From Real Estate Finance to Founder of Development Company - AMA

subsix's picture
Rank: Gorilla | 743

I've been an observer on this site for a few years. In my mid-40s but use the site to keep current on how younger guys look at the business, career expectations, etc. Thought I'd do this AMA in order to pass on what I've learned (though it's your call as to how much you want to generalize from my specific experience.)

Background: No real estate experience before going to Business school (top 20 school but certainly not a top 5). Post-MBA, went to work in real estate capital markets in NYC. Did that for three years. Learned some stuff and got the "pedigree"/credentials associated with an MBA and Wall Street experience.

This is important: I quickly realized that most of my colleagues were as smart or smarter than I was, and just as motivated. Not really a surprise, as most people on Wall Street are intelligent and driven. For me, though, I decided that it made little sense to build my career in a place full of high-caliber competition. Some guys live for that, but I don't; I'd rather find an area with less competition, fewer highly motivated people, etc. and go that route (Peter Thiel sort of covers this in Zero to One.)

So, I left NYC for another city (between the coasts), and got a job with a local multifamily developer/investor. Spent two years doing that, and then (roughly 11 years ago) left with another guy to start our own apartment development group.

We started with about $50K between the two of us, and a 300SF office. We kept at it, stayed aggressive (but didn't take foolish risks) and fast forward to now, we've so far done about $500 million (cost basis) of multifamily and mixed-use development in our market(s). We've gotten paid reasonably well along the way (some years better than others), and have managed to build up meaningful net worths.

We've had a great time doing it, and most importantly, as owners of the business, we own our time as well.

I'll save "lessons learned" for the answer portions of this AMA, but one thing I can say for certain - the great thing about the real estate business is that if you're reasonably intelligent, use common sense, and GO AFTER IT, you can be very successful in a relatively short period of time.

So ask away - I'll answer just about anything, and will reply as time permits.

Mod Note (Andy): top 50 posts of 2017, this one ranks #18 (based on # of silver bananas)

Comments (142)

Jan 30, 2017

Thanks for doing this. 11 years ago brings us to about 2006 which probably wasn't the best time to start your own real estate career/business. How did the GFC affect you and what did you learn from that? As a follow up, $50k is not very much in terms of real estate deals. What was your first deal and how did you source it?

Jan 30, 2017

It's a cliche, but there's never really a right time to start a business; there are always reasons why it's "not the right time." The GFC definitely affected us. We closed on one of our development sites one month before Lehman blew up, and then in 2010 we had another project in lease-up. In the first case, we closed on the site with cash and very little debt. It sucked, but we (and our investors, who were patient and realistic) could afford to wait it out. The project eventually got built and was very successful. In the second case, we had a conservative debt structure with no short-term maturity. Thank god for that. We also had the cash to fund lease-up reserves as we ran through them quicker than projected. That project has also ended up being very successful. Lesson - if you have a good location and a good product, and the financial (and emotional) resources to get through down-turns, you will likely do well, provided you didn't put stupid/aggressive debt on the deal to start.

I've seen too many smart guys get too aggressive, lose properties (and marriages) due to excess leverage, and then watch as the projects became very successful a few years later - after they'd lost it.

You don't need to (and shouldn't try to) make all your money on one deal...

Our first deal was sourced "off the market"; in fact that's how almost all our deals have been done. It was a 50-unit apartment deal, and most of the equity came from outside LPs. Did we give up a lot to them? Yes, but we earned a development fee and more importantly, we started building credibility and a track record, which is what enables you to raise more money and do bigger deals going forward.

With respect to sourcing deals - we turn over tons of rocks, are never afraid to be told "no", etc. I could tell you some incredible stories about the odd ways we've found some of our best opportunities. It's really that simple, but amazing how many guys don't want to get their hands dirty; they'd rather go to conferences, roundtables, etc. and talk shit about the market, stuff like that.

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Jan 30, 2017

Did you ever do ground up?

Jan 30, 2017

Thanks for doing this. I'm on the same path you were on (T15 MBA though I had 2-3 years construction exp. pre-b school) and am evaluating opportunities for full time. If you were graduating right now, what type of firm would you go work for (sponsor or investor level entity)? Acquisitions, Asset Management or debt/equity placement? I too love the multifamily investment/development space as well and want to do this on my own long term. What made you bail from the 2nd shop you were at? Was there a turning point where you knew leaving/starting your own shop was best? How much $$$ do you recommend saving up before making the leap? What strengths did you and your partner possess that made you such a great team? Would you go back and change anything if you could? Lastly (and sorry for all the questions), how do you structure/raise capital for your first 1-2 deals as the new company? Convincing friends/family with a deal pitchbook seems to be most common but did you take an acq. fee up front and/or development fee/PM fee (over the hold period) in addition to back end promote? Did you get push back from LP's on any of the terms?

Jan 30, 2017

Back in a few hours, will answer this and more then...

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Jan 31, 2017

It depends on what you want to do long term. I can say this for certain - the best way to learn the development business is to do the development business. There's no substitute for learning how to source a deal, negotiate a P&SA, do the due diligence, hire your third-party guys (architect, GC, civil engineer etc.), manage the design process, manage the budgeting and GMP process, negotiate a construction loan and an operating agreement, then manage the construction process, live through a lease up, etc.

The great thing about this business is you can learn these skill sets (and make your inevitable mistakes) on very small deals. Buying / rehabbing a 4-plex will teach you much of what you'd learn on a 200-unit deal.

I didn't get started until I was in my 30's. If I had to do it again, I'd start in my early 20's. Go find a small deal, raise the money from friends and family. Take a fee out of the deal, make it successful for your investors, and you're on your way.

My guess is a lot of you guys are young, single and have few financial obligations beyond rent and alcohol (maybe student loans, too). Now is the time to do it.

I run across guys my age all the time who are more intelligent than me, have been in the business longer, etc. But they're still working for someone else. I used to worry that they'd go out on their own and be competition for me. But they most likely won't, because they've got a wife, kids and a mortgage ("the whole catastrophe", as Zorba the Greek said). It gets a LOT harder to go out on your own once you have people depending on you to earn a living.

Another thing - if you're under 30, you probably have a more intuitive feel for what the renter demographic wants than a guy my age. Use that to your advantage. What's the worst that can happen? You do a bad deal, "blow up" and move on. You'll have learned things that only come through doing, not through analyzing on someone else's behalf.

The reason my partner and I left the last place was because we both always knew we wanted to do our own thing, and we knew that buying or building apartments is not rocket science. I've got friends who started tech businesses - that's much more of an all or nothing proposition. They could easily spend 5+ years of their life giving everything to the venture and could still lose everything. Real estate isn't like that (if you manage the risk with some common sense.) You get a lot of "at bats", and you only need a few triples or home runs over a career to make out really well.

In terms of saving money before you do it - that's a personal question for you. If you've got a rich uncle or older family friends who gets off on helping a young guy succeed (don't discount that, BTW), you might need less than others. But really, if you're good at finding opportunities, you will find the money.

My partner and I have very complimentary skills. One of us is better at sourcing deals, designing the project, etc. (the left side of the balance sheet), the other is better at structuring the financing. We are both good at raising money. Temperments are also different. One is aggressive, the other more cautious. It's worked very well.

As noted above, some of the first deals we did were tax credit deals, so we got big fees (that's why we did them; there's not much long term residual value in many cases.)

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Jan 31, 2017

If you had started in development in your early 20s would you still have gone to b school?

Jan 31, 2017

I'm in my 20s and have desperately been trying to get into development. Would you recommend partnering up with a friend or two on a different side of the RE industry (meaning they have a different work history/skill set). I see that you have done it and I honestly think the only thing that has held me back from going out alone is that I am a lot more cautious than I maybe should be. Did you have minimum buy-ins for your first investors and what was your plan in case the first few deals went south? Do you mind doing a brief walk through on your tax credit deals and what kind of metrics you looked out for on small multifamily buildings?

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May 17, 2019

Hi subsix, this topic is great, and I'm not sure if you're still checking this thread but I have a question as it relates to LIHTC development. I currently work in the financing side of the industry for an equity investor, but I ultimately want to be a developer/GP because I am more attracted to the entrepreneurial side of the industry. Do you recommend staying the course at the investor and in a few years trying to move to a more financial role at a developer or do you recommend lateralling now to something like an associate role at a developer so I can learn the entire development process soup to nuts? I don't want to be like the guys you described and in twenty years still be working for the bank talking about how I should have gone out on my own. Concern is if I stay here I'll be pigeon holed into a finance niche and won't have the experience to go out on my own. Thanks for all your time.

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Jan 30, 2017

How did you guys raise equity? I assume you did recourse debt in the beginning for pretty much 100% of your TNW. What was that like?

Jan 31, 2017

Some of the first deals we did were tax credit deals, so that was the perm equity, but there were still pursuit costs up from that required our own limited cash. You learn to make your cash go a long way or you go out of business. That really became our culture in a way; we're still obsessed with limiting our dead deal costs; they can KILL YOU, especially early on. We see a lot of local / regional developers (not the merchant builders that's a different case) with large staffs and wonder how they do it. They end up doing deals largely for fees just to feed the beast. We've never operated that way. We still answer our own phones (no admin help at all), source the deals, do the pre-dev, financing, etc. all amongst the partners and one project management guy.

The debt on those deals was recourse through completion but could be done with limited or no repayment guarantees given the way the debt was structured. Still, we'd be on the hook for tax credit recapture post-completion.

I can tell you, it was nerve wracking the first time, but it forced us to watch every detail during construction, which was a great learning experience.

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Jan 31, 2017

Thanks for the insight and for doing this.

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Jan 30, 2017

How much money was that first deal. Assuming you only had 50k in equity and 2 years of development experience how did you persuade equity and debt capital that you guys knew what you were doing. I guess if you started in 2006 you got a high LTV. Was the deal affordable or market rate and did you guys use any sort of special financing.

Jan 31, 2017

First deal we ever did on our own was an affordable / tax credit deal. The $50K (plus a little $$ from a mentor) got us through to the point where we secured the credits which we sold for the equity in the deal. 2 yrs experience in the affordable housing world was somewhat meaningful to credit buyers (back then, at least). But there was definitely some shucking ad jiving that had to be done.

That's part of being an entrepreneur - convincing other people that you already are what in reality you're still trying to become...

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Feb 28, 2018
subsix:

That's part of being an entrepreneur - convincing other people that you already are what in reality you're still trying to become...

"Ric Flair Drip"

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Jan 31, 2017

Hi subsix, thank you very much for doing this.
Three questions that I'd like your thoughts on:

(1) do you think you'd have made more if you had stayed in RE capital market?

(2) How did you choose who to start a business with in the very beginning? Are there any personal traits that would make a person unsuitable for a partner role? (in addition to the usual laziness, bad temper etc)

(3) what do you think about property securitisation (e.g. sell equity portions of a house to multiple retail investors and let them earn rent, there's a company called Property Partner currently doing this)

Observe. Learn. Share.

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Jan 31, 2017

Would I have made more money staying in RE capital markets? I look at it this way - give the competition, number of peers, etc., I would have had a low % chance of making a huge amount of money, vs. a high % chance of making a lot of money doing what I'm doing. Does that make sense? But as you'll find out, it's not just about the money. It's also about the ability to control your time and how you live your life. I could've stayed in NYC, ground it out for 15 years and made the huge sacrifices necessary to be (potentially) highly successful there. Or, I could do what I'm doing, which allows me to i) enjoy my work; ii) take days off to go ski/surf/whatever; iii) take three days off to go with my kids to their sports tournaments, etc. I can count on one hand the number of days I've gotten to work before 8:30AM or worked past 6:00PM over the past 12 months. That's a question each has to answer - is it more important to earn "X" and have the life you want, or "3X" and not have one. If you're highly insecure and/or your sense of identity and self worth is tied up in 3rd-party validation, etc., then maybe the latter is more important. For me, I had/have my "number", and beyond that, it's about controlling my time and what I do with it.

Will answer 2 and 3 later, have to run.

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Jan 31, 2017

2 - My partner and I had been working together for a few years, so there was a level of comfort in terms of personality fit, work ethic, long-term goals, etc. The last is most important, IMO. Personality differences can be managed if you both want the same things. Conversely, you could get along great, but if you want different things out of the business that could be a problem over the long run. Also, I know that as a person, I could/can trust him implicitly. That counts for a lot and makes it easy to sleep at night.

3 - can't speak intelligently about this as I have no experience with it.

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Jan 31, 2017

great points, thanks!

Observe. Learn. Share.

Jan 31, 2017

Thanks for doing this AMA. A couple questions.

  1. Did you always know you wanted to end up in development?
  2. What did you do prior to getting an MBA? Did you already work in the finance sector?
  3. Could you describe a high and low point throughout your RE career?

More questions will probably follow. Thanks again

Jan 31, 2017

Didn't even know I wanted to get into real estate until I took some classes in business school. That's when I realized it was a perfect fit for my personality type - entrepreneurial, like to do many different things (legal, finance, construction, marketing, etc.), and a desire to be my own boss. Looking back, I wish I'd know it in undergrad, because I would have jumped right into the business and accelerated things by about 6-7 years.

Prior to MBA I worked in a non-finance type industry and then started my own business. It failed, but I learned a lot through that failure; the price of a real-world education, I suppose. Having that experience on my resume also helped me get into grad school, and helped a lot in finding my job post-MBA. It certainly wasn't my finance experience, which was nil up to that point. I still remember one of my first on-campus interviews with an MD from one of what you'd consider a top 5 firm...the guy asked me what I liked better, equity or debt. I stammered some bullshit non-answer, I'm sure it left a horrible impression. That was my first inkling that long-term the finance side of the business was not for me; too many very smart people who live and breathe that aspect, whereas I was much more interested in how to buy or build something that would enable me to turn $1 into $3 (for ME, not for someone else.)

High point(s) - every time we finish a project and get it leased up to the point where it's performing well. Aside from the $$, there is (for me) huge psychic value in being able to drive by a great-looking building, know that I conceived it, took the risk to get it built, and now there are people paying me and our investors to live there. Also, knowing that our investors are happy enough to ask about re-investing with us is very gratifying.

Low point (so far) - 2010, a huge project of ours comes on-line right in the teeth of the great recession. Lease-up much slower than projected, etc. It felt like death, I won't lie. We got through it though, mainly because we proactively reached out to our lender to tell then a problem was coming. Lenders hate surprises. Doing that enabled us to restructure the debt in a way that kept us in control of the property (we still own it), and get another bite of the apple, so to speak. Long term it will likely be one of our best-performing assets.

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Jan 31, 2017

Thanks so much for doing this. It's very informative.

1)How many deal have you done in total on your own?
2) Do you do development only in your market?
3) What was your worst deal and what did you learn from it?

Jan 31, 2017

1) We've done about 20 projects to date, mainly development but a few act/rehab deals.

2) Yes, only in our own market(s). Our competitive advantages are i) knowing where the good sites/opportunities are so we can (hopefully) get them before they hit the open market; ii) understanding local dynamics and the "mental map" of renters (which may be very different than a map on paper); and iii) knowing what is really costs, right now, to build the project. This last one is incredibly important - it allows us to effectively filter the feasible from the un-feasible. Because we're active in the market and know many of the GCs, we can determine early if the costs will work.

This gets back to the importance of dead deal costs discussed above - few things are worse in this business than spending $1MM on pre-dev costs for a large project, and then finding out that the hard costs will be 15% higher than projected and therefore the deal can't get financed. It happens to a lot of guys, though. When it does, they magically convince themselves that they can also get rents 15% higher than their initial pro-forma. Sometimes they can even convince lenders and LPs. Sometimes they're right. But sometimes they're not.

3) Worst deal - see above, the deal we delivered in 2010. Long term it's proven to be fine, but in the short term it was awful. Biggest lesson learned was the value of manageable leverage. I remember as the project was being conceived (2007), we had debt brokers pushing shorter term, high leverage construction financing..."80% LTC, once you stabilize you can put on enough perm debt to repay the construction loan and get back all your equity!!". If we'd taken that route, we'd be dead. Of course, if we'd started the project in 2004, and taken that route, the deal would've been an immediate home run.

That's survivor bias, though - we all see guys who "pushed their chips to the center of the table", took the big risks and hit it out of the park. What you don't see, though (or hear much about) are the three other guys who did the same thing, and through bad luck, bad timing, whatever, lost the bet and BLEW UP. I know a few of those guys; some have recovered, some are working for someone else now.

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Jan 31, 2017

do you absolutely have to quit your job if you currently work in real estate and you still have free time and energy for as many side projects as you can handle (i know someone who did multiple market rate 200-300 unit deals, albeit w an experienced partner, while keeping his day job as a CRE broker)?

how long did it take to build back up to a six-figure income once you quit? was it slower than expected?

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Best Response
Jan 31, 2017

No, I don't think you need to quit your "day job" to get into the business, especially if you're younger, don't have kids, etc. That's one great thing about the business. You just need to make sure you really have the time to follow through and execute well on things.

When we started, I gave myself two years to start making money, but my situation was I had (still have) a wife who worked and made good money.

Look, if you start out on your own, you need to be realistic about the sacrifices you'll probably have to make. Put together a rough budget. Then, double your projected expenses, and cut your revenue in half to get to likely REALITY.

I think many guys look at the idea of walking away from a steady job and pay and say, I'd love to try it but I just can't right now. Or, maybe in a few years, once I save up more money, etc., etc.

**I actually think the bigger risk is NOT going for it when in reality you can probably bounce back if it doesn't work out the first time. ** At how many points in your life will you have the time, stamina and lack of obligations to allow you to take the risks?

Maybe this is a generational thing - I see with our oldest kid who's now starting high school, and our friends with kids - everyone is obsessed with taking the "right" classes, enough AP Classes, enough bullshit extra-curriculars, etc., just so the can go to the "right", high-powered college, which will then enable them to get the perfect job, etc.

So you end up with a huge group of over-credentialed, pedigree-obsessed conformists who think success is all about doing things that other people will be impressed with (hint - that's one reason Wall Street loves recruiting from top colleges.) Meanwhile, there's some lower/middle class kid who went to State U, worked real summer jobs in high school / college, and is now out buying small buildings, doing his own deals, etc. Pretty soon he'll be buying bigger buildings, etc. I know some of these guys!

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Jan 31, 2017

I am currently trying to get into Development/ CRE for past 7 months now from corporate real estate position with F15 firm. I've been cold emailing and meeting guys trying to network my ass off. What advice would you give for someone like me who is one year out of school trying to get into the industry as an Analyst?

Jan 31, 2017

What you're doing is not much different from what I still do - turn over rocks, keep building the network, etc. Two practical suggestions:

  1. Every time you meet with someone, don't leave the meeting without getting at least two other names. The network builds geometrically that way.
  2. One of the best (but most overlooked) ways to break into the business is to find a few real, potential opportunities and bring them to the group you're trying to get in with. You can do this while not totally giving away the deal specifics (i.e., you can protect yourself.)

Example - if a guy comes to me and shows me one or two REAL, live opportunities that he's put together, and has done his own thoughtful analysis, etc....I'm probably hiring that guy over someone who might have a better pedigree. Why? Because i) it shows initiative; and ii) opportunities are the life blood of this business. Guys who can build a 20-worksheet Excel model are a dime a dozen (sorry), but guys who can source deals are not as common. And if he can find one or two, he can find more...

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Jan 31, 2017

Good insight... impossible to overstate the power of being able to source opportunities (and avoiding making enemies in the process).

In the spirit of the topic.... need a new institutional JV equity partner?

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Jan 31, 2017

Very true.

I have to apologize, part of me thought you were faking it but now I see you're the real deal. Congrats.

Do you ever use Loopnet to find deals?

Networking: do you ever go to the IMN conferences?

What is your average construction cost per sq. ft.? Market value per sq. ft.? Price per acre?

Jan 31, 2017

Thank you for doing this AMA - very helpful. If anyone sends questions as a private message it would be really helpful if you answer here on this post. Most of my questions were answered here this way before I had to ask them.

Jan 31, 2017

What are your thoughts on preferred equity? If you had two mutually exclusive equity options, one common equity and the other preferred equity (where you "guaranty" a return, accrued monthly and paid at project completion, but retain the upside), what would be your preference? I ask because my company (that I started in 2016) places equity into real estate development projects and I was shocked to find out that investors' preference was, by and large, for the preferred return rather than the high-IRR common equity piece. I assume most sponsors would rather pay the preferred return and retain the upside, correct?

Thoughts from a sponsor?

Jan 31, 2017

It all comes down to where you want to invest within the risk spectrum. Pref equity is a nice place to be in (standing in front of common equity). If you have a deal you truly believe in and has great downside protection, then I would imagine you would be more willing to take common (aka have a piece of the upside).

Jan 31, 2017

It depends on the deal (sorry). We've done it all ways, from preferred equity to JV equity, and in some cases been able to get an equity multiple hurdle instead of IRR hurdle (which is great when a project takes longer than expected to stabilize and sell/recap!)

I think it also depends on what our goals are for the project; there are projects that we might want to hold for a very long time, others that we think we'll want to sell post-completion. Some we can get more leverage than others, some have more market risk, etc., etc. We really do look at everything on a deal by deal basis.

Another example - we go long on a piece of land (well before we have capital in place to go vertical); the sub-market improves and the land suddenly has a market value $1.5MM higher than our basis. When we go vertical, we want to be able to contribute the land at market value and get equity treatment for it (unlikely we'd get paid out that land value up front.) Potential JV equity partner says no, but here's a really attractive promote/waterfall structure if you do the deal with us. Preferred equity guy says, OK, we'll give you market value/capital account for your land, but our preferred equity gets it's accrual and then repayment before you see first dollar back on your land value. I'm pretty sure the deal will perform well enough to get paid back that $1.5MM land value. How does that compare to the JV deal where I MIGHT make more on the promote, but I might not? It really does (for us) come down to a deal by deal analysis.

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Jan 31, 2017

Your thoughts on pedigree, over competition, conformity, etc. have really resonated with me, and you out to words what I've been thinking s long time. What is your view on the "path" that so many kids on this site try to get into? Also what is your view on the idea that some success is a future entrepreneurs' biggest enemy. Say you had gone to a good school and started in real estate out of college, maybe gotten an MBA and landed at a top developer or REPE firm with maybe some carry and a nice cushy salary. I'd bet that in that case you'd be a lot less willing, and given the future economic benefits that are unknown, prevent you from going out on your own. It sounds like you came from a more "humble" pedigree with maybe as less as a sexy background and thus, you knew what you wanted to do and had nothing to prevent you from going out.. AKA much less to Los mindset than maybe someone else.

Reason I ask this is I've had somewat of a bumpy start to my career but I've always eventually wanted to start my own thing, whereas my friends/peers who killed it in college academically and have nice salaries are much more comfortable and willing to "compromise" and attempt to stay for the long term and try to get on some sort of partner track at their company.

Congrats on your success.

Jan 31, 2017

I will try to answer this later as it's a long and "deep" question...

Feb 2, 2017

My "pedigree", such as it was, was I went to private high school, graduated with a solid B- average, and attended my safety school, which was a State U (out of state, but not a Michigan, UVA, etc. caliber school). As I noted earlier, I started my own business about a year after college. It failed, but I leveraged that experience as a way to differentiate myself and get into business school. I was not the boarding school, Ivy-league, Bulge Bracket analyst guy, but nor was I a blue-collar, up from nothing guy. I was solidly upper middle class.

A more general comment - when I was in college, leaving college, etc. - there was little to no social media. The only people I had to benchmark against were the people I knew personally, or maybe saw in a movie, read about in a magazine, newspaper, etc. So while social anxiety was real (always has been, always will be), it was nothing like today. I actually feel sorry for guys growing up in an environment where the WHOLE WORLD is their benchmark. You see everybody! It must drive you bananas to see all the people doing things that are bigger, sexier, richer than what you're doing. When I was younger, those people were there, but we didn't know much about them.

A certain level of insecurity is actually a good motivator, I think. But you also need to filter out what other people are doing, don't worry so much about what they think about you (Hint - they're not really thinking much about you at all), and just do your thing because it's what you want to do. My purpose here is to give you some insight on one path taken.

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Jan 31, 2017

What's next? What do you envision for your future? Raising a Fund?

Jan 31, 2017

Not sure, but almost no chance we will raise a fund. Raising that kind of money is almost a full time job, and once/if the money is raised, we've now got a "boss", which is one of the reasons I left my previous job. I value my personal freedom and professional flexibility too much.

Maybe when we're older and can hire some guys to raise all the money and run the business:)

It's an interesting question though - is it better to have a net worth of X, plus freedom and flexibility, or a net worth of 2X or 3X (or 5X) but less freedom and flexibility. Everyone has their own answer to that.

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Jan 31, 2017

I find, and other friends of mine, have found that it's easy to go to the money early in your career (In a Non-NYC market right now). How much should we weight pay compared to experience? I've always been one to give up more money for better experience. But when do the two finally level out?

Feb 2, 2017

That's a personal decision. There's absolutely nothing wrong with choosing to go on a career path that involves more steady and predictable compensation, etc., especially if the money is really good. I am saying, though, that if you're one of those people who want to go the entrepreneurial route in real estate, doing it early in your career has a lot to recommend it. At the same time, if you have a great job (responsibility, opportunity to learn, etc.) with great compensation early on, then spending 2-5 years doing that, and saving up some cash, can be a smart thing. As long as you really have the discipline to save the money!

I think that the experience you get early on (IF it's good experience) will pay off in multiples down the road in terms of career opportunities and compensation. Especially if you want to go out on your own. Personally, if I had to invest cash in a deal sponsored by a (smart) young guy with little/no money but 3-4 years of real experience, real responsibility, mistakes, accomplishments and the judgement that come from those, or a guy with $200,000 saved up from 3-4 years of working as an analyst at a REPE firm, I would strongly consider the former. That's a generalization, but you get my drift I'm sure.

    • 1
Feb 2, 2017

I beyond appreciate the feedback - so helpful for someone early in my career. Would love to pick your brain sometime over some more particulars. I imagine you're swamped with keeping up with the questions on this forum.

    • 1
Jan 31, 2017

Thank you so much for sharing, this is super super helpful.

Jan 31, 2017

Thoughts on gentrification and the urbanization movement especially among young millenials fresh out of college. AvalonBay has this business line called "Ava" which basically builds high end buildings in up and coming yet still not there yet areas. These Ava buildings have much smaller apartments but top of the line amenities and the people feel like they're living in high end dorms as adults. My parents house is a 2 family, we lived in the top floor, and they're really tempted to sell it, as our city, right out of the metro area has drastically gone up in price.

Wha do you think do the trend for luxury apartments or lofts being built in the "hood" with just a quick 7 minute train ride into the city/financial districts.

Feb 2, 2017

It makes sense, though you tell me - you're closer to that age group than I am. One general comment - I think that in markets where there is a large net in-migration of young people, there's a good opportunity to build in neighborhoods that are on the upswing but not totally "there" yet. Why? Because young people coming from out of town have no memory of what the neighborhoods used to be like. That's where older, long-time local developers can be at a disadvantage - they have institutional memory and find it hard to put themselves in the minds of a young person just moving to their market.

Look at Washington, DC - 10-15 years ago, many of the currently hot neighborhoods were absolute hell-holes. But there are so many young people constantly moving to DC from out of town, who don't have any recollection of that...

    • 2
Feb 1, 2017

Thanks for sharing. In a very similar situation to what you went through.

Feb 1, 2017

I will admit I have not read the entire thread as I'm busy working, but I will edit later in the case this was already asked.

I'm a first year at one of the top 5 banks for balance sheet lending. Working on a good amount of stuff relating the ground up retail, multifamily, hotel construction, a few potential term acquisition/refi deals, and some other random stuff. I'll have experience underwriting and putting together books for capital market syndications. In a year I'll be promoted to the sales-side lending role (like an associate-VP I guess) and will move to a gateway city. Good company overall and the work-life balance is solid.

I love real estate. I'm looking to purchase a house in the next month or so to flip and eventually start picking up rentals since I'm in a cheaper market now. I originally came out of school wanting to be on the acquisitions or development side. I don't mind working on the banking side, but I don't want to pigeon-hole myself as a lender forever, you know? A lot of people at the bank are very long tenure and there's a lot of support for people like me to stay and grow, though we're not paid investment banking sort of salaries. I interned for a REPE firm that has $8B in AUM and saw a little bit of that side.

I eventually want to be running my own thing, or working at a smaller company with a few people I have a really solid relationship with. I've always envisioned myself on the ownership side or the move-shaker side of the business. It's part of the reason I'm looking to do private real estate investment and almost every day I'm looking online, touring, and connecting with contractors.

I was wondering what you thought. I went to a top RE school for undergrad and could go back to do my MBA or MS in Development there. But that wouldn't be for 2-3 years before I could do that. I'm not sure if there's a 'best' time to transition from lending to acquisitions or development either - whether it's advantageous for me to be working with clients day to day as a lender and be established in my role before i transition or to transition before I'm at that point.

Feb 1, 2017

If you can you should buy, fix and sell as soon as you can but you don't want to get caught with your money in the market at the wrong time (obvious, right?).

I just left a breakfast meeting, sponsored by CCIM, IREM and NARPM, here in South Florida where the speaker was predicting a recession by the end of the year. His name is Jack McCabe of McCabe Research and Consulting - you can look him up.

Whatever you do it should be well substantiated by at least two sources. Not all data but definitely not all gut. An HBR article I read recommends 50/50.

Being an long-term successful entrepreneur requires A LOT just running a business with a singular focus - think painting contractor.

Being a developer is ten times as hard. You HAVE to know a lot about everyone's job: Realtor, title company, lawyer, contractor, lender, etc. They are ALL deal killers. It's hard to tell which is the most deadly. I feel like I'm going to scream out loud in this Starbucks because I'm having flashbacks.

The author of this thread is correct, deal sourcing is a vital skill but there is so much more you need to know from that point. You can source a deal but then you can't lock it up or you can't bring it to the right people or you can't bring it to the right people and not get screwed out of the deal.

So after you 1) get the deal and 2) bring it to the right people and 3) not get screwed, you still have to go through 4) the lawyers to get it under contract and then the 5) title company and 6) lender(s) to get it closed. THEN you have to go through the 7) A/E to put together the construction docs and the 8) city/county to get them approved. THEN you have to get 9) GC's to bid it (make sure you get multiple bids) and then 10) select one to build it. And here is where things REALLY get crazy 11) hopefully your GC AND his subs know what they are doing OR you can forget about your budget and your schedule and your project and your money and your investors money. BUT assuming you survive that you have to 12) find a Realtor to 13) sell or lease your project. Lucky number 13.

And you can throw a market analysis from a real estate Market Analyst in there depending on the size and complexity of your project.

I've thoroughly described the problem, right? So what is the solution?

Study, study, study and start small. And then study some more. If you don't have a professional library you need to start one. Having a job is normal society with all the protections. Being on your own is the Wild, Wild West. Everyone - everyone, I repeat EVERYONE will cut your throat and not think twice about it. "It's just business." Everyone!

"In all of your getting, get an understanding." - Proverbs 4:7, The Bible.

Best way to source deals? Drive for dollars. Weekends EARLY in the morning - no traffic - and drive the area where you want to do deals. Get as many addresses of abandoned or distressed looking properties as you can. Sit down and spend some quality time with your county's tax assessors website. Get the property details and Owners info. Record. Get contact info (skip tracers) and communicate. Always remember this "the fortune is in the follow up".

Next, you've got to learn to value the property type you're focused on.....yikes! And the list goes on and on and on.......

Everyone!

    • 10
Feb 1, 2017

Couldn't agree with this post more. My undergraduate background is in architecture, I knew while I was in school that I wanted to be a developer and thought I could transition without switching majors.....it took wayyyyyy more time and effort than I anticipated. Development shops are so leanly staffed that in my experience they traditionally hire people with a decent amount of experience or relatives.

After undergrad I was able to secure a job at a CRE company as a project manager. Still not development but a step in the right direction. In the meantime I networked like crazy, completed a MSRE program while working (if you can manage this, I would totally recommend it). I also read A LOT and went to every ULI program I could afford to attend. Like RECONBOSS says learn as much about the development process as you possibly can that way when you do come across an opportunity whether it be a deal, partnership, job etc you are ready to show your value. Took me 4.5 years to finally land a development position btw so patience and persistence is key.

I've found that buying my own 4 unit building and rehabbing it was the biggest resume booster I've ever had. Every interview I've gone on that's been a big topic of conversation, like the OP says you can learn almost as much about the development process of a +/- 200 unit building by doing your own small scale project and developers respect that you are confident enough in your development skills to do it with your own money.

    • 4
Feb 19, 2017

RECONBOSS,

Thanks for your post. Are there any personal favorites from your "professional library" that you could kindly share with the group?

Also, your advice on sourcing is the most practical and actionable I've read.

Thanks

Feb 2, 2017

Here was my epiphany - when I was in NYC, in capital markets, we had a meeting with a very big, wildly successful developer / owner / investor (you would absolutely know this guy). Everyone on our team (up to the MD level) was basically stroking this guy off in order to get the chance to raise money for him. It was embarrassing. But that's when I knew I wanted to be on the other side of the table.

The other responders below made good points, I don't have much to add, other than to support their points that it's not easy, etc. But so what? It's a cliche, but if was easy everyone would be doing it. And the only way to really learn it is by doing it. Be smart about the risks you're taking, start small enough to be able to maintain control of the risks and survive the inevitable mistakes, and remember, you really don't need to make all your money on any one deal.

Feb 1, 2017

Thanks for doing the AMA. I know you touched on this earlier, but I find myself in a similar position. Post MBA, have worked a couple years and want to do my own thing. I'm just wondering if you can give a bit more detail about how you raised capital initially to put your first few deals together, when you and your partner were just starting out? 50k isn't much, and its a similar amount to what I have to begin with.

*Edit: You mentioned tax credits. Is that an American thing? (Canadian here)
Thanks!

Feb 2, 2017

Tax credits are an American thing, yes. Raising money is not easy, but it gets done. Be creative and relentless, and remember, the worst anyone can do is say, "no", in which case you're no worse off that you were before you asked.

    • 1
Feb 2, 2017

Awesome thread. Thanks for answering my question above. One more..

How did you learn about the construction side of things? Was it a more learn on the go with experience, did you study a lot? Hire consultants?

Feb 2, 2017

On the initial small deals, we had the good fortune to work with a GC who'm we had prior experience with. Once we got into the market-rate side of things, we almost always hired (still do) an Owner's Rep. And from day one, my partner and/or I attended EVERY estimating meeting, every design meeting, etc. We personally worked through all the lighting packages, plumbing fixture packages, cabinet/countertop packages, etc. to make sure we had the best cost/value combination. And then once the job started, we attended every OAC (Owner/Architect/Contractor) meeting on the job site, walked the site all the time, etc. Once the job was about done, we walked every single punch-list walk with the rest of the team. We still do this on our projects.

For the first few deals, it was incredibly time consuming, but there is no better way to learn the construction side of the business. And if you don't learn it, you're basically going to school every day and practically begging the bullies to take your lunch money. You will learn quickly that a Guaranteed Maximum Price contract does not necessarily guarantee a maximum price for the job.

    • 1
Feb 10, 2017

Construction is very deceptive and complicated and simple.

You need a library: estimating, scheduling, contracts, framing, drywall, concrete, electrical, plumbing, HVAC, etc. If you're serious about getting your black belt in construction you're going to get several books for each topic because different authors cover a topic differently.

If you own your home redo your bathroom. Get 4 outside quotes from contractors. Estimate the budget yourself, build a schedule, buy the material compare it to your original budget, note the items you missed, how much you over/under estimated etc. Do the work, demo, note the complications, the time it took, etc. Check the framing, replace where necessary, usually around the shower valve depending how old your house is. Put back the drywall, finish it, paint, tile the floor, etc

When doing the work you should have someone who knows what they are doing with you. Everyone knows someone in construction so that shouldn't be a problem. Beware of someone who says they can "do it all" unless you know they can do it all.

The books and the work is going to be all you need to initiate the process of learning construction. This isn't commercial construction but it is residential/multifamily construction.

If you're going to do commercial construction you're going to have to learn and understand more complicated Mechanical, Electrical, Plumbing (MEP) systems.

Redo your kitchen.

Redo your aunts bathroom or kitchen.

By the third project you should have a good understanding of the process.

That's one thing, hiring subs and employees is a totally different world. For that you need a black belt in psychology. Yikes.

But knowing construction goes a long way when dealing with subs because they won't be able to abuse you as much as they would if you didn't know construction.

When I was project managing I knew I leveled up when a sub gave me literally 15 excuses why he couldn't do something and I swatted them all back to him until he finally gave up and said ok, he'll do the work.

Sep 27, 2019

Thanks for this post very informative.

I work for a developer right now and we build MF 150-250 unit projects. I'm an analyst and still learning a lot about construction.

Correct me if I'm wrong but a Developer's knowledge base about construction is more concerned with cost/value combination, estimating, scheduling, communication coordination (Plans, Specs, RFIs, COs, Submittals, etc.) - but not so much digging into the weeds about how to build and why its functionally built that way.

My question to you is - What fundamentals are absolutely necessary to keep the developer an active participant in the conversation?

Feb 2, 2017

Can you please provide some details on your developer fees and how that is structured/paid out...and when?

Of your existing portfolio of MF that is owned, what % of equity do you and your partner hold relative to equity you put in the deal?

Feb 2, 2017

Depends on the deal, the investor, etc. %s are different, but it usually ends up being a portion (20% at least) at closing/start of construction, a big chunk paid ratably through construction, and then some amount held back through lease-up.

Feb 2, 2017

Fantastic thread. I have a few questions:

  1. Where are your long term goals? (10-15 years)
  2. How many people have you hired?
  3. How are you funding predev costs?
  4. What are typical terms on predev money?
  5. Do you sell out of each project after leaseup? Developer I'm with now likes to keep a piece of the deal for long term cash flow - thoughts on this?
    • 1
Feb 2, 2017
    • Long term goal is to keep doing this until I die or get dementia. I enjoy it that much, and am now close to the point where we can pick the deals we want to build or buy, etc.
  1. We have two people (project manager and a reporting/compliance/construction draw person) and a part-time bookkeeper. We build/have our own Excel models, etc. It's not rocket science. Experience has enabled us to do projections that focus much more on accuracy than precision. I think it was Warren Buffett who said he'd rather be roughly right than precisely wrong. Reality is, if our model says that our stabilized yield on cost is 6.9%, it could EASILY turn out to be 6.3% or 7.5%. Have enough equity cushion, etc. to handle that and you will be OK. I always laugh now when I see a spreadsheet with a deal IRR of, say, 19.3%. Really, 19.3%? Not 19.2%? You're that sure? Focus more on the accuracy of your assumptions/inputs, and worry less about how elegant the model is, how many worksheets it has, etc.
  2. We fund pre-dev costs out of our own cash. It's the worst part of the business; you take fees from one deal and re-invest a portion into pre-dev for the next. As noted above, if you don't manage these costs they can kill you. Another reason developers in general run very lean from a staffing perspective, etc.
  3. The worst - see above.
  4. It depends, since the LP usually has a big part of this decision. The tricky thing about development is that for the sponsor/GP, much of the value creation "curve" flattens out post-stabilization, right? But maybe you want to stay in for the long term anyway. A forced savings plan, optionality on a positive external event like inflation, extreme cap rate compression, etc. But those all externalities can all go negative, too.
    • 3
Feb 8, 2017

Re #5: Makes a lot of sense. I forgot to mention that their other reason for keeping a piece of the deal (LP permitting) was to have cash flow on the entity level, which would reduce the necessity for personal guarantees. Do you think that's a good strategy?

Feb 3, 2017

Great thread, really appreciate the time. What do you think is the biggest learning curve going to the development side from a traditional acquisitions gig (PE shop, REIT, Pension Fund, etc.)? Entitlement process? City planning board? I get a lot of exposure to the DD process/legal side of things at my fund, but don't have a lot of experience with the ground up stuff. Just wondering what, and to what degree, the knowledge gap would be. The fundraising process I would imagine is the same, albeit a different target audience.

-From a guy who started as an excel monkey at a F500, then leveraged it to an acq. gig on the CRE side.

Feb 3, 2017

A few things in no particular order:

  1. Learning how to effectively deal with (and get what you need from) a wide variety of people, of wildly varying levels of intelligence, education, motivation and integrity. We interact regularly with petty, vindictive or over-worked bureaucrats (many of whom are more intelligent than you might think and resent the fact that they aren't recognized as being so), asshole project superintendents, highly intelligent and experienced attorneys who often miss the forest for the trees, insecure architects and designers who take criticism personally, etc. The thing is, we need something from all these people. When you work in finance, Wall Street, etc., it's easier to just steamroll over anyone who gets in your way, even if it means alienating or antagonizing them, or else think that throwing some $$ at a problem will solve it. It's also more common to look down on people whom you think are not in your league intellectually or professionally. In our business, this doesn't usually work. You really do have to develop a high level of emotional intelligence, and know how to work all different types of people. Or, at least it helps to be able to do so.
  2. Learning and keeping up with the construction side of the business is a huge and almost never-ending learning curve. Unless/until you really understand it well, or have an Owner Rep on your team who does, it's easy to make big and costly mistakes.
  3. Negotiating land contracts that give you optionality and extensive time before closing is really important. Pay attention - long-term land purchase options are one of the most undervalued things in our whole business.

True story - in our 3rd year in business, we found a 2-acre site owned by (and contiguous to) a corporation that was not in the real estate business; they just wanted to get rid of the land. The GREAT thing about the land was that it didn't have the zoning needed for any sort of higher density development. This enabled us to argue to the seller that we needed 18 months to re-zone the site prior to closing, given the lukewarm attitude the city had historically had towards up-zoning. The Seller gave us 18 months in exchange for $65,000 that would go non-refundable in equal increments over the 18 months. The purchase price was $600,000.

What we knew was that the city was in the early stages of putting a higher-density, transit-oriented zoning overlay over a multi-block area that included this property. We also learned that a big box retailer was close to buying a parcel across the street. During our 18 month option period, all this stuff became public knowledge, widely known, etc. A new buyer came along and offered us $1,250,000 for the site. So we worked out a deal where we'd close at our contractual $600,000 price, and turn around and sell for the $1,250,000. Of course we didn't have $600,000 so we went to someone who did, and agreed to pay them $100,000 for short-term funding us the $600,000 (like, one week.)

So we cleared $550,000 on basically $65,000 in earnest money plus some due diligence costs, all because we had a seller who gave us a long-term option. And we took no development risk. Experienced sellers will often include anti-speculation provisions that make it hard to do this type of stuff, but in this case the Seller was not in the business.

    • 6
Feb 3, 2017

Wow, that's awesome. You're definitely operating in rarified air. Those are the types of deals that keep me up all night chasing leads.

How did you find out early about the overlay?

Feb 4, 2017

How soon did you figure out about the zoning change? How soon did the other buyer come along after you had it under contract? I imagine it was before/just as you started spending on DD costs?

Fortunate timing but agree that you need to be astute to set yourself up for opportunities such as these.

Feb 3, 2017
  1. Do you have any thoughts about the Boston market? It is crazy here right now, so not sure if it's the best time to put money into play.
  2. For someone really new to this, any recommended books to get a primer?
Feb 5, 2017

Not knowledgeable about Boston.

Books - here are my favorites, in no particular order:

High Rise - Jerry Adler
Skyscraper Dreams - Tom Schactman
The Reichmanns - Anthony Bianco
The Timeless Way of Building - Christopher Alexander
A Pattern Language - Christopher Alexander
Great Fortune - The Epic of Rockefeller Center - Daniel Okrent
Risk Game: Self Portrait of an Entrepreneur - Francis Greenburger
Art of the Deal - Donald Trump
Chinatown - an incredible movie, but really all about real estate / land deals

    • 2
Feb 3, 2017

Hey, thanks for doing this. Great thread.

What are your thoughts on being self-taught in the business?
Would you say it's reasonable for someone to be successful starting out, by being autodidactic through reading various books/texts etc. on real estate/finance, before jumping in to do their first deal, without any previous real-world experience working for a developer/investor beforehand?

Any plans to leave your business/portfolio of properties to your kids to run, down the line?

tyler blews

    • 1
Feb 3, 2017

I think this can be (and is often) done. The flip side is that a few years working for an ACTIVE developer/investor can give you good experience and a window into how successful, experienced guys think about the business. You can also do the former in conjunction with the latter.

Teach yourself how to put together an Excel model (really it's not that hard) on you own time. Read constantly. Use your time at your job to really suck in all the knowledge you can. Some of the best lessons I ever learned (you don't need to make all your money on one deal; if you're not a seller at a certain price, you're effectively a buyer at that price; etc.) came from discussions with the owner of the company I worked for.

    • 3
Feb 3, 2017

Great discussion, thanks for posting. I'm currently an associate at a mega fund in NYC doing opportunistic / heavy value add real estate acquisitions but have always wanted to get in to development and do my own deals (why I chose real estate as my career in the first place).

What are your thoughts on getting a Masters of Science in Real Estate Development (MSRED)? From my understanding MIT and Columbia are the top schools for this, and the program is 1 year. Do you know anyone who has done this and found it to be valuable? My idea would get to get the degree and upon graduation branch out on my own with a partner and start doing deals.

I have heard many competing opinions on this subject especially regarding the value proposition between a MSRED and an MBA, would like to get your thoughts.

Feb 3, 2017

I don;t anything about the Columbia program but I've heard about the MIT program, it has a good reputation I think. Looks like the curriculum is really interesting and informative, and it can all be wrapped up in one year. Probably great future networking opportunities as well. MSRED vs MBA - pros and cons to each right? MSRED is very specific and short and if you absolutely know you want to be in real estate long term that's good. MBA - extra year, but a hedge against the chance you want to get into something other than real estate at some point and need the credential.

Feb 4, 2017

Thank you for all your responses. They have been eye-opening and helpful. Currently a senior in NYC with REPE intern experience looking to invest in a 4ish unit to flip and hold for rent in the Milwaukee market (hometown, demographics trending upward). Looking to leverage my experience and military background to help with financing and GCs.

My question is in regards to sustainable construction/design. Do you use any sustainability practices in your ground up dev? If so, what kind and are you seeing good returns due to those investments?

Asking because I feel like those in the industry don't see much worth (sadly) in adding sustainability practices to their projects, especially if they are not long term holds.

Feb 5, 2017

We don't, mainly because the economic returns don't justify the added cost, in most cases.

Feb 4, 2017

This is incredible. Thank you.

What do you think about city choice? For someone starting in the business, should they move to an up and coming city to grow with the market, or focus on the cities that they already know?

Also, when expanding to other markets, do you find that it is difficult because of new regulatory or economic environments? Or is the business model something that's easily transferable to another city?

    • 1
Feb 5, 2017

That is a very good question. I think that if circumstances permit, have your cake and eat it, too. Move to a city that's up and coming, and in a few years you will know it well. We've not expanded yet outside our general market area.

Feb 4, 2017

How did you generate the equity to cover the pursuit costs on your first couple of deals? Did you have some investors who were willing to go at-risk on pursuit costs? If so, how did you compensate them? May have missed this above.

How did you have the balance sheet to guarantee the debt early on (after your first tax credit deals)? Did your tax credit deals generate enough cash?

    • 2
Feb 7, 2017

Lot's of shucking and jiving, baking the cake on the way to the party, whatever you want to call it.

Re the B/S and guarantees - we do completion guarantees but almost never recourse on repayment. We've had a few deals where that meant bringing in a partner with a much bigger balance sheet in exchange for giving away a piece of the deal. Well worth the tradeoff. There are also HUD loans, participating mortgage structures, etc., all of which we've done.

Feb 5, 2017

What advice do you have for a start up developer/family office? We've got the equity investments ready to rock but we have very little development experience outside of real estate owned by the family office's primary operating company. I'd like to JV with more experienced developers but the guys with the purse strings want us to be controlling stake equity investors. We're looking to write $1-$5 million equity checks on each deal.

Any idea on how to proceed from here? Maybe find some decent middle market fee based developers that are willing to put some of their own skin in the game with us? We probably own about $500 million in real estate so we aren't complete noobs but developing as an owner/operator/user and developing for a profit in a niche we aren't as familiar with are two different things. Btw, our corporate real estate has been nothing but a series of home runs thanks to rezoning decisions and general price appreciation that has occurred in NYC over the last five decades. I feel like that should give us some credibility. Our Patriarch seemingly has a God given gift for buying one story industrial in areas that get rezoned for trust fund hipster use decades later.

Feb 6, 2017

Would you develop in South Florida?

The reason why I ask is because I have a medical office development deal in South Florida.

Feb 6, 2017

PM sent.

Feb 5, 2017

Thanks for doing the AMA! I have a question: are a majority of your deals off market? Or do you do a lot of on markethe broker deals? Is it an even blend? If it's an on market deal how do you approach it differently than an off market deal?

Feb 7, 2017

Yes, most are off market or not widely marketed. We've had deals where it took over two years of "cultivating" the seller before we even put the property under contract. Time goes by anyway....

Feb 7, 2017

Subsix,

Thanks for your informative and insightful answers on this AMA.

  1. Could you please describe in detail your sourcing process? In my estimation, you might start with a submarket --> neighborhood --> specific site (screening for lot size and zoning criteria) and then start making cold calls? Is there anything more to it than this?
  2. What are your thoughts on the market in general being very over-priced and now not being the "right time" to buy?

Thanks so much!

Feb 7, 2017
  1. I'm almost embarrassed to say, but it's not a formal "process" at all. It's really just a lot of networking, driving around, turning over rocks, etc. And we're fortunate enough that we now have enough of a track record that brokers, etc. will often reach out to us with opportunities that aren't on the market, or haven't reached the market yet.
  2. That's a very general question and one that is more market-specific. However, at least on the development side, it matters just as much what construction lenders think about the market. You may have a great opportunity, your analysis supports the deal, etc., but if lenders are only doing 55% LTC, big recourse provisions, etc. that makes it tough.
    • 5
Feb 17, 2017

Subsix - my apologies as this is going to come off as a stupid question, but can you give a specific example of how you networked your way into a deal? I know you said that you're not much of a conference guy, and I don't imagine you adding people on linkedin and sending them emails. I also don't think people are gratuitously throwing you valuable information, especially at the beginning stages. I know one of the things you did was meet with the Planning department and that sounds like a fantastic idea. Could you please elaborate on "networking" as mentioned above? Thanks so much for your generous contribution to the forum!

    • 1
Feb 8, 2017

Probably the best thread ever on WSO. Threw you a bunch of bananas. Well done and congrats.

    • 6
Feb 8, 2017

What exact function were you in when you did your 3 years of capital markets? CMBS? Brokerage? BS lending? etc.

Feb 8, 2017

Some CMBS and some B/S lending

Mar 10, 2017

Do you ever miss the deal volume of CMBS and B/S lending versus only being able to develop 4-6 deals a year?

Feb 8, 2017

Thanks for your AMA again, this is really eye-opening

As I recall, I rmb you said that you would ve started it early if you could. What I am wondering is, what are the things or skills or backgrounds that you believe we should at least have it prepared before we go out there and start our own RE firm and make our own deals? Cuz it seems like, you and the pp who you work with was really good at eg: raising money etc.. at the really first deal.

Thanks

    • 2
Feb 8, 2017

No questions. Just sharing my gratitude for your posts. Congratulations on your success.

Feb 9, 2017

Kudos - quality thread! Maybe a bit off topic, but with a few years of general RE investing experience...how hard do you think it is to find $10-30M (sounds like a lot...but is it really? lol) of capital to get up and running with a few less-risky non-development deals? (with the hopes of doing sexier stuff later on) I feel like you really need to know what you are doing with ground-up development....but general value-add multi-family isn't rocket science.

I feel like you can make a killing initially just even doing a simple buy it, "upgrade it", sell it strategy within multi-family (20+ unit buildings) by using money from wealthy business owners (doctors, lawyers, and that average joe who happens to own 12 subway franchises types) - I find that all these people are desperate to put their money to work, rather than stuff it in some mutual fund that their financial advisor sold them on after cold calling them at the dinner table. Hanging out occasionally with my brother-in-law/sister's friends in an very upscale development/golf community (clearly a small sample size) ...many of these "folks" are so anxious to be "part of some investment deal"...they hear about big guys on wall street making bank overnight, and they feel left out despite their years of hard work and sweat. They don't know anything about investing/personal finance/wall street...but when it comes to real estate - they sort of get it.

Appreciate your thoughts.

    • 1
Feb 12, 2017

Great thread, thanks for doing this. A couple of questions to tag on here:

1) Can you elaborate on "you will learn quickly that a Guaranteed Maximum Price contract does not necessarily guarantee a maximum price for the job."?

2) I'm working in acquisitions at a large fund and have plan on pursuing my own deals down the road. Trying to map out where I'd go next. Curious your thoughts on working for a co-invest/LP fund vs. an operator - which do you think better prepares you for pursuing your own acquisitions or development deals down the road?

3) What type of deals have you/do you pursue? Solely ground-up equity? Value-add to existing assets? Any debt investing? Curious how beneficial it is to be hyper-focused on a niche vs. being flexible in where you invest.

4) How far in advance of your launching your own shop did you start speaking with potential investors to back your deals? Was your source of funding for your first couple of deals from a single deep-pocketed investor, or was it spread across a handful of guys? Also, how long did it take you from the time you launched your shop to put together your first deal?

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Feb 13, 2017
REAcquisitionsnyc:

Can you elaborate on "you will learn quickly that a Guaranteed Maximum Price contract does not necessarily guarantee a maximum price for the job."?

If things are not 100% clear (on literally everything) within the GMP, contractors claim that pricing increased due to a "change of scope". Meaning, the price that was initially guaranteed did not include said scope, so given this, the developer foots the bill.

Mar 26, 2017

This is true. I'm working on a project with a GMP contract that doesn't guarantee the maximum price due to unexpected scope of work that wasn't discovered during the pre-con phase. That's why in addition to the GMP contract, owner usually allocates typically about 5% - 6% of the total project budget as owner contingency.

Feb 12, 2017

Thanks for the post! Definitely a good read just to learn about the RE world.

Regarding your MBA - what made you feel you needed it? Did you learn anything specifically in the program that helped you down the line?

...

Feb 18, 2017

What did you do before B-school?

"You adapt, evolve, compete, or die." -Paul Tudor Jones

Feb 25, 2017

Thanks for the post. Been getting into buy & hold single family homes, this made me start to consider taking on a multi-unit. Really appreciate all the insight shared by everyone in the thread.

Feb 27, 2018

Hi subsix,

Thanks for this amazing thread. It's been hinted at before, but I'd like to ask if you think it would be realistic for a young 26yr old with some construction experience but no financial / business experience to go to grad school, hustle very hard and be able to go straight into making deals of his own and build a company or whether you suggest I gear up for a job hunt and learn the ropes under an other developer for a few years.

Also any other misc. advice for a young guy who wants to learn how to develop projects that make cities better?

Thanks again.

Feb 27, 2018

@Cadmonkey117 - Any chance you're in the SoCal Market? I have the opposite side of your skillset and looking to gain construction experience or partner with someone who does. I believe that we have similar long-term goals.

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Feb 27, 2018

I wish! SoCal has some cool stuff going on RE wise. I'm an architect in FL

Jul 31, 2018

I have less experience than you, just to be blunt. So I don't have actual experience with any of this.
But some people here have mentioned Michael Stern of JDS Development who started from the construction side and opened JDS at a fairly young age. And I'm currently reading Powerhouse Principles by Jorge Perez (co-founder of Related) and it touches on the urban planning aspect of development. The cover of the book looks like a typical sales type of book, but I think the contents inside are pretty good so far.

"Life is like a song, you are supposed to dance while the music is playing."

Jul 23, 2018

Hi by any chance that you are on BiggerPockets podcast? And what are your views of those deal by deal fund(or syndicate they called)? The way I see it they have huge closing risk of not raising enough equity capital and end up with zero financing. GP cuts usually very steep too. more than what some of industry leading RE fund charges.

Jul 25, 2018

bump

I re-read this all the time. In the current market, what would be the best way to do the first deal, especially with very little to no capital to invest?

I go back to something I heard on Shark Tank (laugh if you want). Think Cuban said it's better to own X% of something that's profitable/working vs. 100% of nothing.

I do have some family members with extra money who have 'expressed interest' in doing deals, but I always get nervous taking family money. It's just something I've always had as a personal rule in the event something goes south.

Flip SF houses? Try partner on deals with individuals or larger established companies? Throw a dart at a Loopnet deal and hope for the best? I've been scouring opportunistic opportunities but am still in no position to lay down any kind of capital solo. I also have been looking at development opportunities where permits and zoning are already in place (small SF/MF etc.) to build some capital.

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Jul 25, 2018

What are some thoughts about one-off fundraising vs programmatic fundraising? I feel like raising capital for a one-off project would struggle due to the time sensitive nature of development vs. programmatic fundraising where you get financial commitments and strategically pounce.

Jul 25, 2018

You remind me of Walker&dunlop, they grew exponentially after the crisis, gambled big time when there is no equity in the market, and somehow convinced GSE to provide them capital

Jul 30, 2018
thhddd:

You remind me of Walker&dunlop, they grew exponentially after the crisis, gambled big time when there is no equity in the market, and somehow convinced GSE to provide them capital

W&D look like a pure debt house/lender, not equity investment fund.

Jul 31, 2018
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