Lessons - How You Win In Real Estate | Stephen Petasky - Founder of The Luxus Group

In this lessons episode, learn the fundamentals of scaling a real estate business from scratch, including practical strategies for raising capital, managing risk with conservative financing, and maximizing returns through short-term rental investments. Gain insights on how passion, persistence, and a strategic approach can drive success in real estate even for newcomers. First of all, raising a hundred million dollars is already an incredible feat. We'll talk about bigger stuff as well, but stay somebody wants to go into real estate, right? And they do want to do something similar to you. It seems like a replicable business model. I don't know if there's a lot of stress and nuance and things you have to figure out. I mean, you figured them out with so-be's background. It's not like you had 20 years real estate, but if somebody would ever want to do this, the friends and family makes that. You raise 3.5 from friends and family, but say you do want to scale up a business of this sort. How do you raise a hundred million in six years? What credentials? Is it just a sales pitch? Is it a sales pitch plus a deck? Is it having a real estate agent on your staff? Is it what is it that convinces people that you're the right person to give a hundred million to? Yeah, you know, I have no, I have any of my original founders listen to this. I want to say thank you because I have no idea why they gave me the money. Like literally, I did not deserve the ability to have those proceeds in my head. I had no experience related to buying real estate, managing real estate, but I think what they found, and aside from being extremely passionate about it, and this wasn't a business to be profitable, like it took us six, seven years to figure out how the business should make money and what the right margins are, because it was really about just an idea of doing something really cool and fun and something we can all be excited about. And so that was like, I think that people bought into that is like the passion. I think that whatever your business is, whether you're cutting hair or taking all garbage or raising a hundred million dollars, and I'll get to how I think someone could do it now in my space, is that you have to love it. And people can see passion, be they feel passionate, they can see, yeah, they can see if you're happy and excited, but they can feel passion. And for me, you know, if it doesn't come through today, like I was, I was very, very excited about that because this would change how my family would travel and how my kids would be raised and we'd grow up. And I only had to put a 200 grand. I put in my 200 grand, same with other 15 or 17 people, and my parents put a 200 grand. So there's 16 additional shares. And that's how we got to that point. So I think to scale it, though, it is very, and now I'm going to give you two, two angles here. This is a very tactical in terms of like if someone was going down this road, to scale this particular business model is very, very hard. And I don't mean to discourage, but there's only like five of us in the world that ever got to this size. There was both 50 of us pre-grade recession. The problem with scale is most people use lever like, you know, obviously, debt financing to scale something. And then when there is a crisis in the world, which we obviously experienced in 2008 to 10, you don't have wiggle room. We did the entire 100 million on cash. So if we actually levered it, but we never levered any of it, we cut out 200 million dollars in real estate. We took a extremely conservative approach, which gave people a lot of comfort that you can't lose all their money and get blood away through mortgage costs and interest costs. So I think it's like creating a safe environment for people at the park capital if you're, if you're new to the space. I think there'll be number one lesson. So okay, I want to go buy a home and send a gift with five friends. Okay, how am I going to make sure I'm going to get some money out of it? Are you buying right? Is it appropriate? I'm going to enjoy is it can you bleed? Can you bleed the money away? Like is it sustainable? So we, we built them all. It was very sustainable. So that was kind of number one. Number two, you need to have the energy to hustle. And I think that a lot of people are good hustlers, but a lot of people think they are, but they don't really realize it literally is a live read eat sleep thing. To get hundreds and hundreds and hundreds of clients through the old way. Now it's, I would say it's easier. It's just different where we talked about using social and different channels. For me, none of that existed in 2007. It was like literally coffee shops. Coffee shop, coffee shop, coffee shop, and I would make a phone call to not cold call. It would just be like a network of a network and you just, you know, you'd share your passion dream and 50% of the time they would do it and 50% they wouldn't. So that amount of energy, I think a lot of people are, um, some of them don't have like the, the staying power. Like I really interfered long game. They look for the quick win. And people see through quick wins, especially when you're immature in early in your career. That was immature in early my career at that time. And I didn't want to make it look like I'm trying to make a quick buck. I was in it for the long game. And so if you people see that I do think it builds a lot of credibility for someone that's actually, okay, this person's here to stay their shoulder shoulder with me. I know they're not making a ton of money, but they're making some money so they're sustainable. I'll, I'll stake this person. I got to jump in with them. And so that's how I think if someone started any business, obviously helps of using social and better channels these days can help accelerate that growth. The best way I think of a real estate perspective isn't necessarily the model we started originally. I think the best angle to make money and real estate right now in vacation are single property or multi property, um, STR or short term rental funds or rental properties. Short term rentals and not good unless, you know, I'll take as far as you want to go down this one, but from a real estate perspective, short term rentals have been so disrupted the last decade all due to Airbnb. So you go pre Airbnb. So pre-2008 and really 2010-11 before it became a thing, they were unregulated. Everyone had vacation rentals or they could rent them out and there was no issues. Airbnb came in the space. They completely disrupted the space. They went from zero rooms to six million rooms in a decade. That's five four times the size of the largest hotel stage in the world, Marriott. And now governments were forced to react to them and they started regulating. So what happened is is that people would regulate, um, so whether it's Florida or Toronto, you probably saw when you were there, they'd regulate Airbnb and Airbnb, a host were kicked out across the board, Vancouver. Every major market effectively in the world has gone through it or is going through it. But we're at this unique tipping point where people want to stay in these homes, these vacation rentals, um, but they, uh, um, they want to stay in them, but they were unfamiliar with the quality of the brand because VRBO kind of beat that up for so many years having these inconsistency. Airbnb has made it not like totally consistent, but a lot better. So I think a great way with regulation in place now, there's clarity and where you can buy, you don't have to worry about being kicked out of your property, like, or not be able to short term rent it. And finding an asset that's in your like for a water day or in, I mean, a lifestyle destination, something California, the desert, you know, out of Mexico, whatever it is, you can like totally DIY it and do it yourself. And that's super fun. You can make multiple five figures, if not six figures of a property by owning a singular asset and you can syndicate it with your friends. So you get your buddies that throw capital in, your debt free, you have a very little lever and you can go immediately start making tens of thousands of dollars. Like, what business can you do that? And all the platforms are there. Airbnb platform, management platforms, they're all exist. And I, people are getting into the space heavy. We're going to hear a lot about it. Those that are early stage will do better simply because putting a foothold in certain markets will help people grow and you can start to accelerate and scale. So it's very long with the answer to that. Sorry about that. No, it's awesome. Don't, don't apologize. Go D. It's smart. A smart group of people listen to this. So go as deep as you love it. Like, okay. So if I'm thinking about this, I just, I just ask questions. Like, if I want to get into this, I always like, yeah, okay, if I start this business, what would I do or how do I think through this? So, and I want to clarify something. When you think about short-term rentals, you can do on Airbnb, but I'm sure you can also do private as well. You don't have to use Airbnb if you can mark on yourself. So if we look at the opportunity, so say we look at, but we buy one piece of property. We raise money. We buy one piece of property. I want property. Yep. Yep. You can kind of have three options. You can either do, you can rent it out. Like, regular rent it out on an annual lease. You can do Airbnb or you can do like a private short-term rental. Yeah. Give me value on that property and then include the breakdown of the management fees and all the other, uh, and salary things and then walk me through what somebody, you can have, like walk me through the math to what somebody could make on this kind of investment. If they, and then they can sort of multiply that at scale, understand the potential if they did this as a, as a living. Yeah. And thanks for clarifying. I use Airbnb to lose slay. It really is STR renting. So short-term rentals, because you might, when you have a property, you can list it on any platform you want plus privately rent it. So you can Airbnb, home away via Airbnb, and Steve Pataski rentals. There's no, they don't have, unless you get to the ultra luxury and use it, they don't even have exclusivity, most have no exclusivity. So you can list it on every platform around Airbnb or most familiar with it, but it really should be short-term rentals. So from a math perspective, I'll just use like a round number to say a million dollar property. Let's say you put in 500 grand and you, and you get a mortgage for 500 grand, you know, like, I'm not going to get into like the debt financing side. That's a different story. We can talk about later if you want, but let's say million bucks is your investment. Your operating cost are usually around, depending upon your market, five to nine percent, kind of somewhere in that range. So let's just say for rough number, $60,000, and that would be property taxes, insurance, you know, replacement power utilities, everything else. Add another couple percent for management fees, assuming you don't self manage, you'll pay someone on the ground to manage for you. You need a house checker and someone to check the guests in and you'll fix the TV and tenant that's not working or whatever it might be. So you're under 10 percent overall operating costs and probably closer if you're, if you buy in a low-cost market, it doesn't have like, like, California's very expensive. High cost of power, high-property taxes, but you can generally get a higher rate, higher cap rate out of it, but it doesn't sometimes necessarily, there's an imbalance between like what you can get from a cap rate or a rental rate versus cost, but let's just say 68 percent. You can create, let's say, $200,000 in revenue on that property. So that would be hustling, so let's just say you're going to rent that million-dollar property out, you're going to rent to $259 at $800 a night, somewhere in that range, you get you $200,000 in revenue, and then out your $70,000 in cost, you got $130,000 in net revenue, it's a 13 percent cap rate. Like, that's not including appreciation on the asset, which is obviously part of your long-term play, is you're really your goal is to build it to not actually sell the properties, and ideally, you build that we have a portfolio of several of these, and they appreciate over time as well. So that would be like, I would say, a low teens would be like a good solid cap rate within the short-term rental space. Certain safer markets like Hawaii and stuff, your cap rate is going to be probably more like five to seven percent, but the real estate market is so safe and so stable, people will take a lower cap rate in those markets, your operating costs are going to be higher, and just the kind of the delta between revenue and that, or your NOI or net operating income will be smaller, but it's safe. You know, Hawaii has a year-round market, and you're generally not going to have a big reset like four to saw 12 years ago or something else. So, pretty good money, and if you're really good at it, and if you want to take a little bit more risk, and then if you lever it, that'll obviously juice your returns further, and you're going to take a bit more risk, you can get mid-high teens. I mean, what business can you immediately... I mean, no, still, you need capital. Like, you need some money out of the gate to get a going. It's not like it's, but you're not... Would you put 500 down on a million-dollar property? Would that be something that you'd feel safe? Because you were talking about before. I've forgotten twice as much. I could have gotten twice as much value at property, but I don't want to expose myself that much risk. So, that's why you do... Okay. Yeah, and our first model wasn't built, it was all built on a cash basis, but at a rental model, I definitely recommend some lever. I think that 50 percent is really conservative. Sixty-seven, you know, sixty-seven you could do, and that just juices it, and a lot of people do that. Like, some people push 80, 90, but I feel like, as soon as there's a 10, 15 percent marker reset, you're really close to the line. I personally think that being relatively conservative isn't a bad thing, so 50, 60 percent lever, that means it gives you double your buying power when you're buying an asset, and you can buy two assets for a million bucks, I said it just one. And that will... Because your income spreads so high, now your N.O.I. is a little less, because you're going to have, let's say, whatever interest rate, 25,000 dollars in interest that year, whatever it could be, then you, you know, you still have a still good N.O.I. maybe it's eight, nine percent now after that, but you're getting a higher return because you have less capital in. So that's a good number. And banks generally will lever you up, pretty comfortably, 50, 60, 70 percent, if you've got some income from another job, that they can, you know, they just shows, or that your, your property's already renting, that's got like an improvement income flow. So talk to your own banker to see what they would lever it out, but definitely I think it's worth it in the rental space because it just juices your returns and it's still pretty conservative. Thanks for tuning in. If you found this valuable, don't forget to hit that subscribe button so you never miss an episode. And if you want to dive deeper into this conversation, check out the links in the description to watch the full episode. See you in the next one.