What is Real Estate?
Real estate is real property that consists of land and improvements, which include buildings, fixtures, roads, structures, and utility systems. Property rights give a title of ownership to the land, improvements, and natural resources such as minerals, plants, animals, water, etc.
Types of Real Estate
There are several types of real estate, each with a unique purpose and utility. The main categories are:
Land
Residential
Commercial
Industrial
For anyone looking to understand how the industry works and what each of the major categories represents, the explanations below will be a helpful guide.
1 Land
Land is the baseline for all types of real property. Land typically refers to undeveloped property and vacant land. Developers acquire land and combine it with other properties (called assembly) and rezone it so they can increase the density and increase the value of the property.
2 Residential
Residential real estate consists of housing for individuals, families, or groups of people. This is the most common type of estate and is the asset class that most people are familiar with. Within residential, there are single-family homes, apartments, condominiums, townhouses, and other types of living arrangements.
3 Commercial
Commercial property refers to land and buildings that are used by businesses to carry out their operations. Examples include shopping malls, individual stores, office buildings, parking lots, medical centers, and hotels.
4 Industrial
Industrial real estate refers to land and buildings that are used by industrial businesses for activities such as factories, mechanical productions, research and development, construction, transportation, logistics, and warehousing.
Examples of Real Estate
Now that we’ve outlined the four main categories, let’s explore some specific examples of different types of real property.
Single-family dwelling – Any home designed for only one family
Multi-family dwelling – Any group of homes designed for more than one family
Attached – Any unit that’s connected to another (not freestanding)
Apartment – An individual unit in a multi-unit building. The boundaries of the apartment are generally defined by a perimeter of locked or lockable doors. Often seen in multi-story apartment buildings.
Multi-family house – Often seen in multi-story detached buildings, where each floor is a separate apartment or unit.
Condominium (Condo) – A building with individual units owned by individual people.
Detached house – A free-standing building not connecting to anything else (a stereotypical “home”)
Portable house – Houses that can be moved on a flatbed truck
Mobile home – A vehicle on wheels that has a permanent residence attached to it
Villa – A building with only one room and typically a steep pointy roof
Hut – A dwelling typically made of raw materials such as bamboo, mud, and clay
Overview of Real Estate Industry
Let’s explore how the industry works and what the major jobs and careers are. The real estate industry can be divided into several different areas:
Development
Sales and marketing
Brokerage
Property management
Lending
Professional services (law, accounting, etc.)
Let’s look at each of these six areas of the industry in more detail.
1 Development
Real estate development is a process that involves the purchase of raw land, rezoning, construction and renovation of buildings, and sale or lease of the finished product to end users. Developers earn a profit by adding value to the land (creating buildings or improvements, rezoning, etc.) and taking the risk of financing a project. Development firms create a new product, which can be thought of as the “primary market” or generation of new inventory.
2 Sales and marketing
Sales and marketing firms work with developers to sell the buildings and units they create. These firms earn a commission for creating all marketing material and using their sales agents to sell the inventory of completed units. These firms typically focus on new units.
3 Brokerage
A real estate brokerage is a firm that employs a team of real state agents (realtors) who help facilitate a transaction between the buyers and sellers of property. Their job is to represent either party and help them achieve a purchase or sale with the best possible terms.
4 Property management
Property management firms help real estate owners rent out the units in their buildings. Their jobs include collecting rent, showing units, fixing deficiencies, performing repairs, and managing tenants. They charge a fee, typically a percentage of the rent, to property owners.
5 Real estate lending
Lenders play a major role in the industry as virtually all properties and developments use leverage (debt) to finance their business. Lenders can include banks, credit unions, private lenders, and government institutions.
6 Professional services
There are a variety of real estate professionals who work in the industry and help make it function. The most common examples (other than the ones listed above) are accountants, lawyers, interior designers, stagers, general contractors, construction workers, and tradespeople.
Careers in Real Estate
If you’re looking for a career in real estate, you may want to consider any of the above six areas of the industry. Here are the most common jobs (titles) in the industry:
Analyst – Performing financial analysis and valuation of properties
Appraiser – Valuing properties
Agent – a sales agent or “realtor”
Building Inspector – Someone who examines buildings and works with appraisers
Commercial Broker – An agent who sells commercial properties
Director of Real Estate – A corporate job
Home Inspector – Someone hired to assess the quality of a home for a seller or purchaser
Loan Underwriter – A person who analyzes the creditworthiness of a borrower
Mortgage Specialist / Underwriter – A person who approves mortgage applications
Real Estate Attorney – A lawyer who specializes in real estate transactions
Additional resources
Thank you for reading this guide to understanding what real estate is, how the industry works, and what the most common job opportunities are.
CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following CFI resources will be helpful:
Financial Modeling Best Practices
The article below will provide readers with information on financial modeling best practices in an easy to follow, step-by-step guide on how to building a financial model in Excel. The tips are adapted from CFI instructors with over 15 years of financial analyst training experience.
Key Structure of Model Building
In modeling, it is crucial to apply a structured approach – a robust model contains three core building blocks: inputs, processing, and outputs. It is important to note that the inputs must be clearly separated from the processing and outputs of a financial model. Inputs should at all times be clearly defined and only be entered once. The processing of inputs to outputs must be not only transparent but also broken down into simple steps that are easy to follow. Finally, outputs should be well organized, so that users have quick access to the outputs they wish to see or use, and can easily understand them.
Best Practices in Financial Modeling
Before we examine the building blocks and financial modeling best practices in Excel, it is important to note that model building is not an iterative process. In fact, models that are built on the fly without scrutiny or attention to detail are typically prone to errors. In order to minimize errors when building your financial models, be mindful of the following five basic steps:
Clarify the business problem
Simplify as much as possible
Plan your structure
Build structural integrity
Test the model
Inherent Tensions in Model Building
In model building, inherent tensions create a spectrum of models, ranging from realistic to robust. While large and realistic models offer users a high degree of detail and precision, due to their complex nature, they are also more challenging to build, follow, and audit. On the other hand, small and robust models are generally easier to build, follow, and audit, but they lack the degree of precision necessary for decision-making. The best financial models work to reconcile these opposing forces, hence keeping inputs and outputs as simple as possible, while still providing sufficient details for decision-making.
Investing: A Beginner’s Guide
Here it is! – That thrilling (and insightful) guide to investing for beginners that you’ve been dreaming about finding all your life. Well, perhaps we’ll leave “thrilling” to your judgment. However, we are quite confident that you’ll become more than just a little excited when you learn the truth about the wide array of opportunities available to you through investing – opportunities you can use to establish and grow your fortune. This guide is designed to serve as an informational primer for you in the arena of investing, even if you’re a complete novice. It’s not a detailed guide to a specific investment (we’ll be offering those in subsequent publications), but rather a broad overview of different types of asset classes that you may wish to consider investing in, along with guidance on exactly how to get started making (lots of) money through investing. We’re also going to cover some basic principles of investing for beginners – principles that apply to any type of investment. Learning these principles will significantly help you to maximize your investing success and profitability.
Basic Types of Investing
This is the building block of investing for beginners. There’s an endless list of specific investments you can make, but nearly all investments fall into one or the other of a handful of categories commonly referred to as “asset classes”. An asset class is made up of investments with similar characteristics that are also usually governed by the same set of financial regulations.
Equity Investing
Equity investing, the buying and selling of stocks in publicly traded companies, is what most people probably think of when they hear the word “investing” and is a popular investment for beginners. Publicly-traded companies offer investors an equity interest in the company through the purchase of stock shares. For example, if shares of Advent Wireless (AWI) are trading at $1.28 per share, then you can buy 100 shares for $128.00.
Fixed Income Investing for Beginners
Fixed income investing refers to investments in debt securities that offer investors fixed-rate interest payments over a specified time frame – the life of the debt security. Debt securities are most commonly referred to simply as “bonds”. The bond market is one of the largest markets worldwide, thanks in part to the massive amount of debt being carried by most governments. When you purchase a bond you are providing financing for a company or a government, and in return, you receive a specified interest rate, known as the “coupon rate”. Interest on bonds is typically paid either semi-annually or annually until you receive the bond’s full principal amount back on the bond’s specified maturity date.
Zero-Coupon Bonds
Some bonds are issued as “zero-coupon bonds”. Rather than offering regular interest payments, zero-coupon bonds are instead sold at a significant discount from the bond’s face value. Investors make a return by purchasing the bond for less than face value and then redeeming the bond at maturity for full face value. (For example, a zero-coupon bond with a face value of $5,000 might sell for $4,500. The investor pays $4,500 to buy the bond, and then at maturity sells, or redeems, the bond at the face value of $5,000, thus making a $500, or 10%, return on their investment.)
Principles of Investing – Fundamental Analysis
In analyzing investments, investors tend to fall into one of two camps – those who make their decisions based on technical analysis and those who primarily utilize fundamental analysis. Fundamental analysis refers to analysis based on economic data or reports, such as the monthly Non-Farm Payroll (NFP) report in the United States, considered an important indicator of the overall health of the economy and, more specifically, of job growth.
Types of Assets
What are the Main Types of Assets?
An asset is a resource owned or controlled by an individual, corporation, or government with the expectation that it will generate a positive economic benefit. Common types of assets include current, non-current, physical, intangible, operating, and non-operating. Correctly identifying and classifying the types of assets is critical to the survival of a company, specifically its solvency and associated risks.
Properties of an Asset
There are three key properties of an asset:
Ownership: Assets represent ownership that can be eventually turned into cash and cash equivalents
Economic Value: Assets have economic value and can be exchanged or sold
Resource: Assets are resources that can be used to generate future economic benefits
Importance of Asset Classification
Classifying assets is important to a business. For example, understanding which assets are current assets and which are fixed assets is important in understanding the net working capital of a company. In the scenario of a company in a high-risk industry, understanding which assets are tangible and intangible helps to assess its solvency and risk. Determining which assets are operating assets and which assets are non-operating assets is important to understanding the contribution of revenue from each asset, as well as in determining what percentage of a company’s revenues comes from its core business activities.
Valuation Methods
What are the Main Valuation Methods?
When valuing a company as a going concern, there are three main valuation methods used by industry practitioners: (1) DCF analysis, (2) comparable company analysis, and (3) precedent transactions. These are the most common methods of valuation used in investment banking, equity research, private equity, corporate development, mergers & acquisitions (M&A), leveraged buyouts (LBO), and most areas of finance.
Method 1: Comparable Analysis (“Comps”)
Comparable company analysis (also called “trading multiples” or “peer group analysis” or “equity comps” or “public market multiples”) is a relative valuation method in which you compare the current value of a business to other similar businesses by looking at trading multiples like P/E, EV/EBITDA, or other ratios. Multiples of EBITDA are the most common valuation method. The “comps” valuation method provides an observable value for the business, based on what other comparable companies are currently worth. Comps are the most widely used approach, as they are easy to calculate and always current. The logic follows that, if company X trades at a 10-times P/E ratio, and company Y has earnings of $2.50 per share, company Y’s stock must be worth $25.00 per share (assuming the companies have similar attributes).
Method 2: Precedent Transactions
Precedent transactions analysis is another form of relative valuation where you compare the company in question to other businesses that have recently been sold or acquired in the same industry. These transaction values include the take-over premium included in the price for which they were acquired. The values represent the en bloc value of a business. They are useful for M&A transactions, but can easily become stale-dated and no longer reflective of the current market as time passes. They are less commonly used than Comps or market trading multiples.
Method 3: DCF Analysis
Discounted Cash Flow (DCF) analysis is an intrinsic value approach where an analyst forecasts the business’ unlevered free cash flow into the future and discounts it back to today at the firm’s Weighted Average Cost of Capital (WACC). A DCF analysis is performed by building a financial model in Excel and requires an extensive amount of detail and analysis. It is the most detailed of the three approaches and requires the most estimates and assumptions. However, the effort required for preparing a DCF model will also often result in the most accurate valuation. A DCF model allows the analyst to forecast value based on different scenarios, and even perform a sensitivity analysis.
Courtesy: Best real estate advisory in Australia
Finance Advisory 