Going out solo as a GP - juice worth the squeeze?
Hey guys,
This forum has been immensely helpful through various stages of my career, and would appreciate your thoughts on what I hope will be my career trajectory.
I’m a VP at a multifamily GP, focused on a particular region (think southeast, northwest, etc.). My plan has always been to go out and start doing my own deals (similarly, multi deals in the region I am currently focusing).
Given where we are in the cycle, and my desire to get even more entrenched in my markets/in the broker networks, I’m thinking about making the leap in a couple years or so.
I’ve come to the realization (without stating the obvious) that I’m trying to optimize financial success and autonomy/lifestyle. But I’m not sure if: A) the juice is worth the squeeze, particularly if you’re starting small, and B) this is the path of least resistance in RE, or another industry given my background (I’m not wedded to RE, more so to the 2 objectives above).
Let’s assume I have a solid broker network and can raise $2mm-$5mm via friends and family (confident I can execute this today TBH). Even with a $10mm deal and the most favorable country club waterfall I’ve seen (50% over an 8), a 20% IRR on a 5yr hold gets you ~$1.8mm (plus fees and AM). Discounting that back and amortizing, it seems like a lot of legwork for not much (raising capital, negotiating all legal docs, sourcing debt without a balance sheet, AM, etc.).
I’m asking myself at what point does the risk/reward profile make sense to jump ship from a shop where you’re pushing $500k cash comp and getting meaningful carry. Of course the answer is scale, but it would be naive to think that my first deal would likely be a bomber. So I’ve come to the conclusion that it’s somewhat of a 1-step back to take 2-steps forward type thing.
All of this is to say - I’m looking for the path of least resistance in RE, and up until now I thought starting your own GP was the move. Thoughts? I still think it’s a great gig, but I suppose not as lucrative as I’d hoped on a smaller scale given all the legwork.
So I think if I stay in RE this would be my path. But at the end of the day I’m not wedded to my industry, and am looking at interesting ways/RE adjacent paths to achieve financial success. I’m a HSW grad and former management consultant, so I’d presume that there may be more non-RE opportunities I could target.
Sounds like I’m venting a bit, but really would appreciate your guys’ thoughts. Think I’m going to put my head down and grind, develop that network and then go out on my own. But I’m oblivious to other non-RE opportunities that would make my goals more achievable.
Of course you are going to take a hit on comp when you first go to do your own thing, that's a part of the risk.
You're making $500k cash comp + promote as a VP at a multifamily GP?
I came to same conclusion as you that it's probably not worth taking the leap unless (1) You're trying to go big and thinking in terms of 10 years from now instead of the next few years, and/or (2) you just really have that burning desire to go out on your own
The acq fees on those HNW deals are pretty solid if you can pull off 2 - 4 deals a year, but as you already called out that promote could be worthless. You kinda have to be prepared to not see the light for 10+ years. Just the way RE cycles, any GP will eventually go through tough periods and see promote checks killed, but the reason you'd do it is to hopefully have many deals capitalized when the market hit it's stride and make a killing. You're taking a risk that your first few years are the bad part of the RE cycle and you don't see a meaningful check for a while (and probably having trouble raising more capital at the same time)
I personally decided I'd rather just work for an entrepreneurial shop, make a nice salary/bonus and get a meaningful piece of promote, and build up my own rental portfolio on the side. But I'm also not bothered that my chances of being worth $20+ million any time soon are slim to none.
I've seen a lot of guys try going on their own for 1-2 years and come back to work for someone else instead. I've also seen guys make a killing in less than 5 years. It's all a risk. I think even a lot of founder's of GP's that end up reasonably successful could've probably came to a better spot financially by just continuing to make 7 figures as an MD at an established shop + promote checks and invest it in their own portfolio versus spending a decade trying to build a GP up and worrying about paying salaries, office space, etc
OP here. Really appreciate the advice.
I’ve been thinking, why not do a smaller deal or two with friends and family ($2-$5mm) equity, get some quick wins, and then really scale.
Similar to you building up your rental portfolio, but I am asking myself why I wouldn’t leverage outside capital, particularly when I’m more astute at RE investing than my capital partners.
Hah, that was my takeway too. I'm a VP at a multifamily GP and now I'm wondering what I'm doing wrong lmao
Maybe they use VP title for more senior roles than your shop?
You & I are in exact same spot in career, asset class, goals. I’ve spent a decent amount of time on thinking about what a firm would need to look like, and here’s the three options I’ve landed on:
- If you are capital constrained with $2-$5mm in LP equity fundraising, you are going to buy smaller unit count deals obviously, will need to do a number of deals a year, and need some early wins (2-3 year holds) to make it worthwhile on the compensation side. The beauty of syndications is you get total control, better fees, and better waterfall economics. I’d think you’d need 4-5 deals a year to make this work, so be prepared to work 70-80+ hour weeks in years 1 & 2
- Alternatively, if you have a partner who can fundraise more money, or have institutional LP equity contacts, you can focus on doing a couple 100+ unit deals a year, which likely means more cash flow, larger whole dollar AM fees, smaller % on acq fee and larger GP position (so you may need to syndicate that), but probably more work/life flexibility. If deal goes well, your whole dollar profit could exceed doing several small syndications. The first deal will be exponentially harder to pull off than a syndication, particularly on the equity front. But you should be fine doing 2, maybe 3 deals a year, and then eventually could roll back to 1-2 year. Anytime you are starting a business you will be working hard, but I don’t see this path being as time intensive as a syndication platform
- Third option, and depends on where you work, but it’s to keep the job you have now and go buy something on the side. You don’t need to start a company, that’s a common misconception. You can just do a one off deal (with a partner or without), capitalize it, and see if you like it/if it can grow into a self sustaining business. I know a lot of people that have done this. Just don’t buy deals that your current firm would target, and don’t use their LPs. This isn’t an option for everyone, and could get you fired at many shops, but at others it’s a nonissue.
Personally I have all but ruled out #1 and happy to share why - there are certain types of people this would be a much better path for though
Really appreciate the advice.
That’s another sticking point for me. I’m confident I can have a go at raising several million dollars, but doing that at a consistent clip of multiple deals per year seems a bit tough with just friends and family.
Like my post above, I’ve been toying with the idea of doing a deal or two on the side with friends and family just to get all my ducks in a row and build up some goodwill and independent track record before I jump ship.
I also have no intention of starting a “business” with overhead such as employees and office space. Of course, the goal is to get there, but I have no problem, scaling as much as I can solo and outsourcing everything I can.
On the “doing it solo” part, it’s tough to handle every single facet of a deal alone - particularly underwriting takes a lot of time (and you’ll need to look at a lot of deals) while also needing to hit the phones with brokers/owners during those same working hours. If you don’t want a partner, one approach I’ve seen is approach real estate-focused students at a full time MBA program in your city (or the MSA you are investing in). Effectively an unpaid internship, which I am usually against, however pay your intern a predetermined $ amount from the acquisition fee if they underwrite and assist with DD on a deal that actually closes, and offer to roll that into the GP if preferred. That way you are using more of your time for higher level tasks without giving up much of the economics.
Don't worry about the capital raising side. If you can raise money for 1-2 deals, you'll be fine if those deals are successful. Money is attracted to returns, and you'll be surprised how much money your network actually has to invest. Get a few wins on the board and money will find you.
Personally, I’ve decided it’s not worth it. I have no desire for an empire and I’ve seen business failure ruin relationships and lives too many times. Often the failure is for reasons beyond anyone’s control. I’ve also seen a lot of guys reach the mountaintop and be less happy than when they started. But everyone is different and it may be right for you.
Thanks. I think a lot of folks don’t give this point due thought, and do some soul searching as to what will really make you happy. Appreciate you bringing it up.
I’ll talk to you via phone if you want. I started small scale now large scale. First deal made multiple millions as GP. Development.
Thanks. DM’ing now.
I'm in a very similar position. I recently met an LP who is willing to invest 10-15mm of equity in several real estate deals over the course of the next 2 years. I would be serving as the GP, but more than anything essentially starting their 'family office'. The issue is: I'm at a very well respected sponsor who has a strong track record, and the head of my firm has indicated there is significant room for growth for me within the company. Several partners have individually approached me with talks about eventually growing into an executive role within the firm. It's recognize this is a good problem to have, but i'm hyper concerned about my ability to raise capital past this HNW LP's commitments, and leaving a platform that has invested in me and given me promise for the future.
Congrats on the potential cattle partner. That’s huge.
If I was in your shoes, I would definitely take a partner up on that offer and get some deals done. That’s quite a bit of capital to put to work, and you’re saving yourself a lot of time and aggravation by sourcing it with just one partner.
Of course you have to think about what makes you happy (e.g., is it worth the stress and extra effort? Will you find it rewarding?) Also I’m not sure what your current economics and trajectory look like at your firm, but I’d be hard-pressed to think that going out on your own with such a big capital partner is not more lucrative.
Definitely wait for the market to turn, and try to get a first deal purchased before quitting if you can.
I know multiple people who went out on their own about a year ago with nothing lined up and still haven't purchased anything.
Also, as somebody who has used LP equity to buy a deal myself, it can be WAY more stressful than you think. I ended up in a lucky situation being able to raise all I needed for a fairly small deal from 1 UHNW individual and the returns are slightly exceeding pro forma, but its still a bit overwhelming to be in control of somebody else's money and not something I really want to scale up even more. Luckily I was given the advice early on to "ONLY take money from people that can afford to lose it, find UHNW people and don't use close friends/family" which helps me sleep better at night knowing even if this guys equity in my deal went to 0 its only like 1% over his overall net worth.
Appreciate it. Agreed that I’d want to get a deal done before I dip my current gig - I think that’ll be fairly easy given that it’s same asset class/region just a smaller check (so I can parallel process with brokers)
Yeah I know of some folks who just went out the past year or two and haven’t been able to get anything done as well.
Timing is everything, and I have the luxury of time to find the right deal at a better moment in the cycle. Need my first deal to be a home run/no-brainer
You’re in a great position with the UHNW, and agree that alleviates a lot of stress and legwork. Unfortunately, unless I get lucky with sourcing a UHNW (you never know, and I’ll grind it here) it’s going to be F&F. Which is even more reason to have the deal be a no brainer and underpromise to investors.
I cannot echo this enough. I say it a lot, but this forum doesn't have a great understanding of risk. I can guarantee the OP that he's going to enter another stratosphere of stress when it's his $500,000 of equity on the line instead of his company's LP's $50mm.
There are two kinds of people in the world: (1) people who put an enormous amount of pressure on themselves to perform when using OPM (other people's money), and (2) people who never think about it again after closing. I'm definitely in the first camp. I feel the weight of every single investor on our deals and it's stressful.
Personally, I'm glad I'm wired that way, but sometimes I'm envious of the guy who told me "yeah I'm going to throw some money at the wall on this deal and see if it sticks".
I'd start on the side and see what happens.
Agree, I wouldn’t venture out without a closed deal.
Like others I too am in the same spot, however I am going to be taking the leap. The key is having a true and unique business plan, or angle, that sets you apart from the thousands of other GP's just buying fix and flips in attractive markets. You need the experience, but more than that, something enticing that will bring someone in the door (if you are going beyond friends and family).
Beyond this, I'm just tired of working for someone and want to plant my own flag. I want to be able to reap the benefits of putting in a lot of hours vs just a hopeful slice of a promote. I'm mid thirties, no kids, no wife, low overhead, there may not be another time to do it, so going to give it a shot, and if it fails, at least I tried.
What’s your angle that’s different from everyone else?
The only angle I’ve ever found that different is just taking more risk by doing unentitled land development or other types of projects others just aren’t willing to do. What are your thoughts?
Why does it have to be different than everyone else? There's plenty of RE out there and people that want their money in RE that don't know how to do it. Lots of fortunes have been made just by consistently buying marketed multifamily properties
It doesn’t. But I was responding to the comment about having a differentiated business plan. While very possible - unless you’re an institution with cheap cost of capital, it is very hard to just buy fully marketed multifsmily and make a business out of it (as a new sponsor).
Everyone else is making great points in regards to comp (obviously going to be lower and less regular for while) and risk (you take absolutely none at the moment, and soon will have a lot), and what your value-add will be/what your angle is (always worth asking). But there are two other points which I think are being overlooked, one of which is above. First off, raising family and friends money is dangerous. Are you willing to blow up those relationships? Because that may happen if your deal goes bust.
Second, and more important to your question, is that you make it plain you want to optimize your lifestyle as well as your earnings. It sounds really sexy to have autonomy and make your own decisions and not be "on call" when your boss or manager needs you... but that isn't the reality. You're still always on call. More so. Something goes wrong on Saturday morning? You've got to figure it out, you don't have a support network. You'll be working your ass off because in addition to doing all the asset-related things you usually do, you're also your own accountant and bookkeeper, you've got to do more work to network, to find consultants to help with your taxes and your entity docs. You've got to ask for and review the insurance certs for all the people you deal with, you have to pay vendors, you have to go out and bind insurance and learn about that industry. A thousand tiny things you probably never thought of, and every single one of them is going to be a non-sexy back office type role. All of which is in addition to actually finding, buying, and running an asset... which is a full time job!
None of which is to say these are insurmountable problems, or ones that don't get addressed by small entrepreneurs all the time with some success. I just think it's worth it to step back and rethink whether going out on your own is actually a plus in the very narrow sense of "work life balance," because my experience is that it is the opposite - you no longer have any distinction, or not much. So if the goal is to optimize between earnings and WLB, I think that being entrepreneurial is actually a net negative, not in the "pro" column. And you and everyone else seems to just assume that of course, being your own boss means a more optimal work environment/schedule.-
Anyone who says that going out on your own creates WLB is a fool. I have never heard an entrepreneur tote that as benefit to starting your own business/firm. Yes, you can take a random Tuesday off without much guilt, but you are going to be making that up on a Friday night. There is so much more work involved than people think about - you did an excellent job of laying it out. You have to do EVERYTHING. No one understands the back-office workload. The accounting. The compliance. The sixth call from one of your 80-year-old investors asking you how to use Dropbox (not an exaggeration). The call from the 60-year-old doctor asking you for tax advice, even after you tell her you're not an accountant and she really needs to rely on a professional. And it's stressful. I don't mind the stress, but I dream about work more often than I'd like to admit. It's just a constant presence in my life. The monetary rewards are great if you hit it, but your wife will ask you why there always seems to be less cash than she thought there would be. "I have to put it into deals", you'll say.
Yep. Or the constant explanations of why, even though you've got $500,000 in the bank, you can't withdraw it because you've got liquidity covenants, so sorry, that nice vacation to Italy will have to wait for next year
I just wouldn’t worry about raising the money. It was amazing for me how referrals came in and grew my investor base after the first few deals. All you need is capital for the first couple which it seems like you do. If you want to pursue the benefits of your own shop, the capital raising will be the least of your concerns. I would agree though that it would be very helpful to find that first deal prior to jumping. If you’ve saved 2 years of living expenses (which you should), you can use acq/am fees from the first deal to hire someone plus give them some free equity in the company. Then you will be sure to find the 2nd, 3rd, 4th deals and scale from there. Once you have that handful under your belt- you can hire more people and work life balance flips the other direction. You will then be better off in that regard than working for someone else or a large firm. That has been my personal experience.
Appreciate that. That’s my thinking as well. I think the hardest part is finding the first deal.
Your HSW background and consulting experience give you a unique edge. Exploring non-RE opportunities could be a game-changer.
There's no one-size-fits-all answer, but your drive and groundwork are setting you up for something great. Keep pushing forward and stay open to the journey.
That’s much appreciated. I feel the same, but I’m at a loss as to what to specially look for given my goals above. Any thoughts?
if I’m in your shoes I’m going out on my own all day, every day.
this thread is wild.
How so?
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