Real Estate Debt-Side Careers – The Good & Bad

Working on the debt side of the commercial real estate industry will give you a very different experience than working pretty much anywhere else in the business, primarily because of what the main focus of a lender is.

While equity investors typically prioritize maximizing returns relative to risk, lenders are primarily focused on capital preservation, and the career paths and opportunities available in this part of the industry reflect that focus.

So if you’re thinking about pursuing a career on the debt side of commercial real estate, this post walks through some of the biggest pros and cons I’ve seen when people go this route, and who a career in lending might be the best fit for.

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What Are Debt Side Roles?

When talking about debt side roles in this post, I’m primarily referring to jobs where you’d be working directly for a commercial real estate lender, where your main responsibilities are to either find investors and developers that need a source of capital or to evaluate deals that borrowers present to you.

The Benefits of Working in Commercial Real Estate Lending

Benefit #1: Broad Exposure to Different Property Types and Markets

One of the biggest benefits of these roles, especially for people who are new to the industry and aren’t sure where they want to specialize, is that you’ll typically be exposed to a variety of different property types and geographic markets in a very short period of time.

When you start out in a lending role at a bank, insurance company, or even a private lender, you’ll typically be working on deals across the multifamily, retail, office, and industrial sectors, located in multiple different cities and states throughout the country. This can give you a much better sense of what types of deals you like working on most, and where you see the most opportunity from a geographic perspective.

This tends to be really hard to do when you’re working for an investment or development firm, since the vast majority of these companies only focus on one or two asset classes in just a small handful of geographic markets. This means that if you take a job and then realize you have no interest in the property type you’re working on, you’ll most likely need to move to a different firm altogether just to be exposed to something else.

Benefit #2: Learn How Different Firms Operate

Working for a lender will also give you the opportunity to see how a variety of different investment and development firms operate and make investment decisions. And if you plan to build your own real estate portfolio in the future, sitting in investment committee meetings and presenting opportunities to senior leadership will give you an inside look into what lenders care about most when considering funding a deal.

Benefit #3: High Job Stability

Another big benefit of working in lending (that tends to be especially true at insurance companies and banks) is that job stability is often really high, even at the analyst level.

Insurance companies will generally source capital from insurance premiums, and banks will typically source capital from deposits, neither of which usually decreases during down cycles in the market.

This means that these firms will usually have access to capital in a variety of different market conditions, which allows them to continue to make loans and retain employees, even when investment sales activity is relatively low.

Why Lending Has More Consistent Business

Unlike equity investments, which in most cases can be held almost indefinitely, the vast majority of commercial real estate loans only have terms of three to ten years. This means that even if owners aren’t selling and investors aren’t buying, there’s still going to be business on the lending side of the industry.

This often leads to more consistent, predictable revenue than you’d see at an investment or development firm that’s heavily dependent on deal volume and current market conditions, which can ultimately result in a smaller chance of being laid off when transaction activity slows down.

Benefit #4: Focus on Finance Without Operations

Another benefit of working on the lending side of the industry, which is especially relevant for people who are getting into this business primarily because they’re interested in finance, is that these roles typically remove you from a lot of the day-to-day blocking and tackling associated with owning and operating commercial real estate.

When you’re working in acquisitions or asset management, you’re very likely going to be spending a lot of your time doing things like working with third-party contractors, negotiating commercial leases with prospective tenants, or working with city officials to get development projects approved. But in a lending role, you can focus almost exclusively on the capital markets and the finance aspect of investing in commercial real estate, while relying on the investor or developer to handle those projects.

As a lender, you’re also typically going to be doing a lot less investor reporting than you would in a typical equity side role, and while you’ll still usually need to report to internal stakeholders on a relatively regular basis, you’ll often be the one reviewing reports from borrowers, rather than the other way around.

The Drawbacks of Working in Commercial Real Estate Lending

Drawback #1: Lower Income Potential

Working on the lending side of the industry does have its drawbacks, and one of the biggest things you’ll want to consider is that, in exchange for that stability I talked about earlier in this post, you may have to give up some potential income upside.

A lot of banks and insurance companies that lend on commercial real estate are huge, established organizations that tend to offer strong benefits and a stable salary, but relatively small bonus percentages when compared to jobs in acquisitions or even asset management.

You’ll typically see more performance-based compensation as you move into more senior-level roles within these firms, where you’re the one who’s directly responsible for sourcing new business. However, if you’re working in any sort of analytical or operations-focused position, bonuses in these types of jobs are typically pretty weak.

On the bright side of this, big companies also tend to be fully (if not overly) staffed, which can lead to more manageable work weeks and a better work-life balance overall. However, if you consider yourself entrepreneurial and want to have more control over your income, working in lending at an insurance company or a bank usually isn’t going to be a good fit.

Drawback #2: Limited Financial Modeling Experience

Another downside to think about if you decide to go the debt route is that most lenders will primarily rely on the borrower to handle the majority of the financial modeling required to analyze deals. This means that in these roles, you’re typically not going to be exposed to things like creating long-term cash flow projections, running IRR calculations, or building equity waterfall models, which are all things you’ll need to be able to do on the equity side of the business.

At banks and insurance companies, most of the underwriting is focused on LTV, LTC, DSCR, and debt yield metrics. These are relatively simple calculations that look primarily at current value and current income, so you usually won’t get much exposure to creating dynamic pro forma models and making cash flow projections over an extended period of time.

Obviously, this isn’t always going to be the case, and if you’re working for something like a debt fund, your day-to-day responsibilities will often include more complex modeling. But in general, if you’re looking for a way to tighten up your technical skill set quickly, the modeling you’ll learn at insurance companies or banks tends to be pretty basic.

How To Break Into Lending

If you’re early in your career and don’t know where you want to specialize, you want to focus almost exclusively on finance and the capital markets, you consider yourself relatively risk-averse, and you value a strong work-life balance, the debt side could be a great place to start your career.

And if you want to learn more about commercial real estate debt modeling, equity modeling, or the real estate investment analysis process overall, 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, which 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.