Would you say you get good enough experience to go out on your own? Whether that’s flipping houses or development. What skill sets do you get working in REIB/REPE that you can apply in the actual world on your own?
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Short answer, no. Long answer, it could be better than the alternative routes to doing your own thing. Let's look at how it won't help you first and then how it will.
How it won't help you:
1. The finance part of real estate is the most important, but also the easiest part of real estate. When you work for a company as an analyst/associate one of the most important skills you offer is financial modeling. When you're doing your own deals, no one really cares about the model. Banks hire appraisers for valuation. There are many developers and investors who do the financial analysis on the back of a napkin and give that napkin to the bank for financing.
2. Construction knowledge is the most important part of doing your own projects in real estate if you are going to be a lone wolf. I don't know the statistics, but I strongly believe that most developers started off with a construction background, not finance. When you are analyzing a potential development or renovation project, you need to know what exactly can and needs to be done and how much it will cost. REPE/REIB/Development (unless you work as a construction project manager for a developer) doesn't teach you about zoning codes (development might teach you this depending on your role), which walls are bearing, whether or not the property is likely to have asbestos, whether the property conforms to building codes (for example, do the stairs need to be redone because they aren't up to code?, are a sprinkler system/fire alarms needed?, etc...). The point is that if you have no idea what can/needs to be done, then you have no idea how much the project will cost, so how do you know how much to even offer at acquisition and how much do you ask the bank to lend? You may value the property based on comps, but even if you bought it at a decent price, you don't even know where to begin the project. For people who want to do real estate projects on their own and do not have deep pockets, I would say that construction knowledge is much more important than finance knowledge because the finance part isnt hard...there are many homeowners who do not have finance knowledge, but can get a mortgage or a small renovation loan from the bank.
3. When you work for any organization, there are going to be responsibilities that you don't work on and therefore won't develop those skills. For example, property management, obtaining builder's risk insurance, drafting leases, and other administrative tasks and paperwork, which are boring, but still need to get done
4. Dealing with other people. When you work for a firm, your boss is probably dealing with most parties outside of the firm, whether that's lenders, contractors, architects, attorneys, city officials, etc... my dad has a saying that goes "objects will never give you a problem...people give you problems."
5. Negotiating. This point overlaps with dealing with people. Anytime you are offering money in exchange for goods or services, you are in a negotiation. Now, some people may accept the first price given to them, but when you're doing your first couple projects, your profit margin may not be that high. Every dollar matters. Anytime someone gives you an estimate, counter it. Worst case scenario you come back to them with your tail tucked between your legs and accept their estimate, but on the flip side, if they accept your counter, then you are able to save a couple thousand to tens of thousands of dollars
6. Problem solving. Business is just a bunch of problems you need to solve. The point of working for someone else first before going off on your own is to experience all the problems they faced, and learn how they resolved them. However, most of the time, especially for major problems, your boss will be doing most of the thinking and problem solving. You as the analyst/associate/VP usually wait for them to come up with the solution and then they tell you to work on it. When you come out on your own, you have to solve all the problems.
Now let's talk about how REPE/REIB will help you:
1.) Money. PE/Banking is easily one of the highest paying industries. Period. It doesn't matter if you've worked as a construction project manager for 10 years...without equity, you can't do any deals. The more equity you can save up and the higher your income is, the more you can invest and leverage up.
The point I'm trying to make is that REPE/Banking/ and even development, doesn't really give you much of the skills needed for doing projects on your own, but you can slowly learn those skills as you go. Your first investment doesn't have to be a project. You could buy a cash flowing property in decent condition hire PM services and make some passive income. While the property is cash flowing, you could bid out the project to GC's for a light renovation job and slowly build up a reliable team (GC, architect, zoning attorney if you want to try for a variance, etc...) and then renovate each unit as they turn to minimize your cost of carry. When each unit is renovated then you could condo them or sell the entire building. Now that you have a reliable team and some experience, you can afford to take a little bit more risk (also potentially more reward) on your next project. Alternatively, you can find partners that bring the skills that you don't have. Maybe you have a good friend who works in construction but doesn't have the equity. There's a reason many firms start as partnerships with different people bringing different skills.
Solid, thank you
It's Monday at 10am...I really must want to procrastinate.
1. The finance part is not the easiest. I mean at the most simple level, yes. If you are doing proformas for back of the napkin and not including every facet of the development and running sensitivites and including all the fees, costs, line-items. Yes, it is very simple. There is HUGE spread of skill in "finance", most people don't know what they are doing, and how to extract value from a financing, capital raising, development. Very few people have the transactional knowledge to pad development budgets...and I'm talking about on the finance side. I just had a meeting a month ago with a GC...well know in my market, respected. I went over his construction budget, I caught about $1mm in missing line-items for a $20mm TPC budget(minus land). There are a lot of "idiots", who just give banks their P&L and wait for loan terms. It takes skill to go through budget line items to get adjusted NOI that is defendable to banks. I've got loan proceeds so high, that owners were shocked at the amount they could refi-out. Oh, you want Capital Partners, well a lot of them come from REIB and have ridiculously good analytical skills, so when you get push back on proceeds, etc, terms, waterfall structure, imputed equity, you have nothing to go on with your model to back up your assumptions. Oh, also banks run appraisals? Yes that is true, but if you don't work the appraisers to get the numbers you want, you are doing it wrong and have no idea of the process. I've had ex-investment bankers be super thankful for how I model(easy to read dashboard and property metrics). If you don't think out of all the OM's they read asking for equity, that if you don't put together a "tight" package and readable model you will be at the bottom of the pile, or deals that get pushed to the side.
I'm talking about finance on the GP side/Development/FP&A. I agree you need that crucial development experience, but where you run the show, financing, modeling and get to sit in on development's meetings. It is easy to learn 50% of development in 1-2 years., if you are running 8-10 transactions throughout different life cycles of the deal. PMs just get 1-2 deals at a time, which could take 3-5 years from design to lease-up, so in finance you can see the bigger picture and get 5-10 deals in 3-5 years.
I guess it was a little foolish of me to knock finance on a finance board and expect not to get push back. Stop glamourizing finance...everything you're describing as "high finance" IS the easy part. The terms easy and important are relative. Relative to the other parts of real estate/development such as construction, property management, dealing with people, problem solving, the finance part is easy. Listen to yourself...everything you're describing occurs at the institutional level. OP is a first year analyst asking about flipping houses and you're talking about sensitivity analysis, padding budgets, capital raising, waterfall structures etc... wtf? Your comment demonstrates exactly why working in REPE/REIB/Dev or any institutional size firm will not provide OP with the toolset needed. You're so lost in the finance side of the business that you completely take for granted other aspects of the business that are frankly much more important because you have a construction team that handles all the construction elements for you. Your firm also probably has a much stronger balance sheet and reputation than OP, which makes getting loans and raising capital much easier. I can't speak to your GC and his reputation, but sure let's say that you caught his $1mm error..great; however, without his construction knowledge you wouldn't even be able to put together a budget at all because you have no idea what can and needs to be done i.e. what is physically possible, but more importantly what will the city's building department require you to do in order to bring the property up to code. If you plan on renovating or developing a multifamily and you don't know that the code requires you to put in a sprinkler system, you're going to have a very rude and expensive wake up call when they deny your CO. And this is just 1 example of why knowing construction and building codes is way more important. Go pick up an IRC code book and have a "quick" read. That entire book governs how exactly your property needs to be developed. Not conforming to that book can be very expensive especially if your building inspector is a dickhead. I also love when finance hardo's use grandiose terms. "Sensitivity analysis" just means running the numbers at worst case scenario numbers and seeing what happens (this practice is common sense..if anyone doing any type of business didn't know to look at the numbers at a scenario that is not the best case scenario then have fun with chapter 11), Padding the budget just means inflating your budget higher than what you expect in order to cover unexpected costs. Honestly if this needs to be taught...then i don't know what to say...also having construction knowledge is much more useful for "padding the budget" because you have a much better idea of the range of reasonable costs each part of the construction can cost. Capital raising/capital partners?? OP wants to flip houses...do you think he's going to do a roadshow and run an entire IPO process? He literally just goes to his best friend Bob and asks if Bob wants to buy a place together. If you're talking about raising debt...as I mentioned before, there are millions of homeowners who got mortgages without building excel models with sensitivity analyses and waterfall structures. And all a waterfall structure means is how profits will be split. If OP goes to his friend Bob, who lets assume is not in finance, and starts talking about Tier 1 pref rates, Tier 2 20/80 split, catch ups etc...Bob's going to think OP is trying to fuck him 7 ways till Sunday and tell OP to fuck off. "Work the appraiser"..I actually just finished the appraisal process for one of my projects..I gave her my budget, told her how much I plan on selling each condo, sent her some comps that justify my sales prices, and told her I think the property should be worth abc "as-is" and xyz "as-complete." She appraised it higher in both scenarios. I'm not really sure which part of "working the appraiser" was difficult. Unless OP is a partner at blackstone or tishman and is planning on raising a couple billion dollars and doing multi-hundred million development/investment deals...I stand by my comment: the finance part is the easiest. And please, for the love of God, do not just say "just hire a GC." This is the most naive thinking that I hear all the time. The hardest part about building a team or hiring people for anything is finding people who are competent, trustworthy, and not trying to price gouge you. Hiring a GC can easily increase your construction cost by 20-30% and sometimes they only work on your job every couple of days. If you're really unlucky, you may also stumble upon a crook who takes your deposit and runs(I know of multiple friends and family, my family included, where the contractor has done this.) You also can't take your GC to every property showing and ask him for construction/design advice and pricing so that you can make an offer
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Depends what you mean by "go at it on your own." If you mean, own your own properties, then no. If you mean building a REPE business, like starting to syndicate deals or raising a fund, then the answer is likely yes.
Did REPE help me start buying apartments? No. Any idiot with a decent salary and thus savings can start buying apartments. And as a fellow idiot, I did so, and that helped. My wife loves buying apartments and she's never worked a day in REPE.
I think though if I had stayed in REPE, I could have tried parlaying that experience into syndication and raising a fund, in which case the answer would be yes.
This is an impossible question by it's construction, "working in REIB/REPE" is broad. If you want to go out on own, you need the ability to raise capital (i.e. have relationships that actually know and trust you enough to invest), manage teams, negotiate, balance risks, etc.
I'm sure you can get that in some roles/forms of REIB/REPE at higher levels. Arguably, brokerage may teach more of those skills (especially with respect to small, private type deals). But again, super subjective, it's not the industry/frim, it's the roles and responsibilities you get there that matters.
I'm not sure why the size of the development/project matters. You don't need to be developing high-rises in order to make good money in real estate and I think that OP is asking about renovating or developing 1-4 unit properties, so talking about "sizable" developments is irrelevant. Obviously if you are developing a 300 unit apartment building, you will need a dedicated team. But if you are working on a 3-unit renovation, you definitely don't need a team for that unless you consider subcontractors as part of the team. In regards to "house flippers," I'm using it as a generic term to refer to the size of the projects OP is referring to. I'm not advising OP to buy a single family and then selling it 6 months later (although if there is a willing buy and he can make some money, why not?). I’m advising OP that is it not unreasonable for him to buy a cash flowing property in order to gain experience in owning property and then potentially add some value by doing a light renovation to each unit as they turn and then either renting it and holding it longer term or immediately selling. As someone who does this for a living…in my experience, the construction knowledge is much more important. If you don’t have construction knowledge, then OP would need deeper pockets and a homerun deal that can financially support a GC and still have a decent profit left for him. But also, dealing with GC’s is not just a matter of money. There’s reason they have such a bad reputation at the home renovation level. In regards to “lol at thinking they care about building codes and permits,” I’m sure many people who do real estate renovations don’t get permits and follow code…but you can only do this for so long until your luck runs out… If you have a crazy neighbor (not hard to find) and they might just call the building department everyday on you just for fun or perhaps you sell a property and the new buyer realized that you did the renovation without a permit and they sue you…these are all real things that happen.
Sorry for the multiple comments, the edit button doesn’t allow me to edit my previous reply
Honest to god if you're looking to do small-scale commercial/single-family/MF deals the most useful role would be property management or construction. Building out a simple cash flow model for these small scale deals with under 5 tenants is easy as sin and you don't need to understand promote waterfalls to do it. Far more important is that you're able to identify a building trading $100K below market value because it has $50K worth of capital needs.
Thisx100.
Not sure why people ITT are arguing finance vs construction knowledge for going out on you’re own. Are you flipping houses and investing in 3-5 unit MF homes or are you trying to raise a fund and build institutional quality assets with institutional investors? Obviously the latter is likely going to require a more stronger financial background. You don’t need to ensure your assumptions are coded Blue in Excel to invest in mom and pop MF.
Exactly. If OP was asking about starting a fund, then I would have told him that REIB/REPE would provide him with most of the skills and connections needed. However, OP asked about flipping houses and development. Flipping houses usually implies smaller scale projects typically 4 units or under, in which case knowing construction is way more important as any average joe can get financing provided that they have sufficient income to support the mortgage. Unsurprisingly, all the finance buffs who think that playing in excel is the most important skill in life came out to defend their only skillset rather than believe the people who are actually in this business.
Definitely agree. Practically speaking I think an owner/operator is a good in-between. You can get tons of exposure to capital budgeting and leasing/PM work without being a designated property manager, which most people don't find the most appealing career path. And if doing your own thing doesn't pan out you've still got great prospects ahead of you working for institutional real estate deal teams.
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Bump
I come from a REPE finance background and would like to do more small scale deals on my own (small apartment renos). I've had to hire a GC in the past and pay them a big chuck of my capex budget in GC fees to handle the design/budgeting, hiring/managing subs, etc... I have enough free time (especially now that I'm mostly WFH) to do this work on my own and be on-site during crunch time, but I don't feel like I have the knowledge or connections to do so (how do I choose subs? how do I determine the order to schedule them? How do I tell if they aren't doing the work correctly?). Is there a way to bridge this knowledge gap so I can truly handle all aspects of small-scale deals myself and save on GC fees? If I do several projects a year this could be $100k in savings... I'm honestly considering just quitting my REPE job and working for a GC on a couple projects so I can just 100% work for myself on my own deals afterwards....
What you're describing is exactly why working for an institution does not help, but honestly no path will really prepare you for all of it. There's no "real estate entrepreneur analyst program" and even if there was, it can't teach you connections and finding trustworthy subs/GC's. I wish I could give you a straight forward solution, but I can't, but I can offer some advice.
1. Do not quit your REPE job and do not work for GC
First and foremost, I strongly advise against quitting your REPE job (unless the hours don't allow you to pursue your own projects, in which case it's your call, perhaps take a more time manageable role?) and I definitely advise against working for a GC. The reason I advise against quitting your REPE job is because you seem to lack the experience needed to make a living by doing your owns deals right now. The problem with being a real estate "dealer" is the lack of reliable income. It's major cash outflow for months and you don't see a penny until you sell (although some banks may allow you to finance a Dev fee/constr mgmnt fee, but banks are generally uneasy about loans going straight into the sponsor's pocket). If you quit your job and shit hits the fan with your project, you could potentially be looking at bankruptcy depending on how bad things are. Don't quit your job unless you are truly confident in your ability to make a living on your own. Also, you will make more money in REPE. As I mentioned in my above comment, equity trumps EVERYTHING in real estate. Yes construction knowledge is very important and prob comes 2nd in importance. But no equity, no deals. When you're in a position that your own projects are making more than your REPE role and it is becoming a more reliable source of income, that's when you should quit. As for working for a GC, I am very opposed to this idea because you are not going to learn the things you need to learn...at least not for many years. If you work for a larger institution, given your lack of experience, you would probably start as an assistant project manager/supervisor. At my last job for a developer, the assistant project manager's only role was pulling demo/building permits (just a bunch of paperwork, bureaucracy, and chasing people down) and he/she was only making like $50-$60k. You prob won't be a project manager for at least 5 years. If you work for a smaller GC (like a 1 or 2 man shop), they probably aren't hiring because.. well they are just too small and don't have enough deals to justify the overhead.
2.) Construction Knowledge and picking the right project
Continuing on my point above, working for a GC won't help you unless you are a couple years deep. To be honest, the fastest way to learn is by doing, which is risky when you don't have much experience, but there are ways to mitigate this risk by being very selective with the projects you choose to take on. As I've mentioned in my previous comment, the scope of work for your first couple projects should not be very extensive i.e. no gut reno's or ground up development. Look for properties that just need a facelift (update kitchens, bathrooms, repaint, resand/refloor) or better yet, you can increase the number of bedrooms. For example, if you're buying a 3-unit property, maybe 2 of the units are oversized 2BR's and there's room to squeeze a 3rd BR and maybe an extra full bath (although do some quick google research on what requirements there are for a legal bedroom...in my state each bedroom needs to have a window that can't be more than 44in from the ground etc...). As for the actual construction work itself and knowing if your subs are doing it correctly, youtube and google is your friend. If a sub is reflooring the kitchen, watch a quick youtube video so you have a general idea of if it's being done correctly (you can prob do this for almost every light renovation aspect). This isn't going to solve all your lack of construction knowledge problems, but at least you'll start to build knowledge and hopefully be able to catch obvious mistakes. The only way to really learn is by watching your subs and learning from them and maybe even doing some of it yourself (paint the walls yourself?). Now for picking the right project, this really comes down to your financial situation, amount of time you can dedicate, and experience level. Someone who has been doing this for 20 years is going to be doing very different projects from someone doing this for the first time and the person who's done it for 20 years has a lot more options as to what types of projects to take on. First, the most important thing about picking the right project is knowing the market. I'm not just saying taking a look at zillow and looking at some sold comps. You REALLY need to know the market. Investing is about conviction. You want to know a market so well that you can instantly say with 100% confidence that a property for sale is a good deal or a bad deal just by knowing the price, condition, size, and location. Go look at open houses every weekend...condos, rentals, multifamilies etc... why did two seemingly similar properties sell at drastically different prices? I spent about a year studying my target markets before making an acquisition (constantly going to open houses, looking at MLS comps etc...) When a property comes on market or an agent comes to you with an off-market deal, you want to know the market so well that you can instantly know whether to take a look or eliminate at the asking price. The reason this knowledge and conviction is so important is because when you pick your project, you want to buy properties that are undervalued by 5%-10%+. In the last 6 months, I've acquired several multifamilies. The appraisal and comps suggest that I acquired all of them for 5%-30% below market. Now you may think that I'm crazy and that there's no way I'm buying properties at such discounts and that would be fair; however, real estate at the homeownership level (~4 units or under) is a very inefficient market because most homeowners are not investors and don't care to penny pinch every dollar. There's a plethora of reasons why a homeowner would sell below market such as estate sales, they don't want to manage it anymore and want to sell it asap, it's in poor condition and they don't have the funds to renovate and want to get rid of it..etc. The property I acquired at a 30% discount was a probate sale where the heirs were all suing each other. The court appointed a court official to deal with the sale. The court official knew jackshit about the real estate market and sold it way below market value. Another deal I got at a ~10% discount was because the owner was sick and needed to sell asap. But these deals don't last very long, so you need to know the market like the back of your hand in order to make an offer asap and bind it. Furthermore, every dollar you save from a discounted value is an extra margin of safety/profit during renovation and sale. Other important aspects for picking the right project is condition of the property, vacancy, and the ability to increase bedrooms. If you're not that experienced, pick a project that is in rentable condition, but could use an updated kitchen/bathroom. Do you want vacancy? Or do you want a property that has 1 vacant unit and the others are tenanted (maybe TAW) and you can renovate as they turn. One strategy is to renovate as the units turn and achieve high rents and then sell the entire building as a cash cow building rather than condoing. This way you avoid vacancy/cost of carry risk, but also make less because condos generally sell more per sf. In either scenario, you need to be very knowledgable about what type of product sells at what price in order to back into your construction budget and purchase price. If you don't know how much construction will cost, go to home depot and look at kitchen cabinets, appliances etc... go look at different types of flooring and tile..and get a sense of how much things cost. Labor is probably the most difficult to price, but maybe you can call some subs and get an idea.
3.) Picking the right subs
By "right" i'm assuming you mean that they charge you a reasonable amount and are reliable/trustworthy. This is difficult and really can only be done by trial and error. You typically won't find the really cheap subs/gc's until you've done a couple projects because anyone who is advertising on google or has their own website is probably expensive. The cheap subs/gc you want to hire won't have a website and not to be racist...but prob don't speak english well. These subs are typically found through word of mouth from your other subs. For example, I needed to find a new painter because my guy was getting too expensive. I asked my landscaper if he knew any painters. He recommended his buddy, so I gave the guy the job (his price was like 30% lower than my other 2 painters). I actually think that I undercut him too much and will pay him a little more than agreed upon at the end of the job. Furthermore, as you're trying new subs, don't give them the entire project right away if it's a multifamily. Tell them you'll let them do 1 unit. If they do a good job, then you'll give them the next so they stay incentivized.
Anyways I got to go, but I hope this helps. If I think of anything else I'll edit my comment
TBH, if you are buying a 5-unit multifamily, the most crucial thing is familiarity with the market/submarket. The key is to not get too granular on the day-to-day operations. Sure, you don't want to overpay for that carpet work, but it's way more important to have a firm grasp of how much rent you can increase and what the direction of the cap rate will be. It's a very local thing and being with a GP instead of a REPE LP will likely give you more benefits.
If you are talking about raising a $50MM fund to buy multiple institutional assets, then of course the name brand of your REIB/REPE firm is the most important thing.
it looks like perhaps others have covered some or all of this (haven't read the whole thread) but i can't stress enough how useless and irrelevant institutional-level eperience is to an entrepreneur pursuing $2-$4mn assets. if you want to be that guy, you will have a much less awkward transition than if you WORKED FOR a guy doing $2-$4mn deals.
of course, then you wouldn't have any money due to the likely low pay, but that never stopped me...
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