Thread by @TheRealEstateG6

Completely correct. Probably easiest to illustrate this by showing how you can build out a real estate firm in 2 different scenarios

Scenario 1: You keep the "firm" small (1-man shop) and only invest your own money

Scenario 2: You take on investor money and grow out a PE firm

https://twitter.com/sweatystartup/status/1426938154196602883

For both scenarios, lets assume you're pursuing a value-add strategy that's expected to 2x your capital in 5 years (~15% IRR)

In Scenario 1, you can stay in far smaller deal ranges. Let's say you stay in the $2MM-$10MM deal range.

If you do a $6MM deal, that would require ~$2MM of equity. A 2x on that capital would net you $2MM profit

You can probably pull off ~3 or so of those deals a year if you're running a 1-man shop with a few VAs or similar. So it's not unreasonable, once you hit your stride, to be making $5MM+/year with very few responsibilities. Few employees, no investors, only answerable to yourself

In Scenario 2, on the other hand, you need to do far bigger/more deals to yield that same profit. Typically private equity firms receive 20% of the profits (classic 2 and 20 model)

That means you'd need $10MM of investor equity to receive that same $2MM profit from a deal

$10MM equity=~$30MM deal size

Doing 3 $30MM deals each year is far more difficult than doing 3 sub $10MM deals. You can obviously also try to increase the deal size (to deploy that equity in 1 deal) but finding good $90MM deals is even more difficult than finding good $30MM ones

It's more difficult because you're now competing against institutions rather than retail. And many institutions have lower return thresholds than you. Not only that, but the marketing process is more robust. Harder to steal a deal marketed by Eastdil than one by a small brokerage

Let's say you're able to pull it off. 3 $30MM deals nets you $6MM profit ($30MM*20%)

(Yes you'll receive mgmt fees too but those are mostly breakeven until you reach a larger AUM)

But you don't get to keep all of that $6MM - you now have employees who eat up some of the promote

If you've given carry to some of your employees totaling 33% of the promote, you're now only making $4MM. So now you're actually making *less* than you would have just simply running your own money

So now you need to grow even bigger to compensate

There's obviously more potential profit in S2 since you're dealing with way larger amounts of money and it's easier to scale when you have a team. But in S2 you're now operating in a more competitive deal size range and against sophisticated PE firms rather than retail investors

So investing itself is actually way harder. Not only that but you have more added stress. You now have a team you're responsible for (and their families as well). You have added stress in that you have investors who you have to answer to and whose money you need to protect

In summary, there's no right or wrong answer. But it's important to think about what you're truly looking for (both in regard to your life and the business)

If you want to scale to the moon and become a billionaire, go for it

But growing isn't always the right option. Sometimes you can make more money with less stress by staying small