Real Estate Development vs. Private Equity (PERE/ REPE)?
Hi,
Is Development or private equity (repe/ pere) a better Carrer path in your opinion? And why? What is more prestigeous and where do you get a better salary?
Best regards
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better career path has nothing to do with prestige..
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I would say that the extent that people care about "prestige" depends on where they fall on the spectrum of real estate finance. Development shops will not care about prestige, only experience. REPE firms will care more about prestige, but I can tell you that real estate is a massive industry and is highly fragmented. Most people have never heard of my company and have no clue what they do, and we are a decent sized firm. Focus on jobs that provide you with a lot of experience early in your career. Working for a small development shop where you can learn how to put together your own deals after 6-7 years is far more impactful than being a development associate at Hines, despite the fact that the latter might have more "prestige". The parts of WSO that have a finance bent care about prestige, but in real estate I would remove that word from your vocabulary. Not too many people really care.
Neither is better, do what you want to do with your life. They're similar but very different careers. Nobody is going to be able to tell you what's a better career path for you - are you more interested in deal making and generating returns, or in the process of creating something from scratch and shaping the communities you work in?
Regardless, as a starting point it doesn't really matter, you should be able to move from one to the other in the early years of your career if you figure out your starting point isn't for you.
x
I agree with the posts here so far. These are two totally different careers. It would be akin to asking if civil engineering or construction management is better. If you are looking for prestige, PE is where you should be as many (but certainly not all) thoroughly enjoy their coiffed hair and their financed watch and German car. In all seriousness, many of the PE guys do come from top-tier schools and many have MBAs (again, certainly not all).
With PE, you are pooling capital and building strategies for funds (looking for developers to partner with on the equity side). In my experience (on the dev side), the PE guys have virtually no exposure to development and have only a superficial knowledge of the development process (because it's not really required to do their job effectively). On the other hand, many really good developers do not have the resources or contacts to draw the kind of equity they need for their deal, especially in todays economic climate where there is a lot of money on the sidelines and projects are getting bigger and bigger.
I am not sure what the payscale is like at PE shop (I would imagine it is pretty good), or how long it takes to start making real coin, but you can make a killing working for a good developer. Developers are the ones who actually create value from what they create (space) and can hit one great deal and be set. PE make their money based on performance of course, but mostly as a function of the size of their fund.
So you just have to ask yourself what kind of work do you want to do? If you enjoy 'banking' and building spreadsheets, go the PE route. If you like building stuff and enjoy all the complexities of making a deal (sourcing the right dirt, understating local markets, chasing the right kind of tenants, building relationships with brokers and banks and equity partners, haggling with contractors, watching weather forecasts, tracking the cost of commodities, etc.) then be a developer.
The only way you can do a deal in the first place is to already have money to invest.
Here’s an example. Say you want to build a $100 million project. You’ll need to finance at least $5 million of pursuit costs just to get to the closing. And typically that comes from the developer.
Assume you finance the deal with $30 million of equity, of which you put in 10%. So you get some money back at the closing but you still have $3 million invested. The 3% development fee should allow you to recoup that by the end of construction.
Also assume you have an 8% preferred return and a 20% promote. If you’re able to pay out all of the preferred return within 24 months that’ll be about $4.5 million. The developer’s preferred return will be $500k.
Upon completion the building will be worth roughly $120 million. So of the value the project generated, there’s $15 million leftover to split and with a 20% promote, you get your own $1.5 million share + 20% of $13.5 million, which is $2.7 million.
To summarize, the developer needed a minimum of $5 million cash to do this deal. In return, they received a $3 million development fee, a $500k preferred return, a $1.5 million return on their equity contribution, and a $2.7 million promote, for a total of $7.7 million. This deal would take about 4 years start to finish if it didn’t hit any significant obstacles.
It’s a good return, but does it allow you to retire? Personally, if I risked $5 million and ended up with $10 million 4 years later after taxes, I definitely wouldn’t.
Besides that, pulling off one of these deals requires millions of dollars upfront. It takes a long time to build up millions of dollars of cash that you can spend on pursuit costs.
You can do several such deals, or just bigger ones - maybe, depending on property type - and build up a sizable net worth after 10-20 years. But just getting to the point where you’re able to finance and run the deal as the GP is very difficult.
In private equity, you can make millions of dollars a year as a partner/MD by rising through the ranks of an already-established firm. Getting significant carry in development almost requires you to start your own shop, unfortunately. The money isn’t spread as far and wide as it is in PE. Development created billionaires, certainly, but also many lower level people, even as senior in rank as development managers, who are just middle class. So I’d say with 99% certainty that the average person in REPE makes and is worth significantly more than the average person working in development.
How are you spending $5M on Pursuit Costs?!
A 10% promote on a deal that is underwritten to a mid-20s IRR are some piss-poor economics.
This is where Co-GPs and personal financing come into play
This is just awful. You're using a $100mm deal as if that's the norm, or the starting point for a new developer. Being a partner or an MD at a REPE also takes years or the ability to raise hundreds of millions of dollars, which is harder to do than an equivalently large development project. Maybe do all this math with a $15mm development, and all of a sudden everything looks a helluva lot more manageable.
At the end of the day, if you want to be in a finance oriented role like REPE, you're trading upside for certainty of income. There is no shame in that; the entirety of Wall Street's attraction is based on that exact trade-off. If you want to go into development, you're probably doing so because there is an easier path to owning your work product. It's that simple. Developers get paid to take risk. That isn't for everyone - some people want the certainty of income that comes with working for someone else. Others are willing to bet on being able to deliver returns. One isn't better than the other, but the only way to make fuck you money is to take risk. Very few people amass generational wealth working for someone else; that only makes sense, since if you're an employee, by definition a large part of the value you produce is being taken by ownership.
Not sure that analogy hit.. construction is a sub speciality of Civ Eng.
Not necessarily. I studied mechanical engineering undergrad and then worked in construction. My degree was purely MechE, it was thermodynamics and physics and partial differential equations. My colleagues went to a very different program and got "architectural engineering" degrees with a specialty in mechanical engineering that were basically construction management where they taught plumbing and HVAC system. Civil engineering is similar, you can learn the abstract stuff, element analysis, statics, etc. and become a civil engineer, or you can learn construction and learn how to pour concrete.
No, it is absolutely not.
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