Equity vs. Debt Careers in Commercial Real Estate

Most real estate investments and development projects are financed with two different parts of the capital stack, both equity and debt.

If you’re just starting out in the industry, each side of the business offers very different experiences and very different exit opportunities, and your overall career trajectory can be heavily dictated by the track you start out on.

So to help you get more clarity on which part of the industry might be right for you, this article covers some of the biggest differences between the debt and equity sides of the real estate business, some pros and cons of each path, and where you might fit best based on your long-term goals.

If video is more your thing, you can watch the video version of this article here:

The Equity Side

Pros

One of the biggest pros of working on the equity side of the business is that, by working for an investment or development firm directly, you’ll tend to get significantly more training related to building your own portfolio.

Many of the things you’ll do on a day-to-day basis involve running detailed real estate investment analyses and creating underwriting assumptions, while also getting a much deeper understanding of the return metrics being looked at by CRE investors.

For people who want to invest real estate themselves, one of the biggest appeals of working on the principal side of the industry is that, in many roles, you’re essentially getting paid to learn this process directly.

Being on the equity side of the business also gives you much more in-depth exposure to the equity raising process itself, which tends to be one of the most difficult parts of real estate entrepreneurship. You’ll also get an inside look into how JV partnership structures operate in these roles, and how equity waterfall structures are used to split cash flows between investors.

Being on the equity side of the business also gives you significantly more exposure to operations and how a property might perform over time, and will also often get you involved with things like construction management or commercial leasing (that you wouldn’t be on the front lines with when working for a lender).

If you want to learn how to do your own deals, make underwriting assumptions, or raise capital and get equity partners to invest in a given project, working for an investment or development firm will usually be the most direct way to get that exposure.

Cons

One of the biggest cons of working on the equity side of the business is that these jobs tend to be more volatile than debt-side roles, with lean years often involving significantly smaller paychecks and a much higher probability of job loss overall.

Working for an investment or development firm also tends to require you to become an expert in only one or two commercial real estate product types, and likely just a small handful of geographic markets. This can be a major downside for young professionals who are new to the industry and relatively unsure about which product type they want to focus on, or even which city they want to live in.

Coming from an equity-side background, your viewpoint on deals is also going to be primarily centered around the equity returns those deals can generate, and beyond seeing loan terms in a term sheet and plugging these into a financial model, you won’t know the inner workings of how lenders view deals and price risk in the market.

Overall, if you’re looking to learn how to analyze your own investments, you have a good idea of which product types and geographic markets you want to focus on, and you want to build your own real estate investment or development firm in the future, the equity side of the business could be a great part of the industry to pursue. However, if you’re not comfortable with potential fluctuations in your income, you’re looking for a significant amount of job security, and you want exposure to multiple different asset classes and geographic markets, you may want to consider the debt side of the business instead.

The Debt Side

Pros

The first benefit of the debt side that many people gravitate towards (especially when working for traditional lenders like insurance companies or banks) is that there tends to be a higher level of job security in many lending roles, often with smaller income fluctuations during down years.

This is usually true even in mortgage brokerage, where commission checks tend to be slightly smaller than what you’d see in investment sales but also tend to come in more frequently, with commercial properties often being financed 2-3 times (or more) before a property is sold.

Unlike equity-side roles, working in debt will also often expose you to a variety of different real estate asset classes across a variety of different geographic markets, so if you want to learn a little bit about multiple product types before committing to an industry sector, a role on the debt side can often help you pinpoint where you want to specialize over the long-term.

Debt-side positions also provide an inside look into how lenders view deals, and the behind-the-scenes conversations that lenders have when making decisions on a project. This can be an extremely helpful perspective to have if you decide to transition onto the principal side of the business in the future, and want to make sure your deals are being financed at advantageous terms.

Cons

Where a lot of people find lending roles tend to come up short is the lack of depth as far as what you’ll learn about commercial property operations, including things like construction management and commercial leasing, but also things like business plan execution, contract negotiation, and general value creation strategies.

Most debt side roles also won’t include in-depth analysis of partnership structures or negotiations with equity partners directly, which can leave a really big gap in your skill set if you plan to raise equity later in your career.

Many lending professionals can also end up with relatively limited financial modeling skills, since most analytical work often involves reviewing a borrower’s pre-built pro forma or using your own basic underwriting model to simply make sure a deal meets certain DSCR, debt yield, or LTC requirements. And from a lending perspective, you usually won’t be taking a deep dive into the IRR, the equity multiple, or the cash-on-cash of a project, unless you’re working for a debt fund in an alternative lending position.

Because of this, it can be difficult for lending professionals with more than about 3-5 years of experience on the debt side to transition directly into more senior-level roles in acquisitions, asset management, or even portfolio management, and often requires a step back in seniority and/or pay in order to make the switch onto the equity side of the industry.

Ultimately, the debt side could be a great fit if you want exposure to multiple different product types, more job security, and more of a focus on the finance aspect of commercial real estate (over managing property operations). However, you might want to steer clear of lending roles if you want to learn more about raising equity, you want to become an expert in real estate financial modeling, and you’re looking for significant income potential (and willing to deal with the risks associated).

How To Land a Real Estate Analyst Role

If you want to make sure you have the technical skills you’ll need to land analyst roles at top real estate investment, development, and lending firms across the industry, make sure to check out our all-in-one membership training platform, Break Into CRE Academy.

A membership to the Academy will give you instant access to over 120 hours of video training on real estate financial modeling and analysis, you’ll get access to hundreds of practice Excel interview exam questions, sample acquisition case studies, and you’ll also get access to the Break Into CRE Analyst Certification Exam. This exam covers topics like real estate pro forma and development modeling, commercial real estate lease modeling, equity waterfall modeling, and many other real estate financial analysis concepts that will help you prove to employers that you have what it takes to tackle the responsibilities of an analyst or associate at a top real estate firm.

As always, thanks so much for reading, and make sure to check out the Break Into CRE YouTube channel for more content that can help you take the next step in your real estate career.