Investing in Luxury Vacation Rentals

Real estate is a great hedge against inflation. As inflation rises, so do property values.

But we all know the future of most traditional real estate deals are uncertain. The themes for this upcoming investment cycle are obvious:

• With ongoing downward pressure on wages, traditional rentals are vulnerable to rental strikes, and primed for government regulation enforcing rent freezes and eviction bans. 

• Commercial/office assets will continue to be hit hard by the growing demand to work from home — a trend that’s here to stay.

• Hotels and resorts are hit hardest in economic downturns, recessions, and outbreak-type natural disasters.

• New development projects are inherently risky, even more so with the current landscape and uncertainty with regards to the cost of capital. 

• The Harvard Business Review: U.S. Commercial Real Estate Is Headed Toward a Crisis

In today’s evolving market landscape, when most commercial real estate and development is trending toward increasing downward pressure, many sponsors and investors stretch assumptions to meet pre-rate-hike expectations, often relying on elevated debt levels that compound risks during downturns. 

Short-term market cycles are becoming increasingly unpredictable, adding pressure and leading some investors to seek faster exits and larger returns, believing this will help reduce the risk of their capital being caught in the next market downturn. 

THIS IS MISGUIDED, and actually has the reverse effect—it compounds the risk of magnifying losses rather than mitigating them.

But forget about these specific challenges for a moment (there will always be global shifts, weak economies, and sector volatility. 

Allow me to focus your attention to a bigger story:

The fundamentals of investing in real estate are changing. How?

The global COVID-19 pandemic presented a pivotal moment for real estate investors. 

Now, long term investors need to hedge their real estate holdings with an asset class that moves in the opposite direction when traditional real estate falls into a bear market.

And that’s exactly what the luxury vacation rental asset class does.

According to JP Morgan’s private banking report, the luxury home market is not a bubble, with price gains outpacing the overall market since 2019. And the pandemic proved that a select number of luxury SFL markets in the world provide stronger downside protection, with exceptional resilience and even growth through economic distress — more than any other real estate asset class.

Here’s why:

First, with the right asset management strategy, luxury vacation home values are not directly linked to their revenue in the same way as other commercial real estate asset classes, offering similar downside protection with strong risk-adjusted returns as the SFR asset class.

Second (and most importantly) the asset class is also protected by the unique resilience of its premium, luxury nature. 

The asset class is pretty much only accessible to ultra-high-net-worth (UHNW) individuals, the world’s wealthiest 0.1%. 

This is a demographic that also historically multiplies their wealth in economic downturns, because they tend to have increased flexibility and liquidity, with highly diversified holdings and income streams, shielding them from the significant losses sustained by the masses.

One of the only things that truly slows down spending on luxury products and experiences during a crisis is the social stigma associated with continuing to spend lavishly while so many others are struggling. This is because the UHNW consumer’s purchasing power is not actually lost and the intent behind luxury purchases supersede price sensitivity. This can be seen in the luxury home market where the rise in mortgage rates has had no material impact on luxury home prices.

Once this social stigma is gone, and when spending becomes socially acceptable again, the purchasing activity rebounds faster and stronger than in most other segments of industry.

The affluent, HNW traveller demographic is also quickest to return, helping booking activity and operating income to recover faster. 

And on the other side of the equation, UHNW individuals have more wealth to buy leisure homes in highly desired markets.

This phenomenon can also be seen outside of real estate, and is the reason that Bernard Arnault (Chairman and CEO of luxury conglomerate LVMH) and his company almost double their net worth and value in 2021.

Sure, every asset class can see a downturn, but if the luxury vacation rental asset class is getting hit? It’s highly likely that every other real estate asset class (and most likely asset classes outside of real estate too) are getting hit much harder.

Ultimately, luxury vacation homes — in the right markets — are the perfect hedge bet against most volatilities in both real estate and travel, prime for stronger and more stable growth over the long-term.

Apart from the obvious liquidity requirements to purchase a $3,000,000-plus vacation home in a market where leveraging the asset is mostly impossible, there are three main barriers to entry that offer established players in the premium and luxury market segments a significant advantage and protection, by discouraging new investors to enter the market.

Generating strong profits with the luxury vacation rental asset class requires a specific knowledge on how to create real value in luxury real estate, and a rare savoir-faire for doing the same in the rental segment.

Sourcing an asset with rare intrinsic value, that also has high-yield improvement potential requires skill that goes beyond the spreadsheet.

And implementing the design and operational improvements that will drive profits at the property level isn’t done in a boardroom.

It’s done by working intimately with each asset.

Our global expertise spans over 35+ markets, across 16 different countries, and we have a combined 20+ years of experience evaluating hundreds of millions worth of luxury real estate opportunities, design projects, and booking activity.

From how we source assets, to prioritizing which design and operational elements to implement, how we market and distribute our properties globally, to how we recruit and build dedicated local operations teams, etc... Our team has spent years of trial and error, improving on and fine-tuning every aspect of our operation. And we're still innovating every day.

Our processes are totally unique to us.

But most importantly, it’s the results that matter. And our assets outperform 99% of all the highest-grossing luxury vacation rentals in each of our operating markets, and globally — including those managed by firms that are larger and have been around longer.

The number of operators with a proven track record of generating strong yields at the asset level in this segment is rare because of the asset class’ unique nature.

And because it takes a heck of a lot of time, money, and experience to learn how to create the most value across all levels of a luxury vacation rental investment life cycle.

Individual investors trying to enter the luxury vacation rental market will do so at a significant disadvantage due to the established economies of scale currently being exploited by the existing leading firms.

A luxury vacation rental operation requires a robust operational structure that runs 24 hours a day, seven days a week, 365 days a year.

For instance, let’s just use one aspect of the luxury vacation rental operation: Booking management.

At Jack Laurier, over 30 percent of our bookings are confirmed during the hours where most people around the globe are sleeping — Without this 24 hour coverage, this opportunity is lost. 

To properly cover this 24 hour period, successful teams must be unencumbered by any inexperienced personnel, and have multiple, highly-skilled professionals who are expertly trained in luxury sales and service to be on call over different shifts. The same also applies to almost every link in the luxury vacation rental value chain.

On top of that, you have to design, stock and service the luxury vacation home according to what commands and converts the highest ADR.

Established luxury vacation rental operators (like us) will also have experienced interior designers on their team, and have valuable vendor relationships with luxury suppliers. We have access to wholesale rates and large discounts that individual investors or potential new entrants simply don’t have access to.

The clear benefit to established teams is that they can onboard new properties faster and at less cost, and can manage a larger number of bookings for many different properties at any time (albeit, a top manager will never have too many properties in the same market in its portfolio).

Alternatively for individual investors, the significant amount of time, expertise, and financial resources required to release a new property all while building successful teams will greatly shrink margins, and ultimately deter them from entering the market.

There is significant amount of time and financial resources required to build a successful team, there are also considerable marketing and set up costs associated with onboarding a luxury vacation home and preparing it for release. 

At Jack Laurier, we invest a lot of resources into the onboarding of a new asset rental operation.

It goes into time, market research, finding the deal, travel expenses, photography, videography, post-production, branding, ad graphic & web design, professional copy, display & media placements, custom booking funnel creation, interior design and FF&E plans, dedicated staff sourcing, recruiting and operational workflow training, etc…

Almost every single aspect of the luxury vacation rental operation is either a marketable advantage that increases the property’s perceived value in the marketplace, or it is simply wasted potential.

And poor quality marketing assets, or uninspired design elements can also decrease a property’s perceived value, and in return, deteriorate its overall potential. 

As a result, most investors are either deterred from entering, or grossly underestimate these costs, cut corners, or aren’t able to properly compete with the market leaders and are pressured to exit their positions early.

Naturally, a luxury vacation rental that generates seven-figure returns is quite rare.

It’s rare because most housing markets don’t have the characteristics to support generating this level of returns.

It’s also rare because the vast majority of luxury vacation homes on the rental market are owned or purchased by HNW and UHNW individuals, who naturally prioritize personal taste and sanctuary over operating a consumer-focused for-profit asset class.

And so, most managers in the space are built to service the individual wants of a demanding clientele of owners, where creating value and generating profits is not, nor ever will be part of the management mandate.

And it’s rare because most traditional strategies that work well for investing in other segments of real estate, like those that thrive with uniformity and rapid capital injection for scalability, simply don’t work with this asset class.

Now, to a savvy investor, this means that there is a genuine, bankable opportunity, ripe for the picking.

The problem is that creating true value in luxury real estate isn’t done from a spreadsheet. 

It’s done with proper execution at the asset level, which naturally requires tact, exceptionalism, rarity, scarcity, etc… — with asset management and marketing strategies that most investors and managers can't execute (or don't even know exists).

And for a select few, the luxury segment of the vacation rental industry is a surprisingly lucrative sector.

At Jack Laurier, we know this because we prove its profitability day in and day out for our property partners.

The assets we operate in the segment outperform 99% of all highest-grossing luxury vacation rentals, globally — generating up to 10x more profit per property than local managers and notable larger firms.

An asset with a base CMV of $4M, operating at a 6X GRM and 50%+ operating margin will generate a seven figure gain in just 3 years from cash flows alone.

And that doesn’t even include the bonus market appreciation of the asset itself through the hold (which can be above 9% CAGR in the strongest luxury markets), or the value add accelerated by any minimally-invasive high-yield property improvements, or the value-add premium from having a multi-six-figure profit operation on top of the asset.

All of which can turn a base CMV of $4M into $5M+ throughout a relatively short hold period.

There is no perfect timing to start investing in luxury vacation rentals.

Just like most other stable, long-term investment plays, compounding profits over time is what generates the highest returns. And the more strategic you are about your reinvestments, the faster your equity will compound within the asset.

Waiting for a market downturn can be tempting, but it’s unlikely to be that long or that big, and the competition for the few fire sale opportunities can be fierce. Which could delay your entry, and maybe even cause you to miss the downturn altogether.

Ultimately, the luxury vacation rental industry is still in its infancy as an emerging asset class. 

And the number of operators with a proven track record of generating strong yields at the asset level is rare.

Which is enough to keep the segment well protected… at least for now.