When Does Equity Comp Meet or Exceed Debt Brokerage Comp?
Self explanatory based on the title - when does compensation on the equity side run parallel with the debt side? Is it when you are VP+ and finally get some carry/promote?
Asking because I'm working on a debt team and always thought the equity side was the promised land. However, after speaking with some younger producers (28-30), I am realizing the amount of money to be made in debt.
For example, all producers except for the youngest in my office took home over $1MM last year - when can you expect to reach that on the equity side, if ever?
If you’re a debt guy and can consistently generate $2.0mm in gross fees, you’re making $1.0mm+ every year. I could be wrong on this, but I think a top producing debt broker is always making more $$ than a mid level or even sr level equity guy that has a sliver of the promote at a fund or an operator. There’s more upside if you’re on the ownership side, but I think you really need to be the founding partner or on of the founding partners of the fund or operator to see that big upside.
Again I could be wrong on this, that’s just my read on it...
I concur with this. I think successful debt originators can make more than all but the most entrepreneurial equity guys (read - will need to take principal risk) and the guys who can hit partner/principal level at the very top firms. Part of this is the 'prestige discount' that particularly slaps you at the associate / AVP / VP level in most mid level / non-elite equity shops. They know guys like calling themselves private equity investors and between that and not being a slave to a client (though it probably only results in a 10% improvement to WLB) and will accordingly know they can comp you less.
I’m currently an Analyst for an Institutional D/E team and am going back and forth on the same topic. Feels like brokerage in general is more fun and more lucrative if you’re good at it.
This is the same reason I want to start out on the brokerage side. Seeing the young brokers in my firm who are only like 3 years in and making 200k+ with lots of room left to grow just makes it harder to go for the buy side out of school.
Does anybody have an opinion on wether a debt broker has a higher income potential vs. a IS broker?
Yes that’s what this thread is about
This thread is primarily discerning the comp between debt brokerage (sale side) vs. the equity principal side (buy side). I was more curious about debt vs. IS comp
I have a good friend who has been at top institutional brokerage teams (equity investment sales) for their entire career (7-10 years). They have talked with me about moving from the brokerage side to the investment end but generally keep coming to the same decision - the cash comp on the brokerage side far outweighs what they can command on the PE side. Additionally, their hours are better (though they were terrible when we were analysts. The money got significantly better on the brokerage team quicker ($200k+ by 25, all cash), and will continue to stay strong as long as the team can produce. All my friends on the investment side can't keep up with our friends on the brokerage side. With that said, our long term incentives that we are beginning to receive should (in the long run) even things out, but only if we can sit in our seats long enough to get the incentive.
Trying to compare comp that is driven by deal volume, fee/commission rate, and successful closings to more standardized salary+bonus comp is never that fruitful of an exercise. Clearly, the fee/commissioned based person can outpace the buyside person, but will they do that every year? Hard to say.
My biggest issue with this question is the contention that all debt brokers take home over $1mm per year, sure can be true in some shops, some teams, and some years, but to suggest this is just the universal outcome for anyone in debt brokerage is misleading (in fairness, I don't think that is what the OP intended to say).
So, that all said, I'll answer the question...
Buyside comp will exceed sellside comp with seniority and promotions, period. The EVP/MD level can outpace the average broker easily, even those in mngt of the brokerage. Even the director/VP level can get there with bonuses, promotes/carry, long-term comp, etc. at times (again not every year) at some firms.
Still, a super star broker, like a Darcy S, can legit make $10m a year many years. How many of them actually exist? A top exec at a buyside role (talking more exec/c-suite level) can easily surpass that as well (again, some years, not all, and really at not that many firms tbh).
If you like deal heat, want the potential for high pay, etc. then yeah you really should pursue sellside roles. The "buyside" is not about max pay, never has been. BUT, that presumes you can be one of those high producers in brokerage or banking, if you can't, you will get shown the door or float to a team/firm where making $200k a year is the norm (which is still a ton of money tbh). Suck more, leave the field totally (and frankly, this happens a lot). If anyone has any legit data on the "success" rate of new people entering brokerage/production love to hear it, but I'd guess it's less than 20% long-term.
Thank you for explaining this. Young people think pay progresses linearly so if you make $250k on the sell side at 26 and $150k on the buyside at 26, pay at 46 will also be higher on the sell side. But yeah... that’s just not the case (when controlling for equivalent success in both fields)
I think people also need to remember brokers 'seem' to make a lot of money, but there is also survivorship bias. If you can survive as a broker, you will 'generally*****' make decent money, but with high variability. I have seen many brokers make $600-$700K one year and make $0 the next as the market crashed. Even in a non-crashing market, you could find a 50,000 square foot tenant with a 15 year term need and make a great commission, but the next year, you do 2 deals for 10,000 square feet each and a shorter term, and there you have a much more variable compensation.
Take 2020, there were many leasing brokers in NYC doing large amounts of business which dried up for the majority of 2020 and their pipelines are only beginning to open up again. Their compensation was down significantly in 2020, and will probably continue to be down in 2021, and only in 2022, as the transactions they are beginning to work on now close / lease start occurs and commissions get paid, will they begin to get paid again. That's 2 years of no or low income. Yes, if they were successful, they were making money prior to 2020, but they could get tossed out come a downturn such as this because going 2 years with no income is extremely difficult.
What is pay progression like for debt brokerage? How long does it take to be making $200k+?
I'm pretty sure you're only going to approach $200k with bonuses/splits of fees/commissions, so you have to be on a team that is closing deals and you are getting to contribute into the process. So, "how long" is really tough to say, but you need to be "useful" enough to earn your splits.
There is reality of this whole question I'm not sure has been really said enough.... the only way you make really big bucks in brokerage/banking of any kind is to "make it rain", meaning bring in clients and deals. This isn't something you are likely to be able to right out of school, or frankly until well into a career (with big trusted network built).
This is also why interviews at these brokerages often involve a "rolodex" check.... figuring who your friends are, your family's friends, what school and clubs you were in, etc. They want to see who you can call on, if your parents happen to own a real estate firm, find a way to get it on your resume lol.
This is pretty much spot on. If you've got a network of wealthy people who could be clients, you're in. If you don't, you're out.
Any thoughts on staying with an institutional brokerage team to age ~30 and grab a VP/director title and then move to the PE side in a senior associate / VP role? Think that may make the most sense.
I like this approach, I've seen this approach work out many times, and I myself am on this same route.
I think brokerage is somewhat glamorized on this forum strictly due to comp potential, but I think it is important to remember just how many of these "Superstar Brokers" there really are in each market. In LA and NYC, there are a few dozen maybe, but when you get into smaller markets, its only a handful. Even in a city like LA, out of the entire RE population, only fraction of a percent of brokers are making that crazy comp you read about. Pareto principal is strong in brokerage, but you don't hear about it enough because most of the publications that come out are about how x broker makes millions. This of course isnt meant to deter anyone away from brokerage, because at the end of the day you CAN make an absolute killing. Just dont think that its going to be a walk in the park (and your chances of every becoming that superstar broker are extremely low).
Also- how many of you really think you're going to take market share away from someone like Darcy S? Possible, but not very probable.
I think so much about this industry gets glamorized in that same way, how many people want to go out and do their own developments or raise their own fund to start making millions by the time they're 35? Sure there are a few who can do that, but far more just barely make their pro-formas (if at all) and take home a small profit, barely break even, or even go bust. Not trying to say it's not worth it, and collecting some rental properties can give you solid cash flow, but people are often salivating over carry checks and I wonder how many in the industry actually sees the big numbers everyone is chasing.
One other thing which I haven't seen considered on this thread, yet, is taxes. Once you start to get those Carry checks, you're only paying ~30-35% state & federal taxes on them.
Example: Let's say a broker makes $550k/year for 5 years, whereas a REPE VP makes $350k/year + a Carry check for $1MM at the end of 5 years (same comp of $2.75MM over 5 years). Assuming this is a state with state taxes in a major market (NY/LA/SF, etc), the broker will take home ~57% of his income which equates to ~$313k/year. Over 5 years that equals $1.565MM in take-home comp. Conversely, the REPE VP will take home 60% of his income which equates to $210k/year, and then when tax time comes in year 5 after getting that Carry check, he/she will only pay only a 36% combined tax rate and take home $640k. Add that up and you get $1.69MM, so an extra $125k in your piggy bank.
Yes, the argument can be made that the time value of money constitutes a dollar today is more valuable than a dollar tomorrow, but realistically due to lifestyle inflation and some off-years along the way for the broker, it makes sense to see how the REPE choice may yield a higher NW down the line.
President Biden would like to have a word with you..............
I’m a debt broker but I also own multifamily, both as a managing member and I passively invest in some of my clients deals. I’m able to qualify as a real estate professional and as such I can apply passive losses to my 1099 commission income. Thanks to depreciation and bonus depreciation, you’re almost always reporting losses to the IRS on multifamily investments.
I’m not there yet but my goal is to eventually reduce my tax liability to zero. I don’t know if you can do that if you’re a W-2 employee with a fund or operator
The big benefit of being 1099 vs W2 is there are a lot more loopholes you can exploit to reduce your tax liability. We’ll see if those loopholes stick around, but for now...you can take your tax liability to very little or zero if you plan right
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