are two years ahead of you and there’s a

Dylan Silver (16:46)
True.

Stephen Petasky (16:58)
supply problem and a surplus I should say going forward, you’re going to have best product in this, you may never get it sold through or leased up. ⁓ people rush the deals, we take everything slow. It’s kind of one to two years of underwriting before we do a deal. Not everyone has the luxury of waiting that long. We never did either actually out of frankness. not like it’s a luxury, but we just took our time and any deal we rushed did not perform the same as the ones we took our time on. So that would be my advice to the group.

Dylan Silver (17:26)
Yeah, and I think there’s a lot of people who got into the business before 2020 who saw kind of you could even buy a deal wrong and you could just bank on the appreciation and a number of other factors and you could hit your pro forma in half the time. Well then those time horizons have seemingly expanded now and then if you took out variable rate debt and that rate doubled, that can be very tricky. And so I think that especially in multifamily,

Stephen Petasky (17:38)
All

Dylan Silver (17:53)
It’s definitely an interesting time right now and we’re kind of watching the dust settle as we speak here. But I do want to go back to the short-term rental space and specifically, you know, talking about high-end luxury STR. I’ve heard from a number of people who’ve been guests on the show that people are doing like concierge service and really going above and beyond what I was even aware available in short-term rentals to give the ultimate guest experience.

Have you seen any of that? then also as well, are these services that these owners are procuring themselves or are there like third party management companies that are doing this on their behalf?

Stephen Petasky (18:35)
It’s a great point. It’s both. it’s Airbnb has gotten, I say Airbnb, short term rental space has had pressure since COVID. There was obviously this artificially, it was already a good rise in the artificially inflated time for years, few years post COVID. Lots of people got in, thought it was a super sexy new thing and realized that it’s very hard. It’s a very grindy business and they need to find ways to stand out to differentiate. So whether it’s an individual host, like I own my own home and I’m providing an upscale service, unfortunately it doesn’t do anything for you out of the gate.

because you’re competing with everyone else on the platforms like Airbnb. But what it does do is create loyalty and loyalty where someone says that was someone stayed at your house, they probably stayed at others in the area over the years and they’re like, that was a disproportionately better experience. I’m going to rebook this home. So if you’re trying to play the long game, the service is a differentiator and then we as a property management company also are doing that providing a differentiated in residence experience. What kind of a consistent

hotel brand standard meets luxury short-term rental so people know what they’re gonna get on other side. And ultimately people just want familiarity and they wanna know what they’re gonna get. And then a really high touch service point where people are like, wow, that wasn’t just like they put the key in the lock box and I had to fend for myself. It was, I got this pre-arrival experience, I got this in residence experience, this post-departure experience. was like very, felt more like a hotel in terms of the quality, like a luxury hotel than just like I just stayed at someone’s house.

And if you’re playing the long game as we are and everything we do, we think in five to 10 year cycles, you build it on that because loyalty will build and they will rebook your homes. They’ll tell their friends and you can get higher. You can push ADR, you can push occupancy and you can create more revenue for yourself and the homeowner.

Dylan Silver (20:17)
You know, I think luxury as a whole, although there is some sentiment from folks that it is more impacted by, you know, many recessions, it does feel like in some ways it’s more resilient. the reason why I’m saying that is because I see so much luxury development happening, everything from the residential side to hospitality to short term to even, you know, experiences. Experiences seems to be

what is driving population migration. I see how many top golf facilities am I seeing being built around the country in areas where you’re also seeing like pickleball courts and you’re also seeing malls be ⁓ repositioned into some type of indoor outdoor kind of ⁓ green area and as well shopping area and residential. I think you can’t underestimate

Stephen Petasky (20:56)
Mm-hmm.

Dylan Silver (21:13)
the staying power of these luxury assets.

Stephen Petasky (21:17)
Yeah, you know what, it’s interesting with luxury. We kind of break it into three buckets because luxury is someone could say at a $700,000 condo or a $17 million house and say it’s luxury or not. So we look at it in three buckets. There’s like attainable luxury, which would be your 500 grand to 2 million, and then your luxury 2 million to 6 million and your 6 million plus you move into ultra luxury. Now it’s very market dependent. That’s very generalized, but the kind of three buckets we see in the ultra luxury space.

is that that is a relatively untouched, would say untouched, unfazed market by recession. They’re the ones that wait for recessions to make more money. It’s probably how they made lot of their previous money. The attainable luxury and luxury, we see the people just trade up or trade down based on the economy. Generally, if they’re in that top 10 % income earner, which would fall in that those buckets versus the top 0.1 % that might be paying $10,000 a night, they trade up or trade down, they generally don’t stop traveling. There’s a hmm, I was staying at a $1,500 a night.

luxury place, I’m going to move to just down to 750 or 800 bucks a night. So they don’t change their patterns so much. So much as what they’re willing to spend. So we’ve really focused our energies in that attainable to luxury space, we do have some ultra as well. But because we see that that is a much bigger demographic, you know, it’s your top, you know, 10 % income earners, and they don’t generally don’t stop.

traveling it just comes down to they want a great experience they feel like they’ve earned it they’ve worked hard in their career to have the money to spend on that but if the economy turns like it is now or it’s uncertain they’re not necessarily going to stop traveling they just might change when they book and what they book but they generally keep going.

Dylan Silver (22:47)
Now, bonus question here, Stephen, is there something that you see investors missing when they’re established in the STR space and looking at scaling that business?

Stephen Petasky (22:50)
Go.

The scaling, so it’s a great question, is that we’ve…

taking an approach about for scale. It’s a very difficult business to scale why very few companies have done it successfully over the over the years in the property management space. So again, you’re not owning your own asset. This is your manage other people’s assets and there’s there’s regulation risk. There’s geographical risk in order to scale. You can certainly scale regionally like I’m going to be the best short term mental operator in Dallas, but you do carry risk because if Dallas changes their laws again for the areas that do allow it, you could be cut out and be out of business. So we’ve seen that happen. So we’ve taken the approach to

have ⁓ multiple markets. We’re going to have eventually 20 markets, 20 to 30 properties each, so 500 to 600 homes. So we have head office scale immediately. But if one market gets affected by regulation change, it’s not going to affect materially your portfolio as a whole. And you kind of get the people trading around. Now, it’s expensive to do because every state and every country has its own rules and laws, brokerage requirements, trust requirements, trust reporting, all these things.

And so scaling is tricky. need just being honest, millions of dollars and a track record of doing it for a period of time to scale. Or you’re just a really good, solid kick ass local mom and pop shop that over has spent 20 years in a market building up a great portfolio. You probably have a portfolio of some value, but it’s hard to replicate that sweat equity into a new market. So you have to add systems that allow you to scale.

Dylan Silver (24:23)
Yeah,

no question. And all of that can seem overwhelming a lot of times, but being able to diversify to other markets, like you mentioned, can really be your way to hedge against that, which does help at economies of scale as well. We are coming up on time here, Stephen, any new projects that you’re working on and then as well, what’s the best way for folks to reach out to your team?

Stephen Petasky (24:34)
Mm-hmm.

Mm-hmm. Sure.

Yeah, so there are big new one now it’s a couple years into kind of our seven eight year plan but it’s Luxus vacation properties. So you can go to luxusvp.com. So it’s L-U-X-U-S. So and Luxus is the Latin word for luxury in everyone’s wondering how we came up with the Luxus group. And so if you’re a traveler and you want to have a great experience, go to Luxus VP, see if we have a home for you. If you’re a homeowner of a short term rental asset and you’re looking for a new property management company or maybe you’re self managing, you wanna shift to a property manager

We’d be glad to take a look at your home and to see if it might be a fit for our portfolio. So that’d be great. We had to reach out and connect and and we’re really proud of what we built and what it’s going to be building over the next five or six years. So it’s a great time to jump on board. And if you want to hit me up directly, my Instagram is just Stephen Petasky, Stephen with a PH. I don’t post a lot of Instagram, but it is a good way to connect with me offline if someone has a question or is curious about the short term rental space.