Leave brokerage to be GP

Would like to get others thoughts/advice.


Have been working in institutional investment sales (mainly multifamily) the past five years. It’s been quite a ride. Was approaching 7 figure years, but that’s obviously been tampered down the last couple years as the market has struggled.

it was easy to put my head down and grind when the fees were coming in left and right. But the past couple years have been less fun and not sure the brokerage culture/politics is for me long term.

how realistic is it to start buying $5-$15mm deals? Would likely start in my current msa or at least within easy driving distance. Understand there is a learning curve to actually operating assets, but feel like I’ve been able to absorb what sets some of the better operators apart.

i struggle with how the potential economics would look in a GP role vs current role in brokerage. Could certainly weather a year or two of lower income, but it’s scary looking beyond that. I’ve got about $500k cash which rough math would suggest could buy a $10mm deal at 50% ltv. Assuming a 1% acq fee and 1% AM fee on invested equity…that’s $150k which pales in comparison to current comp. 
 

I guess my question is what happens after buying one deal? I’ll be out of cash for GP equity on another deal. Is it better to divide that cash among a GP interest in few smaller deals? But either way, feels like you get back to the same economics and constraints. Maybe if spread across more deals there’s a chance one of them hits early and you can capture a refinance or promote that fuels more deals?
 

are there any folks out there that have made this transition and can shed light on how it played out. Were you clipping coupons for 1 year, for 5 years, before you felt like you replaced your old income? Obviously don’t want to plow forward carelessly, but also don’t know what I don’t know and would like to put a box around the risk to extent possible.
 

I really can’t bear the thought of working for anybody else for much longer and ready to figure out how to make it work. I think I can raise enough capital for the deal sizes mentioned. While it would be a syndication model, certainly have seen enough horror stories in the current cycle to have some understanding of what makes groups successful or unsuccessful. Any advice is appreciated. Thanks


 
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Why not buy a deal now and stay in brokerage and build to a few properties then move. You don't need to go big, look at deals in the $1-5mm range.

At $5mm, let's say 70%/30% you have to put down $1.5mm. Do you have colleagues, friends, brothers or other family that would be interested in partnering or putting in money? 

If colleagues that are friends you can find 2-3 and put in $3-400k each. If family do the same. Maybe your family is willing to come in and you can raise half the money from others you know. I don't think it needs to be super structured and what I've seen seems to be the issue with CRE is liquidity. You're making high 6 low 7 figures, save up over $1mm total next year then maybe look at smaller $1-2mm deals and do them on your own. Once you have 5 properties then think about going on your own.

Look at foreclosure auctions, cheaper properties larger groups aren't targeting or even SFR for initial deals to build. You see very wealthy families today who started this way, not more a syndication play like a lot of the scammer/scummy groups are doing for fees putting up no $. You need real cash first, why not buy a few SFRs this year with that money get cash flow and go from there and build into commercial.

 

Appreciate the response. Agree with what you are saying about getting a few under the belt before jumping off. It’s just tough in the transaction business as things pick up quick and all of a sudden you are working 70-80 hr weeks. But if there is a will there is a way.

on the smaller properties, it just doesn’t really appeal to me. I’ve consciously saved cash to be able to start on slightly bigger properties. The math on SFRs doesn’t really work, at least higher interest rates have caused commercial properties to decrease in value. Seems like in sfr your debt service has just exploded but values haven’t really dropped at all (at least where I am). I have considered partnering or hiring a GC to build, would just need to find the land.

 

Fair point, have heard of people throwing out offers like 30% off "current" price and 1 out of 100 desperate owners will respond so maybe do that as a bottom feeder with SFR. You have to remember 99.9% of the population is not as well capitalized as you are, a lot of money to have in cash is a few $k so there are people that are struggling out there that may want to do a private, quiet deal to save face socially.

 

Being a GP is usually not a make-money-now situation. As the poster above alluded to you can buy deals while continuing being a broker. One jll broker in Philly just left to become his own shop after buying a bunch of deals while still working at jll

Having said that, if you are looking to go full-time GP you should start talking to capital partners yesterday. There are groups that fund gp equity+lp equity, you can bring a deal to a larger sponsor for a cut into the equity, etc. $500k of cash is honestly a fair amount to start off, but that will be gone after a couple deals if you need to fund gp equity 

 

There's also not many deals right now and it seems everyone is going out on their own now. No one really has an edge and are just one man shops, but it's tough to make it. Better to build something up on the side first.

This is always the case.  Go back through 10 years of this forum and you'll find people saying the exact same thing every single day.  There are never many good deals.  You should make the jump when you're ready, not when you think the market is.

 

I'll comment on this as well. I left my current acquisition role to start a GP company with a few others going after institutional deals in markets we were all targeting previously. It's stressful man - yes, there is money to be made when valuation reverts but everything else in between is tough. A few questions to think thru

  • Is it just going to be you or will you have employees(s) out the gate? Even if just you, a portion of your savings needs to be allocated to living and covering expenses for you on the personal side. This number scales if you have an SO or family. If you have a high earning SO, well that takes some stress off there.
  • It might be different on smaller deals - but we don't make a ton of cash right now personally. Our acq fee goes to company overhead (salaries for our employees, rent, etc.) and gets rolled into the deal (which is taxable income so I lose cash actually because I dont get any on Day1)
  • Add the market still being slow / uncertain when working with LPs - and not a lot of deals are being done so we're not making a ton of income and can't take meaningful salaries. We're burning into our personal savings right now.
  • Pursuit costs - these add up. Especially when you have a deal die at the 1 yard line and can be $50k+ (on the intuitional side) - you have to cover. These can crush you if one or two deals die on you.

Things may be different on the smaller deal space so I may be ranting. With that said, I am optimistic long term about this venture and earnings potential and feel blessed to be in this role relative to my age / peers. Along with a supportive SO who can cut costs until we start making money. 

TLDR I would try to do a few deals while you have a job and then peel off once it makes sense. 

 

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