How is it that brokers really get paid so much? I'm at a small brokerage shop where the top 3 guys are easily in the 7 figure range in a good year, and the #1 guy can even see north of $3mm in a great year (i.e., this and last year). Yes the top guys are absolute hustlers who know the industry/ business/ players inside and out. However, the ONLY real risk they have is a complete market turnaround, but even in '08/'09 some of them still pulled in $100-200k.
Then on the principal side of the business, you have to pull deals together, source capital, sign recourse or at least carve-out guarantees, then manage the properties/ assets, while keeping investors happy, and finding more deals to feed them. While all that is going on, you are 100% at risk of a market turnaround and your net worth plummeting along with it. All that for a lousy 7/8% return (with markets like they are right now)?
Anybody else feel like this?
CRE: Principal vs Broker earnings comparison
My friend is a top originator at an elite single-family mortgage bank. This mortgage bank only hires established top producers.
I read a few years ago that the average loan officer makes $40,000 per year while the average loan officer at this mortgage bank makes in the neighborhood of $240,000 per year
The model for generating income as a
Your investors may want you to prove you got the experience by getting off-market deals.
If your promote structure means you have a certain hurdle to meet and the economy tanks, well looks like you'll be working without a paycheck for awhile and unless your properties start performing again, you'll be hit with constant distribution accruals from not meeting the hurdle
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You're falling into the survivorship bias fallacy. Most sales jobs live by the 80/20 rule--20% of the people do 80% of the business. In commercial brokerage it might be closer to 90%. And for the other 90+% they barely make enough to live off of. And even that may overstate the success rate since countless others simply leave the industry in a year or two.
The reality is that brokerage can be a great career path for those who have the "it" factor (might include very high levels of extroversion and a hard-to-define-or-teach level of charisma). Without the "it" factor you are doomed to failure. The same thing is true on the principal side but the personality "it" factor is different.
I've been an independent broker in San Diego for 15 years. Virginia Tech is right in that very few people truly make a living doing this. When I had agents at my shop I outproduced all of them combined.
As far as effort versus returns, yes there is more effort on the principle side for relatively small'ish returns. The principle side model or business plan is to achieve smooth and steady income, with, while you may see it differently, much lower risk. What's riskier, chasing deals as a broker or being a large Multifamily syndicator with 4000 units under management making fees. Lots of work to get those units under management but I'm pretty sure those rents paid with calculated certainty in 2009 and 2010.
So, yes, the OP is correct that there CAN be times when money is really slow on the principal side as well.
I never really thought of the principal side as more of a smooth and steady income stream, but that definitely makes sense so I get it. I've only been at my current job for a little over a year (right out of college), so in my head I have it that brokers have a reasonable shot at making a few hundred grand each year, after they get their careers going. But again, that is definitely survivorship bias because I'm at one of the top shops in my city and most of the brokers are very well established.
BUT taking risk out of the equation, how can it be more "profitable" to make a commission off many properties/assets than to actually own a few properties/assets? Its the same with stockbrokers back in the day - you could make way more by making a commission from a high volume from clients than you can actually investing in the stocks yourself.
I'm trying to make the long-term decision about being a broker and investing on the side or getting into the principal side full time and opening up my own shop someday.
My friend is a top originator at an elite single-family mortgage bank. This mortgage bank only hires established top producers. To a person being mentored by an employee of this mortgage bank it appears as though loan origination is a slam-dunk, risk-free career path; however, I believe I read a few years ago that the average loan officer makes $40,000 per year while the average loan officer at this mortgage bank makes in the neighborhood of $240,000/year.
To your point about which shop you're at, if it's a top shop then it means it largely hires top producers, so to you it looks like almost everyone is killing it in the business when the reality is that almost everyone is failing (except your co-workers because they were selected for their prior success).
You can do both. Be a broker that puts your commissions into deals. Or be an Acq Mgr that earns a bonus/equity on deals you Acquire.
I'm pursuing Acq roles with this comp structure now. The income is pretty good but 30 years from now I could be a very small LP on 100 buildings across one or many asset classes. While I'm interviewing waiting for that ideal Acq role I'm still focusing on my brokerage. I'm working on a few larger development deals right now and if they close 80% of my commission is put back into to the deal.
The goal is to live modestly, make big commissions and put that money into low risk MF type deals. All the guys in SD I know make money this way. But you have to live modestly.
Thanks for the info guys.
PacNumber I'm assuming you worked for a brokerage for at least a few years before going independent. What have you found to be the pros and cons about going independent?
All really good comments in here.
No I never worked for any type of recognized brokerage. Right out of high school a large consumer finance company hired me in 1995...along the lines of TransAmerica, Household finance, etc. After 6mo they transferred me to San Diego when I was 19. Within a few months I quit and entered the mortgage business. Hustled residential deals. That was not fun in 1996...
Around 2000 I studied for my brokers license here in CA. Got it in 2001. I had done a few commercial loans and sold a few very small 5+ unit buildings by that time. A mentor that was a regional VP at a well recognized commercial bank needed a broker to refer his loan turn downs to. Once a client trusts you with say a $2mil refi, then they trust you to sell that building years later too. I've turned many loan clients in listings.
I do deals all the time with M&M and CB. My struggle with going there is the commission split and team structure. Half to the house then some sort of tiered commission structure to pay the team. There is one team and one team only that I would join but neither of us are rushing into it. Just cause you go to CB doesnt mean you suddenly do $40mil deals. The trenches of brokerage at least in San Diego is $2mil to $10mil...maybe today more like $4mil to $12mil. An indi broker can totally compete in that market.
For those saying the principal side makes a ton of money and is stable are completely wrong. All of this depends on multiple things such as AUM, promote structure, and deal flow.
You have to hustle in both brokerage and principal the same amount. You think people build up $500 million+ in AUM in their sleep? Also deal flow isn't as easy as going to the HFF web page and signing a couple CAs and getting access to the data rooms. Your investors may want you to prove you got the experience by getting off-market deals. If your promote structure means you have a certain hurdle to meet and the economy tanks, well looks like you'll be working without a paycheck for awhile and unless your properties start performing again, you'll be hit with constant distribution accruals from not meeting the hurdle.
If you don't see the obvious risks and pitfalls of being on commission only then perhaps you should be a broker after all. I would warn against comparing the elite of one group to the elite of another. Much more realistic to compare the average broker to the average principal.
Your risk is dependent on so many things. Think about it this way - if the market crashes, and no deals are being done, the principal is still collecting rent checks while the broker is frantically cold calling people for the first time in a decades like he's new to the business.
So much of this is skill-based and personality-based too. The idea that you merely select which to succeed in isn't exactly accurate. In a way, it selects you. If being a broker is the obvious choice to you, go for it.It might just be who you know. My anecdotal evidence points in the opposite direction. I know a few rich brokers, but everyone I know who is WEALTHY in this industry is a developer or a principal. The brokers who get to that top echelon also develop or own on the side too.
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