Numbers for starting my own shop
I've been thinking what would be required to start my own shop. I've got a few years experience and looking to eventually start my own shop.
Capital raised externally: $10m
LVR: 65%
Projected MOIC over a 3 year period: 30%
Total capital amount: $28.5m
Development profit: $8.6m
Carry/promote fee: $1.7m (20% fee of the dev profit)
Development fee: $1.4m over 3 years (5% fee on the total value $28.5m)
Development fee annually: $475k
In addition I will add $2m of my own equity that gets me to $5.7m total value with the same LVR (65%). This gets me to a $2m profit @ 35% MOIC (5% extra since I'm not charging myself a fee).
The annualized income is a bit over $1m from the $10m raised and the $2m I contributed gets me to $1.7m.
Interested to hear what you have to say about my numbers/assumptions.
Isn’t MOIC an equity multiple?
I thought capital is overall capital and not equity. For example cost of capital includes both debt & equity.
That wasn’t my remark… MOIC is the multiple on equity invested. It shouldn’t be 30%.
Yeah you're right MOIC would be 1.86x and the return on costs would be 30%
Think you still have some learning to do before starting your own shop
It should only be as easy as the scenario you've laid out.
Unfortunately, none of this means anything because what you really need to ask yourself is 1) can you raise the equity and than 2) can you invest it and get the returns you are noting here. If you can do that - sure start your own shop. There’s not much for anyone to comment on here because all you done is listed theoretical returns and fees - what are we supposed to say?
As others are saying, if you're sitting here thinking about the hypothetical returns you could achieve on the deals you could hypothetically lock down, and all while assuming you can hypothetically deliver those projects on time and on budget.... maybe just stick to thinking about what you'd do if you won the lottery.
And for what it's worth, your numbers aren't good. At all. How are you covering predevelopment expenses? When is the equity raised coming in (/when does that IRR clock start)? How many deals do you intend on doing; big difference between one $10mm equity deal and two $5mm equity deals. Promote isn't 20% of profit, it's 20% over some hurdle, so your math is straight up wrong on that one. Development fee isn't always paid chronologically, but rather is usually tied to hitting construction milestones, so a lot of your fee income is probably back-ended. Also, a 30% IRR (which is what I assume you meant to say) is pretty aggressive; you don't have huge leverage and it's not like people are building to 8 caps anymore, there is a lot of competition. How do you intend on guaranteeing your construction loans?
What about all the back office? If it's just you then some of it won't matter, but why is someone giving you money to do this when there are dozens of better qualified people with more resources and a better track record?
With as little offense as possible meant, if you (or anyone else) is thinking about opening their own shop and the first question you're asking is "does my calculation of profits sound right?" and not something related to risk and exposure, you are not ready to be doing this on your own. Real estate is about risk management, nothing more, nothing less. If you want to daydream about making tons of money, again... lottery. Or go start a tech firm that does something stupid and "disruptive" and bilk a bunch of greedy VC folks out of their money
everything that OZY mentioned here is spot on and valid. OZY is always saving people
Thank you for these arbitrary numbers, Mr. Analyst 1 in RE - Comm from WallStreetOasis.com.
Weird flex, Analyst 1
Yikes
Don't listen to these haters, young King. You go find your sugar daddy to give you $10mm and shoot for the moon!!
Quis pariatur et inventore omnis. Odio quia repudiandae eveniet nulla ducimus officiis.
Reiciendis quo at dolorem magni eligendi commodi ut. Placeat neque quidem est provident rerum alias eveniet sint. Dolor et perspiciatis unde et. Fugit sit ab et atque impedit.
Aut qui nobis vel voluptatem odit. Fugiat inventore natus omnis placeat. Sequi laborum nam id expedita repellat vel. Beatae ut ut consequatur. Sint voluptatum occaecati et quibusdam et consequatur voluptatem.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...