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Wharton Emeritus Professor Peter Linneman explains the timing of real estate company formation.
BRUCE KIRSCH: How does a real estate professional know when they’re, quote, unquote, “ready” to go off on their own, to leave the mother ship and start their own company?
PETER LINNEMAN: It’s funny. If you say when do most of the people really go off, it’s at the two points in the cycle. It’s at the point in the cycle when the market is really giddy, and the point in the cycle when times are really tough. People go out on their own way disproportionately when the market’s really giddy because raising money is easier. And since real estate is a capital-intensive business, the ability to attract capital tends to be most when markets are really giddy and you say, OK, I’ve had enough of this. I want to do it on my own. And by the way, it looks really easy to make money.
And so off you go on your own, and then about six months later, the market crashes and you go, oh, first of all, it wasn’t that easy. Secondly, raising money is no longer easy, and I’m still in the early phases of it. And you’re facing a stark situation at that point.
At the bottom of the cycle, in an odd way, it’s easier. Namely, a lot of people lose their positions as the industry goes through a contraction. And some of those people– what is it– necessity is the mother of invention. Some of those people have been wondering, should I start my own firm? When I lose my job, I don’t have a lot to lose. Yes, raising money is hard, but I have an opportunity. And if I can convince two friends and a lender, I can be in business and see where I stand. And it’s better than sitting at home doing nothing. And if when things pick up, I want to go back to work for somebody, I can. And if I like this and have made it go, I’ll stay with it.
So in an odd way, it’s a high and the low of the market when people generally go out on their own. They either jump or are nudged in a funny way. If you said from a soul search point of view, you’ve got to have a more compelling reason than, I just don’t want to work for people. It’s got to be a reason of, I don’t want to work for people and I can believe that I can do it better, cheaper, or faster. And here’s why, and here’s how, and by the way, here’s even an opportunity where I can get it started. Usually if you have an opportunity, it just makes that job easier to make the move.
BRUCE KIRSCH: I also think, whether it’s out of necessity or by choice, it requires an acceptance of this notion of deferring gratification. OK, whatever your lifestyle was at the company, you’re probably not going to be able to live that same lifestyle if you really want to put your money into this company. And that requires a certain level of maturity and a certain level of willpower and the willingness to make that investment as well.
PETER LINNEMAN: You’re 100% right in this notion that you get rich by going out on your own and being an entrepreneur. You get much richer working for a big company, using their capital, using their brand, using their access, using their business card. Generally, you can make far more money, certainly in the first three to five years of your business, then as an entrepreneur. There are obviously exceptions, but the exceptions make Fortune magazine. The rule is you grind it out and then, for five, seven, 10 years, maybe all your life, you would have made more working for somebody.
But hopefully, you’re enjoying what you’re doing. You find it rewarding. You find it challenging. And even if you’re not making the absolute maximum money, it’s what you want to do. If you happen to make more money, that’s nice too. Highly successful entrepreneurs are visible. Normal, struggling entrepreneurs are a lot less visible, but are much more typical. It’s a get rich slow business being an entrepreneur. Yes, there are the ones who get rich fast, but getting rich slow is what it’s all about. You show me most successful businesses, and I’ll show you an overnight success that took seven to 10 years. And anybody who gets really rich as an entrepreneur basically deserves it. Because nobody knows what they went through in those early years.