Forget IB: The big bucks are made in Real Estate

jlock678's picture
Rank: Baboon | 152

A few friends transitioned from IBD into RE, like REPE and their move pays out big time...

Is the real estate industry the new classic PE industry these days?

Comments (29)

Funniest
Sep 4, 2019

LOL - I know the bubble is coming soon when everyone I know in finance is clamoring to get into CRE...

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Sep 5, 2019

A month ago or so, 0% 20 year and -0.5% 10 year fixed interest mortgages were issued by Danish banks Nordea and Jyske Bank. That's going to stimulate an increase in housing price even more, so I doubt that bubble is going to pop anytime soon...

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Sep 5, 2019

European buyers invest in core assets in mostly gateway markets typically along public transit. These assets will continue to perform well due to scarcity of supply. This doesn't make a difference when it comes to out of control leverage and rental rate growth assumptions in the value-add space.

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Sep 5, 2019

How serious are you on this? Tbh after I got my bonus I've been looking at condos for investment property but have never done RE before.

Sep 5, 2019

Well it varies substantially from market to market. In gateway markets CBD properties should do well because it is so difficult and expensive to build new supply. From a higher level capital markets perspective, 70% LTC construction loans are back, mezzanine/junior loan growth has exploded, pro forma rent growth is unsustainable, and cost/expense pressures at high for both construction and operations.

There is the old saying about knowing when to exit the stock market when the cab driver is giving you stock tips. Same thing goes for RE, but when those not in the industry are all getting into or talking about home flipping or small scale multifamily when valuations are at record highs.

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Sep 6, 2019

@justphresh Are you in CA? I'm a licensed realtor monkey, I'd love to help you with your search.

Sep 6, 2019

Does it rival tech?

I work in this industry and the amount of smarmy Goldman & Mckinsey guys jumping ship to "change the world" with their Insert-Your-Favorite-Word-As-A-Service offering is absurd.

What's going to happen when a debt bubble in real estate and an equity bubble in tech/index funds blow up at the same time?

Sep 6, 2019

No, I think tech is worse. That said, we shouldn't discount the massive amount of derivatives linked to real estate.

Most Helpful
Sep 7, 2019

I'm a VC at the moment, and couldn't agree more. I've been saying for a while that there is a massive, massive over-allocation to venture deals at the moment. The history of venture capital is short and predicated on a small number of scrappy technologists exploiting US government R&D dollars (either through the military or through universities that get the preponderance of their grants from the government) to take risks that traditional financiers wouldn't take.

That is not the current state of affairs. What made the field viable and what would perpetuate the field is an influx of money and talent into principal research that actually changed lives. I know more people at high-end start ups than almost anyone, and a lot of the country managers at major VC-backed unicorns were the same people that got annoyed with me being a boring cunt talking about the markets or macro issues a dozen years ago when I was in graduate school. They are now the same people--uninterested at their core in global macro trends--who are running large swaths of the tech start-up ecosystem. Things like Lime, for instance, aren't transformational. They're unnecessary. And a lot of the people that run Lime were never interested in global markets. I know them well.

Or if you take the example of something like Medici Living Group in the real estate sector. It's a co-living platform. They're the largest co-living platform (basically a shared housing arrangement for 20 somethings). They're masquerading as a tech company. They're raising money at SaaS valuation when they're clearly a real estate company. While their TAM, SAM, and SOM are all high, their capital needs are intense, their valuation is bloated, and they should probably be a REIT.

There are hundreds and hundreds of examples of these sorts of companies which--for one reason or another--are raising funds from the VC world which really shouldn't. Beyond that, basic bitches like my own mother are willing to place money into IPOs for loss-making entities like Uber. My mother has never taken an Uber, but she likes talking about (what she considers) interesting investments with her friends at dinner parties or over cocktails. This is the exact same thing that happened before the dot.com bubble burst in the early 2000s. Valuations got silly. Normal people got silly. Professional investors kept putting money to work because, you know, what else would they do--that's their job. And then the bottom fell out. The difference this time is that the majority of the money flowing into these venture originate from private capital sources (endowments, foundation, pension funds, family offices, etc) so the bubble will grow larger than last time. But that's where we are right now. We are at peak bubble.

The more McKinsey and GS types that jump ship into a VC role, the more I worry about the space. It is ill-suited to large inflows of capital from allocators. It is best handled by a small number of tech gurus who disdain finance. Finance is a necessary evil to sustain business operations so a true venture can scale quickly enough to become cash flow positive. We now have moron consultants coming into the business who understand nothing about actual risk-taking manipulating the numbers and messaging the story to convince other investors that growth is the only thing that matters. But that has never and will never be true in finance. The bottom line matters, but we've seemed to forgotten that.

And yet, money still pours into the space because there are few alternatives. I just had drinks (pardon my rambling) with the CIO of a large endowment. His hospital system is forcing him to allocate money to a corporate VC, and he's pissed. It makes little sense, but the CEO and CFO want to have something interesting to talk about at cocktail parties. This is an insufficient reason for creating a fund. They don't really intend to make money from the fund. They just want the PR exposure that comes from making these sorts of investments. And among their C-suite friends, they want to be able to talk about it.

I can't convince anyone that it's a bubble if you can't see this sort of evidence and come to that conclusion on your own. We each make our own choices, but don't be the guy that chases sexy money at the most-ballooned portion of a bubble because you're unwilling to put in the hard work of sticking with a high-paying corporate role for a few more years while the bubble bursts. Patience is a virtue.

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Sep 6, 2019

Just when I thought that the market couldn't get any frothier...

Sep 4, 2019

bubble time

Sep 5, 2019

So how will it burst if rates are kept low?

Sep 5, 2019

ask yourself this question...WHY are rates so low?

just google it...you're welcome

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Sep 5, 2019

Michael burry has entered the chat

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Sep 6, 2019

Rates are so low because the total sum of max potential future EBITDA is substantially lower than the sum of total future debt service. Therefore, everything is getting refinanced into perpetuity at lower and lower rates now with larger and larger interest reserves/accrue pay until the notes start getting underwater and eventually a huge mark-to-market will occur.

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Sep 6, 2019

I was an analyst during the financial crisis. I really wanted to trade exotic derivatives and structured products because that's where I thought the money was. I remember interviewing for trading positions while in graduate school and telling the man who would eventually become my boss why I wanted to work on his desk. It essentially came down to the money. I remember him looking at the other MD in the interview and saying something like, "That's it. That's the top of the market." He went on to jokingly explain that the surest way to spot a bubble is to survey the incoming analysts and associates to see which desks they wanted the most. Since we didn't know much, we were essentially a 'dumb money' signal to him.

It turns out, he was right. My first day on the trading floor was the exact day that Lehman Brothers collapsed. I got moved from exotics to flow derivatives since liquidity in structured products and exotics dried up almost overnight. No one really talked to me for the first week since everything was such a shitshow, but at our first after-work drinks outing, I reminded my boss of our interview (which he had forgotten). He then drunkenly repeated that anecdote to his boss (the other MD who was in the original interview), saying, "I told you I called the top." To which his boss responded, "Then why the fuck are we losing so much goddamn money?"

It just goes to show--even smart money doesn't necessarily have the discipline to get out of the market even when they know they should. After all, if you're an investor in a particular asset class, and that's your whole job, what are you going to do? Convert all your holdings to cash? Migrate into another asset class outside your mandate? You're kind of stuck playing in your sandbox.

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Sep 6, 2019

There may be a few mega RE funds that pay more than banking, but overall banking still pays more between Analyst -> VP. I'm guessing your friends negotiated some type of carry/acquisition fee/etc to be making a lot more in RE than an i-banker....

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Sep 6, 2019

That's the thing. Big funds don't pay the most in RE. Most shops run lean, think like 3-5 people and tons of contractors. Carry and Co-Invest bonuses are all given at low levels because there isn't much hierarchy, and no need for the years of grinding for that precious carry.

I'd say the VP's probably make more for the same reason some junior guys make alot in RE. Mid level management doesn't provide much value in RE and the jump from analyst to deal maker is hard.

Most people have to just leave and start their own firm to get higher up. They just fee up deals and syndicate them out, obviously a little more complicated but the fact that it is so easy to explain just makes this post that much more real.

Sep 10, 2019
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