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Commercial Real Estate Brokerage: Making Millions Without the Grind of Investment Banking

CEO Khai Intela
So, let's dive into your future career goals: You want to make a lot of money... And ideally own a building or three with your name on them. But you'd like to avoid the killer...

Commercial Real Estate Brokerage 101 So, let's dive into your future career goals:

  • You want to make a lot of money...
  • And ideally own a building or three with your name on them.
  • But you'd like to avoid the killer hours of investment banking.

If you want to achieve all of that without sacrificing your sanity, consider commercial real estate brokerage (also known as CRE Brokerage). Not only can you get started without attending a top school, but it also offers the potential for great wealth and the freedom to enjoy life on your own terms.

Today, we have an interview with a young broker who is making his mark in the industry and can provide valuable insights on how you can achieve the same.

The Origins of a Commercial Real Estate Mogul

Q: So what drove you into the commercial real estate world in the first place? Fantasies of multiple skyscrapers with your name on the front?

A: Hah! I think that's a ways away... but to answer your question, working with real estate was always more interesting to me than stocks and bonds. The tangibility of the assets is what drew me to the field. It helped me understand the industry and the processes behind it.

When I was younger, I had friends already in the industry. They were a few years older, so I had a chance to see if they enjoyed their career path and made good money. Turns out, they were doing both.

Unlike some other industries, all my friends in real estate genuinely enjoyed what they did.

Q: So how did you break into Commercial Real Estate Brokerage?

A: I started in brokerage right after undergrad. I first did office leases, and then I felt the urge to transition to the buy-side. I had been in brokerage for a few years, and faced a decision: continue down the brokerage path or go back to business school for a buy-side transition.

I chose business school and eventually found a job with a real estate development firm. However, after some time there, I realized that owning property for myself was my true goal. That's when I saw brokerage as the best way to generate enough cash flow to achieve that.

After months of networking, I landed a job at a multi-family brokerage as an apprentice to established brokers.

Q: Great. And just to clarify, what exactly do you do as a CRE broker?

A: It's similar to what investment bankers do, but for properties instead of companies.

We connect buyers and sellers of investment-grade properties and earn commissions for closing deals. Each property is unique and presents different values to potential investors, making it trickier than it sounds to find the right buyer for each sale.

To succeed in this industry, you need connections, resources, and excellent networking skills. You must also be adept at real estate market analysis to determine the best regions, property types, and buyers and sellers to focus on.

Degrees and Pedigrees for Commercial Real Estate Brokerage

Q: In some industries, like investment banking, having the right pedigree (school, connections, etc.) helps tremendously in breaking in. Did you find that this was the case in commercial real estate?

A: Yes and no. The specific school you attended doesn't really matter, especially in brokerage. No one cares about your alma mater as long as they believe you can get the deal done.

However, connections are everything in CRE brokerage. You can't close big property deals without a wide circle of potential buyers, sellers, and financiers. Attending a top school exposes you to more people who could one day become clients, investors, or partners.

As a broker, you're constantly chasing new deals. It's like networking to break into investment banking, but instead of a job offer, you're gunning for a deal.

Q: Is there a certain "path" that most real estate bigwigs take to get to the top? It seems like a lot of the head honchos are "old money." How does the "new money" float to the top?

A: There isn't one specific path to real estate success, but there are common themes. Most people who achieve great success in real estate have the end goal of owning income properties themselves.

Successful real estate investors come from all walks of life. The key is to find something you can initially succeed in to generate enough cash flow to own properties yourself. Starting with brokerage makes sense since it's lucrative and allows you to be involved with the assets firsthand. Many successful brokers also own investment real estate on the side and may transition to full-time investors if they do well enough.

For undergrads interested in CRE, analyst and support positions are the best way to break into the industry. These positions provide opportunities to learn about a wide range of real estate transactions.

"Making It" in Commercial Real Estate Brokerage... and Getting Paid for It

Q: Starting out as a broker is an uphill battle, and many burn out before closing their first deal. Why is this?

A: To answer your first question, it's mainly that it's very easy to get discouraged. There's a ton of uncertainty about when that first paycheck will come in as a new broker.

Similar to networking in finance, you exert a ton of effort and time upfront, with no guaranteed outcome. As that initial outcome takes months to materialize, some people simply give up.

This uncertainty, along with the risk of going broke, leads many potential brokers to exit the industry before even getting a chance to succeed.

Another reason for burnout is the hiring practices of some firms. There are companies that engage in shotgun recruiting, hoping to attract as many candidates as possible and seeing who sinks or swims. It's like a scene from Glengarry Glen Ross or Boiler Room, although arguably more ethical.

Smaller firms, on the other hand, offer a more personalized approach. As a younger broker, it's crucial to have a leader to look up to while building your business.

Q: So how much can an established real estate broker expect to get paid, and what does the commission structure look like?

A: Commissions are on a sliding scale. Initially, when a deal is closed, the broker receives a commission based on the transaction price. For smaller deals, this percentage is usually around 5% and decreases as the deal size increases.

After receiving payment, the broker owes the brokerage firm a cut. This percentage also varies but starts at around 50% for new brokers. As you bring in more deals and gain leverage, you can take a larger portion of the commission home.

Experienced brokers in investment sales should make at least $250K per year. Rock star brokers can make millions, depending on their deal volume and average deal size. However, brokers making hundreds of millions or billions a year usually transition to the investment side and buy and sell property for themselves.

Deal Making in Commercial Real Estate

Q: It seems like the average pay in commercial real estate brokerage is lower than that of mid-level professionals in investment banking careers, but the "ceiling" is similar. How do you analyze real estate deals to ensure the numbers work?

A: Investors typically look at three factors when analyzing a property:

  1. Current income: They examine how much income the building generates and the associated expenses, which provides the Net Operating Income (NOI).
  2. Income sustainability: They assess whether the property can maintain its current income and avoid factors that could negatively impact it.
  3. Future projections: Investors project how the building could increase income or reduce expenses in the future.

Investors focus on either current income or projected income, depending on the type of deal. For example, stabilized deals primarily consider current rents, while bank-owned REOs focus on projected income due to potential vacancies and property condition.

Comparable sale analysis is crucial in valuing properties. It's important to remember that the value of any investment, whether it's real estate or stocks, is ultimately determined by what someone is willing to pay for it.

Modeling, Valuation, and Due Diligence in Commercial Real Estate Brokerage

Q: How does the real estate financial modeling process differ, and how detailed does it get?

A: Valuing real estate doesn't differ significantly from valuing other investments. Whether it's real estate, stocks, or bonds, the primary focus is on cash flows and returns. In commercial real estate, the property generates the income for the return.

Calculating cash flow for commercial real estate involves considering rent as the gross income and deducting expenses like maintenance and management fees to determine the Net Operating Income (NOI). This number represents the return. You can model different scenarios using various financing options to calculate cash-on-cash returns and perform discounted cash flow analyses.

While numbers support valuation, comparable sale analysis is king. The value of a property is ultimately determined by what someone is willing to pay for it. Cap Rates, also known as Yields, are widely used in property valuation as they indicate the return on investment.

However, Cap Rates have limitations. It's important to analyze each building and market thoroughly because every property has unique nuances that affect its value. Relying solely on Cap Rates can lead to undervaluing or overvaluing a building.

Q: Due diligence plays a significant role in property deals. How does it differ in the real estate setting compared to other industries?

A: Due diligence ensures that a deal isn't riddled with issues. Sellers want to maximize their property's price, and brokers aim to close deals. Buyers must protect themselves to avoid getting a raw deal.

Due diligence involves analyzing the property in both the micro and macro senses. In the micro sense, you examine the building itself, ensuring projected rent prices align with market trends and tenants' financial stability. Macro analysis involves looking at comparable sales and assessing the submarket's future economic growth.

For example, buying a building in New York or San Francisco carries less risk than purchasing the same building in Detroit, despite the lower price. Thoroughly analyzing each property and market is essential to determine its true value.

Final Thoughts

Becoming a competitive CRE broker is no easy task. It can be even more challenging than investment banking due to the industry's ease of entry and high competition. However, those who succeed can find great wealth and a rewarding career in an intriguing field.

If you're interested in pursuing a career as a CRE broker, take the time to network, build connections, and learn from experienced brokers. And remember, it's not just about the money; it's about finding enjoyment in what you do and maintaining a healthy work-life balance.

If you found this article helpful, check out "How to Get into Commercial Real Estate: Side Doors, Front Doors, Steppingstones, and Career Paths" for more valuable insights.