Let’s talk saving money in RE

I’m a recent grad working as a development analyst making about $105k all in.
I made the mistake of talking to my friends in IB about this who have $75k+ saved because of their bonus.
Although real estate pays well I think it’s clear to everyone that it doesn’t pay nearly as much - especially at the junior level - as IB/PE, etc.
Realistically, for the more Junior folks on this thread, how much are you saving?
I can start, I graduated 2 years ago and have ~30k saved up which I feel like is low compared to my peers. Any tips for saving? I’d also like to do my own deal in the next few years for what it’s worth.

 

I use a pretty detailed budget spreadsheet and I've found that makes it really easy to see how much unnecessary spending I'm doing every month. That way I think more about buying random shit on amazon. Or just live with your parents

 

yeah pretty much just do it 1/2x a month and sort manually into categories. Im sure there's some way to automate the sorting but i haven't toyed with that 

 

Always pay yourself first. Figure out how much you need to live off of and how much you can save each paycheck. Then have automatic withdrawals from your checking into your savings/investment account the same day your paycheck hits!

 

At what level of savings do people usually go out on their own?

My understanding is that’s the primary path to making big money in real estate and you cap out at around $300K in comp as an employee (have read this elsewhere so not sure how true it is). Main reason I’m asking is that I’m thinking of making the switch to development but am scared off by the pay cut.

I’m in a distressed credit role so I feel like I have plenty of reps to identify what a good deal looks like regardless of industry and am just missing the operational experience piece.

I don’t doubt thats the biggest piece of the puzzle but isn’t that something I can just get around by hiring a consultant or learn by bringing on a business partner for 1-2 deals?

 

Not to discourage you or come off as a dick, but I think it's pretty naive to think that because you are in a distressed credit role that you will be able to identify what a good deal looks like especially in real estate development, unless it is dead obvious, in which case why haven't much more experienced developers identified it? Ultimately what makes a "good/great/" deal is price. For every home run deal, there is a price that makes it dogshit. Now, no offense, but if you, as someone who has no experience in real estate development, can identify a good deal, I'd be surprised if much more experienced operators would not be able to and then bid up the price. Furthermore, in real estate development, you cannot separate identifying a good deal from operational experience because all your deals will have some level of value add, whether it is a gut renovation or ground up, otherwise it would not be development...just real estate investing.

When real estate developers look at a project, we see possibilities. We think about maximizing the property's value be it a renovation, entitlement, a completely new building, etc... But if you have no experience in real estate development, how can you know any of the possibilities? Let's talk about a renovation, specifically a gut renovation as opposed to a face lift because if the renovation is so simple that a homeowner can do it, then when you bid on the property you are now competing against homeowners as well which increases the price..and trust me...homeowners will outbid you because they will value a home for their family a lot higher than your profit margin. When you walk into a property to add significant value, can you identify how to add value at an affordable cost and meets building code? Are you able to design the new layouts? Which walls are bearing? How will you repartition the walls? Do you need a sprinkler/fire alarm system? Do you need to be ADA compliant? All of these and much more affect your budget. Now if you walk into a property and don't know how to add value, then how do you come out with a budget? If you don't have a budget, then how can you know if a property is a good deal or not? A very common misconception on this website is that you can "hire" your way to success without any experience/knowledge of your own. Yes, you can hire an architect and GC...but are you goiing to bring an architect/GC to every property you tour? If the property is truly that great, it wont be around long enough for you to get plans and consultant your GC. Good deals are often gone overnight or latest, a couple days. Furthermore, not all architects and GC's are good. I would honestly argue there are more bad architects than good ones from my experience. It may take a couple tries to find the right team and even then you still have to review their work, but how do you review their work and provide feedback if you dont have any experience. Entitlement is even riskier because your entire plan to add value is in the hands of someone else ie the city and neighborhood.

This example I provided is just for a renovation on a "small property". If you think it gets easier with larger properties/more units it doesn't. When you take out a $10mm construction loan from the bank at 9% and raise capital from investors and your project gets held up because of something you missed due to lack of experience, the bank is still going to expect that $75k check each month and your investors are not going to be happy when you ask for a capital call.

As for real advice, do you actually want to work in real estate/development or do you just want to do projects on your own? There's a difference. There are many people out there who have never worked a day in a real estate corporate setting but own several investment properties and have probably done some renovations and even maybe development. If you actually want to work for a developer, then yes going back to get an MBA or MSRE would be helpful maybe even necessary, but you should probably expect a sharp decrease in pay and title (not sure how old you are/position). If you just want to do deals of your own, then just start buying property. I say this to a lot of people on this website, but your first real estate investment doesn't need to be development ie the most complex/riskiest form of real estate investing. Do you even own any property? If the answer is no, then that should be your first step. Buy a house for yourself and house hack or buy a stabilized duplex/triplex and learn how to deal with tenants and manage a property. Then maybe on your second property you look for something that could use a face lift and do a small renovation. Slowly accumulate experience and hopefully one day you'll be running your own development project

 

Appreciate the candid feedback.

I’m in my late twenties with 5 YOE so I’m making good money at this point in my career but not enough to where I can’t walk away. I’m at a more laid back fund (50-60 hours per week with no weekend work) so comp is lower than the street ($200-300K all in).

If I were to make the switch the goal would be to work for a developer to get the training necessary to go out on my own at some point and do my own deals. That seems to be where the money is and frankly I wouldn’t be happy working for somebody else for 10 - 15 years.

What primary draws me to the development side of the business is that its dynamic and has a lot of variety. I frankly don’t want to be sitting behind a computer for the rest of my life building models in excel. Development from my research seems to be the best place in that I can still get the quantitative piece of my current job while drawing from other disciplines to influence something tangible.

I think I’d be a good fit for the role longer term because I spend my day focusing on everything under the sun that can go wrong and then pricing in that risk, which I think has some parallels. Shit is also always popping up that needs to be addressed with little or no notice so I feel that I’m already adept at rolling with the punches although the problems themselves may be different.

On your point regarding regulations and requirements doesn’t that just boil down to doing good due diligence?

For example, I’m not sure if you’ve ever read a bond indenture but I think that anyone reasonably intelligent could get the gist of it if they spent enough time reviewing it. Sure they’d miss out on some of the finer details on the first few go arounds but if you gave them access to a lawyer or consultant for 2-3 hours to ask questions they’d probably be dangerous enough to not be a complete liability.

Wouldn’t the same logic apply to a development?

Things like knowing whether you need to follow ADA rules or have fire sprinklers are compliance issues that are publicly available. Sure there’s some nuance involved that you learn with experience but it feels like what you’re saying is that you can’t understand accounting unless you have a CPA.

I’m not saying I’m going to attempt to do a 500 unit development on my first go around that would be insane. Goal would probably be to start off at 10-20 units for 10-15 deals before trying to do something larger. That I think would give me the freedom to make mistakes and try a few different approaches out before trying to grow. The primary approach I’d take would be blending datapoints to maximize the developments value while also taking into consideration that I should be building something I’d want to live in (where a lot of people go wrong IMO).

Ultimately, I’m just coming from the perspective that despite what people lead you to believe very few if any things are rocket science. I think substantially any person is capable of learning to do something well so long as they’re willing to put in the work.

Surface level overview of current apartment and thoughts:

Thinking about my current place for example (new development 2 years old by institutional developer), the studios and 1 bedroom apartments are identical (layout, sq. ft, storage, etc.) with the only difference being that the 1 bedroom has two chicken shit walls so they can charge $200-$300/month more.

Theoretically, I can see these assholes celebrating thinking they’re clever and have done it again. The reality though is much different because consumers can see it doesn’t make sense to pay the extra money for same unit. As a result, substantially every studio is filled and 70% of 1 bedrooms are vacant because people go elsewhere given the lack of value. I’d guess in the event that they ever tried to sell this that any value they thought they were getting by adding those walls is at best a net neutral investment given the high vacancy rates.

Then in terms of the layout of the floor plan nothing makes much sense. I have a balcony with no view but the hallway across from me and no storage. It’s also so small you’re barely able to turn around and you can’t even fit a chair on it. Eliminating that alone would have allowed them to make my entrance bigger allowing for a more seamless layout of my home office setup.

The oddest decision though by far was putting storage in my kitchen. There were plenty of other places that could have gone within the apartment without changing the layout at all. My bathroom for example is enormous and has a very obvious lack of storage.

It doesn’t take a rocket scientist to notice any of these issues yet they still made it all the way through the approval process. If I were to working on something like this these are some of the things that stick out to me that I’d change on a development that I think would have positive impacts.

 
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Once again, not trying to discourage, but you are making everything sound way too simplistic. Before I get into further details on your response, I also need to emphasize the importance of your budget and schedule. Yes, every mistake can be fixed, but what is the cost of that mistake? When you have a construction loan and near 10% interest rate, you don't have the luxury of figuring things out as you go. Unless you have incredibly deep pockets where you don't mind if 12 month project ends up taking 18 months and you are okay paying the extra 6months of cost of carry. It's not just about successfully developing/renovating the property, but its developing/renovating it within budget and schedule. That's where experience comes in.

I think I’d be a good fit for the role longer term because I spend my day focusing on everything under the sun that can go wrong and then pricing in that risk, which I think has some parallels. Shit is also always popping up that needs to be addressed with little or no notice so I feel that I’m already adept at rolling with the punches although the problems themselves may be different.

Real estate development isn't just about pricing and valuing and tbh you only need to be within ballpark range. No one ever says that a property is worth exactly $1,368,349.16.  "Pricing" in risk only matters when you are in the acquisition stage, after that there's no more pricing because you own the asset...an incredibly illiquid asset....you are stuck with it. The only thing that matters from there is execution, which comes down to experience. You say "shit is popping up that needs to be addressed" happens in your job, this is not unique to distressed credit nor real estate development. Shit pops up with little notice in every job....experience is what solves them, so to say that you are adept at rolling with the punches in distressed credit doesn't necessarily translate into development. That's like saying your car breaks down on the way to work, but because your distressed credit job has taught you to "roll with the punches" you are able to fix it in time to make it to work despite not knowing anything about auto repairs.

On your point regarding regulations and requirements doesn’t that just boil down to doing good due diligence?

I mean can't this be said about any profession that requires schooling or license? Why go to university? All the text books are online/youtube. Lawyers don't need to go to law school, just read the constitution and study every single piece of legislation and case law on your own...it's all public. When you operate in multiple markets (and no I'm not talking about California vs New York, I'm just talking about two different towns in the same state) the regulations are different for each market. For example, in one of the towns that I operate in, the affordable housing requirement is 13%...in literally the next town right over (10min drive) it is 20%. If you bought in the 20% affordable housing town thinking it was 13%..well then that sucks. There can also regulations on the physical aspects of your property. For example, I am currently working on converting a single family to a two family...I was initially going to open two separate front doors for each unit, but I just found out that that is not allowed. The town wants to preserve the appearance of a single family home, so requires that you enter into a main front door and then have two entrances into the two units from within. This is not a big deal as I can adjust this, but when you have so many stupid/small regulations like this, they add up. Another recent scare I had was regarding the height. In order to convert the property to a two family, I need to be within 35', but the existing house is 36', even my zoning attorney missed this. We just assumed that it was within regulation, but even if we didn't, there would be no way to know without a survey  which takes 2 - 3 weeks. Now the obvious solution would be to cut down the roof but this runs into 2 issues 1.) How does cutting down the height of the building affect the interior? Will the ceiling heights still meet code? If not...then that's a problem 2.) The town that this property is in cares a lot about the historical architecture of every property...they can impose a 12month - 18month demolition delay on any property they deem architecturally significant and it is entirely at their discretion...there is no criteria for what is considered architecturally significant (cutting down the property qualifies as demolition under the town's by law). Luckily they don't care about the architectural significance of my property, but this is by dumb luck. If it was another property that they did care about, my plans would be significantly affected. When you have all these small and incredibly specific regulations for very specific scenarios and every town has different regulations, it's impossible to know all of them...that's why there are zoning attorneys. Their entire profession is to study the by laws. And this doesnt mean hiring a zoning attorney will solve all your problems. Similar to the architect/GC, you can't bring your zoning attorney to every property. You can hire them for a zoning opinion or consult but if you have to do that for every property you look at it's going to get very costly. Also the zoning attorney took 2 weeks to get me a zoning opinion on this property...if i waited for him, the property would be long gone. You don't need to know the regulations as well as the zoning attorney, but you need to be deadly enough..which comes back to experience. I'll provide one more example, there's a local builder/developer in another town that I operate in. He bought a single family home on a two family zoned lot with the intention of redeveloping it into a two family. The poor sucker was new to this town and didn't know that the property sits in what's called a "local historic district." Basically what it means is he is only allowed to do an interior renovation. He can't even replace the windows without city's permission. He's been trying to sell the property for $100k less than what he paid for it for almost a year now...it's still on the market.

Things like knowing whether you need to follow ADA rules or have fire sprinklers are compliance issues that are publicly available

You're only listing these items because I listed them...can you list ALL the other requirements? When you walk into a building to renovate/develop, no one is going to tell you all the building codes (which is thousands of pages), zoning code, ADA regulation, fire/safety regulations that you need to comply with for that specific building. If you purchase a property to develop/renovate thinking that you only need to follow XYZ ADA regulations and life safety and then realize that there are 10 other things, RIP your project.

I’m not saying I’m going to attempt to do a 500 unit development on my first go around that would be insane. Goal would probably be to start off at 10-20 units for 10-15 deals before trying to do something larger. That I think would give me the freedom to make mistakes and try a few different approaches out before trying to grow. The primary approach I’d take would be blending datapoints to maximize the developments value while also taking into consideration that I should be building something I’d want to live in (where a lot of people go wrong IMO).

If you're talking about development then you might want to start with 2 units, maybe 3. 3 units or more is considered commercial and triggers more stringent regulation depending on height, size, etc...

Ultimately, I’m just coming from the perspective that despite what people lead you to believe very few if any things are rocket science. I think substantially any person is capable of learning to do something well so long as they’re willing to put in the work.

The best way to lose money is to think that everything is simple. There's a reason homeowners would prefer a brand new home rather than renovating their home. There's a reason homeowners hire GC's to do the work. If everything was so simple, they would do it themselves. The issue with investing/working in something completely new is that you don't know what you don't know. You think real estate renovation/development is simple, but you don't know that it is. That is the problem.  If you invest your money based on what you think and not what you know, then you run the risk of losing it and depending on how much you don't know and how much money is invested, you could lose a lot. And once again, when you have to make mortgage payments every month and your investors are on your ass or you have a tight budget, you don't have the luxury of figuring it out as you go. 

If I were to make the switch the goal would be to work for a developer to get the training necessary to go out on my own at some point and do my own deals. That seems to be where the money is and frankly I wouldn’t be happy working for somebody else for 10 - 15 years.

As for making the switch to development, it is up to you, but from what you are telling me, I would advise against it. You likely won't learn what you are looking for by working for a developer, especially if it is a large institutional developer. Working for a real estate developer is more or less the same as working any other corporate role. If you work for a developer that builds 500 unit developments and your goal is to pursue sub-50 units, the experience will be pretty useless. If you want to develop 20 units, then you need to work for a developer that develops within that range, but you will likely take a very steep pay cut because those are small developers. My advice is for you to learn real estate on your own outside of work. The hardest part about getting started in real estate is capital/income to borrow. You have a high paying job. Everything else you can figure out on your own. Just don't do a development or deep renovation as your first investment. As I said previously, buy a SFH or duplex/triplex first. If you really want to, buy a property that needs a light renovation. Slowly accumulate experience with the least amount of risk

 

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