How many of you actually plan on going independent?
I have the desire to one day start my own development business and I read a lot of comments on here where people mention that they plan on one day starting their own shop or that's "that's the dream."
I was just wondering how many of you are taking the steps to make this happen? Also, how many people ever actually pull this off? I always hear about "local guys" who for years put together deals and are successful, but whenever I research the local firms in a local market, all of those guys have the typical backgrounds (MBA and solid experience at national firms).
So what are your plans for making it happen? Do you know anyone who actually has made it happen?
It is definitely my intention and I know people who have pulled it off.
The big question for me, that I don't yet have an answer to, is "when." Sure I can make a plan such as "within 5 years," "within 10 years," "by the time I'm 35," "when I have X amount in cash" etc. but there are so many variables that it's hard to really put a definitive timeline on it. Some of those include:
1. The Market
This might be the biggest one, because it's not only my timing that matters, but the real estate market's as well. Ideally, I'd hit my stride just as a downturn was starting to turn around and I could buy land low, deliver rents way beyond proforma, and cash flow or sell for a fortune, but life doesn't always work out how you want it to. In development, you really need to nail your first couple deals. Old guys can get away with a bad one here or there because they have a track record. If your first deal or two are busts, you're looking for another position in the industry.
2. My Bank Account
This is a big one for me. My parents are solidly upper middle class, so while I didn't want for much growing up, I have 6-digit student loans and lack a billionaire father. When you are basically paying two rents every month to get your debt load down, it's difficult to A) Leave a well-paying job and start a business that doesn't make any money at the beginning and B) Secure a loan with an amusingly high debt to income ratio. Most likely, I'll have to start small on the side while still working - build a couple townhouses or a stand alone retail building or invest in a value add small office building and try to slowly increase my monthly cash flow until it gets to the point where I can do it full-time and build the fun stuff.
3. Current Company Compensation
Similar to #2, I also have to weigh the cost-benefit of leaving my current development firm. I make decent money here, but the people above me, at the level where I will be in a few years, make fantastic money. In 5-10 years, the owners are going to be a semi-retired investment committee some people above me will move on I'm sure, so there may be an opportunity to excel where I am, or at a similar firm like this. You make less money, but you have dramatically less risk. I'm not saying I'd do this forever and give up on the dream, but would I delay the dream a decade to put the theoretical kids through private school and buy a nice house? Perhaps.
4. My Experience Level
All I'll say about this is that the more I work in development, the more I realize how much I don't know. I understand that you'll never know everything and you learn a lot by doing, but if I'm going to have a competitive advantage in the market, I simply need to learn more - particularly construction. I have a master's degree in development and 3+ years experience and, without exaggeration, I learn multiple new things on a daily basis.
5. Debt/Equity Connections
I know so many people in this industry, both solid professionals and lackluster idiots, who have access to more capital through Daddy and Grandpa than you would believe. Some already "own" entire real estate portfolios simply because their family put their name in the ownership structure. They'll have no problem putting a couple hundred thousand down for a new development either because they can ask for it over Sunday dinner with the parents. Me? I have to work with what I have. I know of a brilliant guy in Nashville who essentially ran a development company for two silent partners for 15 years. When he went out on his own, though, he struggled to raise any money. His connections, in fact, were actually his bosses', and they didn't necessarily want to invest with him. I have a lot of networking ahead of me, both on the debt and equity side, and I'm working on it, but these things take a lot of time.
6. Partners/Employees
I am well aware of my own shortcomings in terms of development, both in temperament (I have a temper, I have a very forceful personality, and I like spending money) and knowledge base (construction, capital markets), Ideally, I would like to team up with people who are even-keeled, absurdly spendthrift, aren't afraid to stand up to me, and have a background as a project manager for a premium GC and/or a financial wizard from the REPE world to help offset my personal and professional "weaknesses." I see the benefits of this daily - the two partners of my company have wildly different skill-sets and personas - one only drinks Coors Light and drives a used pickup but knows numbers like you wouldn't believe while the other has a construction background, drives a Cayenne Turbo, and is brilliant with materials and design but can blow your budget with one chandelier. and both lean on our construction team on a daily basis. Luckily, coming from grad school, I know a lot of people in development - my best friend locally is in development, my girlfriend is in development, my classmates are in development, my co-workers are in development, etc. - but I don't know all that many REPE or GC people outside of the few I interact with. Getting that strong team is very important to me.
So, yeah I'll be a full fledged developer one day, but the when, the what, and the with who? Who knows. The best I can do is keep learning, keep making money, and keep making connections so that whenever an opportunity presents itself I'll be ready.
I have good anecdotes too, however. Another guy, a buddy of mine,, started out as a bit of a developer for hire. He was good friends with a lender and one day the lender told him that there are rich people out there who have land and money and who want to get into the game but don't know what they're doing so they can't get a construction loan. So my buddy, who had about 4 years of development experience and a grad degree at this point, just started working for developer fees. After a few years of doing this, on all sorts of random projects, he suddenly had a fantastic track record of running projects, even though he personally had not put his money at risk. He and the GC he used on most of those deals became friends and they teamed up to build townhouses. They are killing it.
To your point about risk/reward, I kind of wish I would get fired. Otherwise, I feel like I'm going to remain a "wantrepreneur" rather than an entrepreneur forever--in other words, one foot in, one foot out of entrepreneurship. I don't think a person can really excel when he or she is lukewarm.
All lot of senior guys at solid development shops have no reason to leave. They can pull in 7 figures working 40 hour weeks while taking almost 0 risk (relatively speaking, anyway). They can also personally invest in deals they are working on or in side deals.
Equity is the hardest thing to find. Starting out as an independent developer you'll more than likely need a trusting relationship with someone who will go at-risk on pursuit capital (earnest money, design, due diligence/consulting fees, etc.) and who has a balance sheet and balls to guaranty the construction loan.
Although I haven’t, I absolutely intend to and as someone whose company has transitioned from a private equity/joint venture to a development model I want to weigh in as I’ve seen (and we’ve invested with) operators who are successful versus those who have failed.
As everyone has touched on, raising capital is the most difficult part of the process. The biggest thing to keep in mind is that whether it is friends/family or institutional investors you are asking money from they will be betting on you. Yes, you as the person - this includes all the relevant experience you likely need to have, your personality, your organization, your flaws, ability to present (and for some to simply explain to non-real estate investors) your investment thesis but mostly your ability to execute on all levels. Ultimately to get started someone is going to have to bet on you the person before you have a portfolio to point back towards and this gets eliminated from the equation or you develop the relationships to raise reliably equity.
As such, the most important thing that most of us could be doing is developing ourselves to be the type of owner and operator that investors not only believe in but believe in strongly enough to place their hard earned capital with you.
What have I been personally doing at my position/what can you do to get closer to being that person?
Get a position doing as close to the role, company, product type you envision as quickly as possible - who is the easiest person to invest with? Someone who has proven, fantastic results and returns in that asset class. Every career move, upward progression and side hustle you work on should be building one, any or (hopefully) all of the skills you need. Every next step needs to enhance or give you exposure to areas you are not comfortable or need to refine. Development in particular is too overarching to be an expert in everything so you need to figure out which subset you want to focus and specialize in (entitlements, construction, design, marketing, leading, etc) and double down on what interests you. Always be looking at the long term goal of one day running a business independently and how any use of your time contributes to your learning and development towards that vision.
Think like an owner - just because you aren’t acting as a developer within your current organization (don’t be ashamed, this basically doesn’t happen anywhere) doesn’t mean you can’t develop and bring an owner/operator mentality to every position, no matter how small. Whenever your boss or leaders are poised to make a big (or any) decision that you are aware of or involved with, always ask yourself - what would I do in that circumstance? What are the potential effects and outcomes? What do you feel would benefit the organization in the long term? Pay attention to the results and see how well they match up with your calculated probable outcomes.
Execute like an owner - no matter what level of responsibility, aim to accomplish your role excellently. What does excellently mean? It means going above and beyond, often two to three steps past your job description or assigned task or even better taking the process all the way through and solving problems for your respective leaders. The key here is to use appropriate judgement but ultimately you want to lean on the side of asking for forgiveness, not permission. Keep in mind that as a future owner all decisions are going to eventually end up with you. What does that mean for most of us who are not in the “top spot”? As someone who has close to an ownership level of responsibility, this first step means taking “problems” that land on your lap as a team member and turning them into solutions or at the very least several well researched options with context for your leader to quickly and simply decide between. This alone with place you into the top 10% of employees even if you don’t end up being an owner so it’s a winning mentality either way.
Network, network, network - all of the above advice is totally irrelevant (even if you don’t have any capital to play with) if you have an amazing network. This sounds like a broken record but the reality is friends and family are typically the easiest, cheapest and most flexible capital you’ll have to work with. Why? Because of their personal relationship and implicit trust they have with you. One of the best ways to get ahead is to develop personal relationships with those who capital they are able and willing to invest. Further recommend reading: “The Trusted Advisor” by David Maister, “Networking with the Affluent” by Thomas J. Stanley, “Never Eat Alone” by Keith Ferrazzi.
Now, just like any stretch goal that requires so much work over a lifetime this will ultimately include some level of luck but I assure you that if you consistently do all of the above and continue to work your ass off even if you do not succeed at becoming an operator, you will be far better positioned and compensated as a team member who has worked towards and understands that perspective.