Why Not Start Your Own Shop?

Texas_Forever's picture
Rank: Baboon | 142

Those of you who want to start your own Real Estate Development shop.. what are you waiting for? What's stopping you from starting tomorrow? Is it a lack of financial security? Feel like you need more experience at your current job to feel comfortable going out on your own? Curious to hear what's keeping ambitious people from going out on there own.

Comments (64)

Jan 31, 2020

1) Need an impressive track record or access to capital (equity and debt), it's hard to raise money and promote your investors if you just start off
2) Need strong existing relationships and network in the community (brokers, lenders,
3) Very hard to manage the non deal related tasks while trying to bring in deals
4) This is a big one...a lot of people underestimate how hard it is to be a developer and the risks that comes with it. You need to personally guanratee and sign a reocurse loan which is very scary. Building shiny things don't guarantee returns, it's different if it's on your firm's balance sheet and bigger companies usually have less leverage..therefore smaller returns
5) To add on to the point above, there are so many moving parts and risks, all it takes it's one thing to not go right and you'll lose everything you have/net worth

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Feb 1, 2020

Good summary. Additionally, by the time a lot of people have built the track record required to secure capital at reasonable rates, they've probably also built a family and had kids that may completely or partially depend on them to bring home steady income. A lot more to lose.

Feb 1, 2020

If point 5 is true and all it takes to lose your shirt is one variable going wrong, then why even become a developer at all? Sounds like a losing battle if it's truly that risky.

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Feb 1, 2020

because people wants to hit homeruns/do their own things. you don't hear a lot about the people who never made it, only the people who made it.

also, pride. people are infatuated with the idea of "i built this", but at the end of the day numbers speak volume.

Feb 3, 2020
Texas_Forever:

If point 5 is true and all it takes to lose your shirt is one variable going wrong, then why even become a developer at all? Sounds like a losing battle if it's truly that risky.

Because you can also make a ton of money? I'm not sure how this is a difficult concept to grasp.

Real estate is a high risk business, but the potential rewards are enormous. Yes, guaranteeing $65mm construction loan is terrifying. But you're also making a 5% fee on that $100mm project. That's a lot of money, and that's before you even know if your underwriting assumptions will be borne out.

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Feb 3, 2020
REPE_Guy123:

1) Need an impressive track record or access to capital (equity and debt), it's hard to raise money and promote your investors if you just start off

This is only somewhat true. In a hot market, if you have a good deal, you can find money. It's a hustle but it's possible. Or Co-GP with an established firm. Lots of options if you've got a deal that pencils under contract.

2) Need strong existing relationships and network in the community (brokers, lenders,

Have to disagree on this. No one needs relationships with brokers, they're parasites and there isn't a ton of value there. To the extent you need to know that Broker A is absolutely, 100% lying to you and Broker B is only hiding the truth most of the time, that's important. But if you're assuming that every word out of a broker's mouth is a lie, you won't be burned.

Networking with lenders is nice but not necessary. Any pre-existing relationship you built will be set aside when you hang your own shingle; risk and credit committees won't care that you delivered on a dozen projects for them while you were at Related, they'll care that REPE_Guy Developer LLC has no track record and no history and lend accordingly.

3) Very hard to manage the non deal related tasks while trying to bring in deals

This is very true. Which is why it behooves most potential developers to have a site tied up, so they can focus on that and not on hustling for all the other parts of setting up a business. Have an income stream to hire help, too.

I think most people I've spoken to who are considering going on their own, or who have in the recent past, confuse the relative difficulties. A ton of folks still have the mindset that networking is of all consuming importance, that those local relationships are make or break. And it isn't to say that those bonds aren't important, but I think people who focus on that have the wrong mindset. If you are good at your job and (importantly) have a project your working on, those people will come to you.

By contrast, folks seem WAY to confident about their ability to run a business as well as a development deal. Just the accounting and legal and office management shit is incredibly time consuming and requires a bunch of specialized skill sets that your average developer just doesn't have

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Feb 3, 2020

good points. thoughts on the last two?

Feb 5, 2020
Ozymandia:

No one needs relationships with brokers, they're parasites and there isn't a ton of value there. To the extent you need to know that Broker A is absolutely, 100% lying to you and Broker B is only hiding the truth most of the time, that's important. But if you're assuming that every word out of a broker's mouth is a lie, you won't be burned.

Ozy you add so much to this site, but I gotta know...who hurt you? Was there one specific time a broker so misguided you that you were tangled up in litigation for years? Not asking sarcastically, genuinely curious. You're obviously very experienced so I'd imagine you have some good stories to tell.

Would make us all better brokers if you could elucidate the grievances beyond "they're not necessary to the ecosystem."

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Feb 1, 2020

Doing this is very clearly a "easier said than done". While it can lead to getting really rich, it can also lead to failure (but that is obvious right?). In reality, starting your own shop does mean more "freedom" but it really has a lot more obligations. Travel expenses are your own expenses, and can you even take vacations?

I think many people, especially mid-career and senior, how have been successful in the corporate real estate space stay there because it really is a better risk-return trade off. This is why so many stories of entrepreneurs begin with getting fired or laid off; the choice (at least with timing) wasn't fully theirs.

To anyone really considering this, talk to a lot people who are senior on both sides, each will say the grass looks greener a lot of the time.

Feb 2, 2020

agree. the older you are, generally the more risk adverse you become. the thought of losing everything you've built is scary. sometimes getting laid off or fired could be a good thing.

it's also a 24/7 job. you're not going to get a lot of sleep if your GC is behind or zoning approval don't move in time, etc.

Feb 2, 2020

If you're going to do it, do it when you're young and can afford to fuck up hard.

Feb 3, 2020
m_1:

If you're going to do it, do it when you're young and can afford to fuck up hard.

This isn't silicon valley.

You should probably not ruin your reputation and credit by fucking up at development when you are young.

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Feb 3, 2020

I think "Afford" means not having as many responsibilities like a wife and kids and being able to take the risk.

Feb 3, 2020

A couple things.

More experience obviously.
A bit more money.
And a dip in the economy to where some people need to sell their land/homes, and suddenly contractors are begging for work.

Funniest
Feb 3, 2020

Because I don't have 18 months of my salary plus the minimal $250k I will need for predevelopment expenses lying around in cash.

EDIT: This should go without saying but my lack of cash will make my guaranty capacity minimal as well.

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Feb 3, 2020
Texas_Forever:

Those of you who want to start your own Real Estate Development shop.. what are you waiting for? What's stopping you from starting tomorrow? Is it a lack of financial security? Feel like you need more experience at your current job to feel comfortable going out on your own? Curious to hear what's keeping ambitious people from going out on there own.

Are you fully aware of what it takes to start your own development business? This seems like a very weird question to ask.

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Feb 3, 2020

Here's what I'm aware of; a lot of guys on this site want to eventually do their own deals. My question is simply "What is the obstacle keeping you from doing it right now?". If that's weird to you, idk what to tell you.

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Feb 3, 2020

I'm not starting my own shop because the crash is imminent.

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Feb 3, 2020

boo

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Feb 3, 2020

Everyone wants to be an owner until they find themselves sinking money month after month in a seeming money pit. That said you go through stages of denial, action, etc.

If you have the mindset that you are making rich people richer, then it all falls into place. Eureka!

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Feb 4, 2020

This post is Dallas TX AF

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Most Helpful
Feb 4, 2020

Started a new small shop last year and can provide some insight on the biggest challenges looking backwards in time:

  1. Access to some pursuit cost capital. It's very hard to find a partner who is willing to fund 100% of predevelopment costs; they want you have some skin in the game. Due diligence costs on a deal typically run $30-50K plus any earnest money deposits forwarded to tie up the deal. In our experience, each individual deal requires $80-$200K of dry powder to get things moving.
  2. Additional capital for GA. Development fees are frequently deferred to later stages of the deal. Generally speaking, a new developer needs additional dry capital to cover salary/office/insurance expenses during the fee-less ramp up period.
  3. Disagree with recourse comment, it's not a huge deal. It just requires bringing on a partner who is also willing to sign as a guarantor with more liquidity in exchange for a slice of promote. This is pretty normal.
  4. Deal flow. If you are not a good lead generator you are toast. The fee income that is the bread and butter of a developer salary (and the promote that is the end game) are completely dependent on the pipeline you generate. This is not only your ability to find deals, but also to find partners willing to jump into bed with you; sellers who understand what you are trying to accomplish and think you can execute.
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Feb 4, 2020
Ricky Rosay:

3. Disagree with recourse comment, it's not a huge deal. It just requires bringing on a partner who is also willing to sign as a guarantor with more liquidity in exchange for a slice of promote. This is pretty normal.

Depends on the slice of the promote. If you're giving up a third of your upside right off the bat... well, that's obviously a big deal. Still have overhead risk and all that, too.

Feb 5, 2020

This is great, thank you. Could you elaborate a bit on your process for sourcing deals? Any advice on sourcing deals?

Feb 6, 2020

I'll start a thread to answer some of these, sounds like there is interest. We source through a combination of local broker relationships and off-market through industry relationships. There are two of us at our shop; my partner spends 80%+ of his time talking to folks in the market and digging up leads with 20% on execution work...I quarterback execution in an 80/20 opposite split. You really need a guy very dialed in on the happenings in the local market to dig up off-market leads. Advice on sourcing:

  1. Meet sellers in person. Face to face relationships create a sense of trust. This is especially important in this era.
  2. Have a clear execution strategy (or a good BS story) in mind when you are trying to put something under contract. Sellers are trying to figure out if you can close. If you tell you them you want to build specific product type Y, are going to kick off due diligence reports X/Y/Z and engage specific capital partner W, that sounds much better than not sharing or trying to play coy. A lot of buyers make the mistake of trying to be secretive, it creates distrust.
  3. Meet in person on re-trades. Sellers are generally pretty reasonable if you can look them in the eye and explain why you need that extension, why you need to chop off $500K on the price, etc.
  4. There are certain flex points you can use to win a deal. You might put a first tranche deposit at risk after 30 or 60 days; you might shorten your due diligence period; you might offer to introduce them to your capital partner to get them more comfortable with your closing ability.
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Feb 6, 2020

Thank you for the detailed write up. I think advice about sourcing deals is helpful to a lot of people on this forum, and I definitely find it helpful.

Feb 6, 2020

Great answers, I work as a Development Manager for a LP turned developer and can confirm these would make an operator stand out in today's environment.

Do you mind going deeper into your investment strategy/thesis? Saw your post looking for an analyst and it appears you pursue multiple property types, as a small shop can you walk us through your line of thinking to not limit yourself to a specific property type recognizing that you probably hold your region (LA) and investment size constant?

Appreciate the insight!

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Feb 7, 2020

This is great. Looking forward to the "establishing @Ricky Rosay Inc" megathread.

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Feb 7, 2020

Timing isnt great given that this is the longest expansion in US history, there is way to much liquidity in the space and looking to be in the space, which has led to investment fundamentals looking pretty poor across most property types. Acquisition prices are sky high. Construction and land cost are through the roof. We need a correction. You make your money when there is blood in the water, not buying wanna be value-add deals.

Feb 7, 2020

Because my name isn't Chad Thaddington, I don't have an irrevocable trust in my name titled "Daddy's Money" to raise capital from and RE valuations are currently bananas^ / I don't want to start my own shop just to stop my own shop.

^ read "inflated as fuck"

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Feb 11, 2020

Why not take a different approach and act as an independent sponsor and look for value add opportunities to hold instead of wild developments?

Basically act as an acquisitions agent and manage the properties. As your fees increase and you get more equity in the deals along the way, you can slowly tip toe down the risk curve of development.

Very curious to hear this forums thoughts on this approach.

@Ozymandia

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Feb 11, 2020

Because I'm a developer, not a value add person.

I'm sure I could figure it out, but I lack knowledge of the nuances, and would be giving up what I do, and want to do, with my career.

Edit: I'm not sure why someone would give me monkey shit for this either (unless it's just one of the trolls who follows me around because they don't like my politics). Knowing what you know, what value you bring, and perhaps most importantly, what you don't know, is incredibly important. It makes zero sense for me to spend my life on ground up development, only to open my own shop doing value add rehabs.

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Feb 11, 2020
Venturepapi:

Basically act as an acquisitions agent and manage the properties. As your fees increase and you get more equity in the deals along the way, you can slowly tip toe down the risk curve of development.

With all respect to @CRE , I actually agree with this approach. It's a low-risk way to show proof of concept. You have a reputation for being good at X. But no balance sheet and no way to put hard money down. Approach someone and tell them you'll do it for an asset management fee and maybe a small success fee. If you can execute once, you then have a lot of leverage and maybe additional cash.

That being said I wouldn't want to manage properties. Generate your value upfront and get out, if you take this approach and you get bogged down in the morass of property management, of fighting about what constitutes success, that's trouble. You want to execute a couple quick successes and move on to investing in deals yourself.

How else does one get capital, especially young? Sure, if you've been running a fund for 20 years you can leverage that relationship, but if you're young and hungry no one is going to trust you. This avenue allows me to keep the lights on, pay my rent, and establish and independent reputation without having to put up hard money, or guarantees, or even source deals myself.

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Feb 24, 2020

I started the following way:
1. Find a rich dude with a big ego. (I found him by writing letters)
2. Convince him that development is a good way to flex his ego and make more money
3. Negotiate fair terms to pay you for your time based on performance
4. Use this deal to create your track record
5. Rinse and repeat (this is the stage I'm in now)

I officially formed a development company with a new partner and it is based on this track record. I wouldn't have it any other way. Just do it. What's the worst that could happen? You have to go back to your j.o.b.?? Or maybe, like me, the stress will make your hair fall out? Worth it. You only live once.

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Feb 24, 2020
Hulk:

1. Find a rich dude with a big ego. (I found him by writing letters)
2. Convince him that development is a good way to flex his ego and make more money

This is hilarious. I'd love to hear the story.

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Feb 24, 2020
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