Real estate propertis come in many shapes and sizes and serve a multitude of purposes. Some are created so people will have a place to work and collaborate while others are created so people will have a place to live.
The five main types of real estate properties are:
Similar to a mutual fund, a real estate company will pursue opportunities that fit within its risk profile. Companies looking for high returns will invest in high-risk assets. Companies looking for steady cash flow will invest in low-risk assets.
In real estate, risk profiles are broken out into four categories:
To be successful in real estate, you need to intimately know your market. When you know your market, you will know the local players, the leasing/sales history of properties, strengths of the local economy, and the brokers and owners. All of this allows you invest in real estate a its true value and not at the "out of town" price.
Understanding the key metrics of a real estate investment is essential to interview effectively, model a real estate transaction, and evaluate the merits of an opportunity. Although each real estate asset class has unique metrics, these are the key metrics that are universal and essential to understand.
The capitalization rate (just called the "cap rate") is the most basic metric in the real estate industry. The definition of the cap rate is the ratio of net operating income (NOI) to the property's value.
Cap Rate = Property Net Operating Income / Property Value
The best way to think about the cap rate is that it represents the percentage return an investor would receive on an all cash purchase, similar to the coupon rate on a bond. Similar to a bond, the cap rate is inversely related to the price of the asset. The higher the price, the lower the cap rate.
Regardless of your job function in real estate, you will need to know how to analyze and model a lease. Leases are legally binding documents between the landlord and the tenant. Each party will outline what it will and will not do during the lease term.
In order to generate higher returns, real estate companies finance a portion of its investment using some form of debt. The amount of debt can range from a conservative 40% (typically for less risky investors such as REITs) all the way up to 75% (typically for risky investors such as a development companies).