I have been in commercial real estate since 1980. That year I went to work as a financial analyst for The Grupe Company, a real estate development company located out of Stockton, California. Over the years, I’ve gotten to know many CRE professionals – real estate brokers, lenders and mortgage brokers, title people, appraisers, etc. I’ve observed those who have prospered and unfortunately I’ve seen those who have failed. Those who truly succeed financially in our business do so because they do things a certain way that over time gives them the best opportunity for a financially rewarding career.
My Definition of Financial Success
Before I go on, let me give you my definition of financial success. Those who succeed financially are free from financial worries. They have multiple sources of passive income and need not continue working in order to maintain their current lifestyle. They continue working because they enjoy what they do, not because they have to work to pay the bills.
Salary versus Commission
I will get my bias stated right up front. Except for a very few at the very top of the organizational chart, those who exclusively work for a salary have almost no chance to financially succeed in commercial real estate. Worse yet, when an economic downturn comes (think the Great Recession) salaried employees work at the whim of their employers resulting in many of them being laid off. There is no such thing as job security in commercial real estate. Bottom line: There is almost no chance for someone who draws a salary to retire financially well off.
Sisyphus and Commission Based Compensation
But commission based compensation is no piece of cake either. For those of us who work on commission, we know how difficult it is to get started in the business. Some will say it takes a good two to three years before a commission based CRE professional can say they are “over the hump” and on their way to success. I disagree. Yes, it gets easier the longer you’re in the business, assuming you’re doing all the right things, but very few of us rarely “arrive.”
Commission-based compensation reminds me of the story of Sisyphus of Greek mythology. Recall he was punished for his many sins by being forced to roll an immense boulder up a hill only for it to roll down when he was near the top, repeating this action for eternity. We who are on commission, like Sisyphus, are always chasing the next deal and once it closes we’re back on the never ending quest looking for the next deal. Only the very successful CRE professional, the top 10 or 20 percent, accumulate sufficient wealth from earning commissions. The rest of us, just limp along.
How to Succeed Financially as a CRE Professional
Now I don’t want to sound like a Debbie Downer. I really don’t, but before I give you my answer on how to financially succeed in commercial real estate, an honest appraisal (no pun intended) has to be aired. And that is what I’ve now done. Unfortunately most CRE professionals will not succeed financially. But that doesn’t have to be your fate. You can succeed. As I said in the first paragraph, successful real estate professionals follow a very observable pattern of behavior. I have noticed five things that most successful CRE professionals do:
- Their spouse works outside of CRE drawing a salary with good benefits – About every ten years or so there is a downturn in the real estate market. The easiest way to survive the downturns is to have a spouse that earns their living outside of commercial real estate who draws a salary with good health insurance coverage. Can you succeed in CRE without a spouse working? Yes, but it’s certainly more difficult to do so.
- They live well within their means – I once had a friend that when he received a large commission check he would spend it on the latest man toy. It wasn’t in his thinking to save a portion of that check for the next slow time. He made good money but he spent all of it and then some. I don’t have to tell you his fate. You already know that he is no longer in the business. Successful CRE professionals live well within their means. They intuitively know that there are good times with euphoric highs and there are bad times when everything comes to a roaring halt. When the CRE market slows, the successful CRE professional has saved sufficient funds to hunker down and wait until the market turns once again.
- They know their marketing/sales system – I couldn’t tell you what it takes to succeed as a commercial real estate broker. But I do know what it takes to succeed as a commercial mortgage broker. I know: a) How many marketing contacts I need to generate one loan inquiry; b) How many loan inquiries it takes to generate one loan package; c) What percentage of loan package are converted to loan applications; d) What percentage of loan applications are converted to signed applications; and e) What percentage of signed applications close. Every successful real estate professional knows their numbers, backwards and forwards.
- They have grit – What is grit, you ask? People with grit are not easily discouraged. And as we all know, it is so easy to get discouraged as a CRE professional. People with grit consistently make those marketing calls even after being told “no” countless times. They persevere during times of adversity. They never give up, no matter what. And slowly over time, they succeed.
- They invest in commercial real estate – The first four factors above are necessary to become a CRE journeyman. Actually none of them by themselves will help you succeed financially at commercial real estate. Consider them the prerequisites for success. There is only one sure way you will ever be financially successful in this business. You invest in commercial real estate. Commercial real estate is the road to wealth but it’s not from drawing a salary or from earning commissions. It’s from owning commercial real estate. Andrew Carnegie said it best when he said, “Ninety percent of all the millionaires become so through owning real estate.” If you go through your entire CRE career without ever owning a rental property there is very little chance of retiring well. It isn’t going to happen.
Strategy for Owning Commercial Real Estate
So how does a CRE professional go about buying a rental property especially if they are new to the business and have modest financial resources? I think the easiest way to break into CRE investing is for the commission-compensated professional to invest their portion of the fee into the deal. So instead of putting their fee into their bank account, they instead invest their commission check as a small interest in the property they helped their client to purchase or finance.
Now many of the clients you have will likely not want you as a minority partner. Don’t take it personally. They wouldn’t want anyone as a partner, including you. And then there are some clients that you wouldn’t want to invest with for a variety of reasons. But there is a small subset of clients that like you, and you like them. These are the ones that you should be investing with.
Imagine investing just one commission check into a rental property every other year. How would that change your financial situation when it came time to retire? Instead of just retiring on your social security check and your 401(K), you would also have passive income being generated by a dozen or more rental properties. No longer would you be concerned about retiring well. You would be financially free.
Tired of watching TV commercials showing you how much money you need to have to retire well? Read my article on Three Not So Obvious Reasons for Owning Commercial Real Estate.
Those are my thoughts. What do you think?