At what point is it worth leaving your job and running your own firm?
A lot of RE people do their own investments, tend to be smaller, but its the best way to make some money and participate in higher promotes. I have done some deals myself, but partners that I have worked with continue to grow and want me to grow with them. Problem being we are all somewhat young (low 30s) and don't have the NW to support doing 5+ deals a year without bringing in a co-GP.
In deals I own I split AM fees 50/50 and am getting close to reaching ~60% of my salary in those fees, at what point does it make sense to leave my job? Curious to hear how people here have went on to run their own RE firm, and at what point they went for it?
Never attempted but I've seen some senior members of the team do this over the years.
-Proven Investment Thesis
-Market Knowledge
-Trustworthy 3rd Parties (experience transacting with them)
-Capital Sources
Realizing now that I did a shit job of addressing your points.
If I were in your shoes, I would want to make sure that my non-day job pipeline is robust and can feed you for 5-7 years. Tough thing to peg down and even more ballsy to leap into fully. But if you're making 60% of your salary on these deals alone, then maybe see if it's feasible to match your total comp 1:1 and feel secure enough with your future pipeline to jump. Either way, congrats on the success and update us as you work out the transition!
The partners I work with are FT doing their own deals with me, but have done 9-10 investments with round trips before I started with them, so it's less so going out by myself, and more combining our efforts. I am at the director level at my full-time job (director->VP->Partner), but I'm working 70-80 hours trying to balance both lives. They have the networth to guarantee loans, but we are focusing mostly on deals we can fund full ourselves on the GP side so we can get most of the fees and have the control.
Toughest part for me is capital sources, we have a ton of connections, but equity raises are never a given even with connections. The spread on pricing between what LPs want and what sellers want is very wide. My full time job hasn't completed an acquisition since the fall, and my pay is very heavily weighted towards completed transactions, my salary is very very low, but my incentives are far below what I get doing deals myself, which makes me want to go out since I'd be doing much of the same things I do now anyway.
The other thing is, I make 1x my salary in acquisition fee of each deal, but I need that to continue to help fund GP equity. Investing a couple hundred k doesn't generate enough income for me to save acquisition fees until we've done like 5-6+ deals. AM fees will keep me paid for the next 3+ years as Freddie/Fannie loans have longer YM costs we'd like to avoid, and if we did end up selling early it would just mean I'd be getting my promote sooner.
What is your typical deal size and asset class?
Typical deal size is $20M-$30M, we have done two deals that are bigger than this, but in general this is what we look for.
Impressive to manage deals of this size while maintaining a full time job. I am also evaluating the right time to leave my job. Right now I am working with a partner that is taking lead role in operations until I quit my job.
pm me if interested in sharing thoughts
What kind of equity structure do you tend to have with your LPs? This sounds incredibly interesting but the ~$6m to ~$9m equity requirement makes this seem like a crazy pipe dream from where I am. This is especially true for markets where LTV is closer to 50% than 70%.
I assume these are value-add deals with short horizons that you're doing?
So bring in a Co-GP? I don't see the issue. You're really young to be starting your own company, so giving up some upside for 2-3 years while you build a reputation and a balance sheet isn't costing you valuable years of your life. If you were 55 it might be different.
It makes sense to leave when you feel you can pay your rent and manage to live on the revenue stream from your new company. Entrepreneurial risk means giving up a guaranteed salary to go make the jump and spend a few years at a lower income bracket, because the upside is multiples higher. Not everyone is capable of taking that risk, by the way, so if you're not comfortable with it that isn't a knock on you.
If you feel like you'll be living on cup o noodles for two years while you get this thing up and running, maybe it isn't worth it. If you need to cut back on eating at fancy restaurants to make it work, maybe it is worth it. Only you know what your financial situation is. But your deals and fees will stack, and the more time you spend on it the more able you'll be to cut costs, or do new deals, or raise more money.
Ya, I think this is where I am at, I am fine with taking the risk as long as I have a decent enough runway of expenses saved. I'm trying to get to 1x salary saved that does not need to go into a deal to allow myself time to get deals closed if I were to quit. The goal is go full time into my own deals by the end of the year, but the market isn't worth rushing into at the moment.
I appreciate the advice, it helps to talk it through so I know I'm not missing anything.
I agree with this, OP you can probably find a GP who will be willing to let you keep the fees (or at least enough to pay yourself a decent salary) in exchange for backend economics. It will help you make the transition, and once you get enough capital/experience you can worry about getting more of the economics while maintaining your fee flow.
You're there already. From what I can tell you have all the experience necessary to quit your job and run your own deals. I don't know your personal life (family, dependents, etc) but I want you to know that you have everything you need to get going on your own. The choice for you now is how to set up your partnerships and the economics such that the RISK of going out on your own is justified.
It sounds like your partnership is missing the third leg of the real estate biz, capital. It sounds like you are capable of the other two, finding deals and managing them. When you make the jump you should have a very clear understanding of how you are going to fund the first few deals. This is the biggest hurdle for all new GPs (it was for me), so I suggest you commit to learn how to raise money. If you don't, you will forever be beholden to that first partner or equity brokerages, both of which are not ideal positions to be in.
With all that being said, keep in mind that the current partnership you are in may not be the best platform for you to launch your career.
I recently left my the corporate world and started my own business investing in value-add, core-plus flex industrial and developments in BTR and apartments.
Were about the same age / experience level....I previously worked in capital markets, specifically on the debt financing side at the large shops...CBRE, HFF, MetLofe, etc.
I partnered up with a couple co-gp's that specialize in their respective niches and have a balance sheet for guarantees and GP equity contributions. My value add is finding deals, boots on the ground, underwriting, raising debt and LP capital, executing the business plan and asset management.
In return I get 25 - 40% of the GP and don't have to invest my own capital. Maybe you can work out a similar structure until you start harvesting equity from old deals.
I took a huge hit on salary but make multiple times that in implied equity on deals. Hopefullyit pays off ha.
Feel free to DM if you'd like to connect.
I am in the process of doing this by teaming up with a more senior partner. He'll be putting more money in and I'll be doing more leg work, but I'll still be an owner.
What i've seen time and again in this business is folks with enough experience that have complimentary skill sets team up and make it happen. I for example know I would need an experienced construction guy and CFO in my corner because I don't have the chops for that. Some people need a capital raising guy. It all depends on your situation, deal type, and goals for your business. No one size fits all.
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