FINA 210: Introduction to

Real Estate
Introduction to RE, REI Process and
Investment and Market Environment Analysis

Professor Michael Masters

 Topics
• Introduction to Real Estate
• What is Real Estate
• Residential Real Estate
• Commercial Real Estate
• Office
• Retail
• Industrial
• Real Estate Ownership
• Real Estate Functions
• Building and Operating
• Investment Management
• Other Participants
• Real Estate Investment (REI) Process
• Investment Environment and Market Conditions Analysis
• Market Environment
• Legal Environment
• Financing Environment
• Tax Environment
 Topics

Introduction to Real Estate

 What is Real Estate?

Property:
What can be owned or possessed

Tangible: Intangible:
Physical Non-physical
Personal Property:
moveable and NOT Real Property: Real
permanently affixed Estate
to land
What is Real Estate?

Moveable:
Personal Property

?
Real Estate:
Permanently
affixed to land
 What is Real Estate?

Real Estate

Improvements Improvements
Raw Land
TO land ON the land
What is Real Estate?

Raw Land

Improvements to land:
utilities, sewers, roads

Improvement on land:
structures
 What is Real Estate?

Real Estate

Residential Commercial

Single-
Multi-
family Office Retail Industrial Hotel
family
homes
Residential Real Estate

Single-family

Multi-family:

Low rise: < 4 floors

Mid-rise: =>4 floors <10
High-rise: => 10 floors
 Commercial Real Estate
Office

Office

Downtown Suburbs

Single- Multi- Class Class Class

tenant tenant A B C
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 Commercial Real Estate
Retail

Retail
Shopping Power Lifestyle Street
Centres Centres Centres Retail

Super-regional Regional Community Neighbourhood

 Commercial Real Estate
Retail
Shopping Centres Power Centres

Lifestyle Centres Street Retail

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interview/?utm_source=Retail+Insider+Newsletter&utm_campaign=813d34a276-EMAIL_CAMPAIGN_2024_04_22_01_02&utm_medium=email&utm_term=0_-813d34a276-%5BLIST_EMAIL_ID%5D
 Commercial Real Estate
Industrial
Warehouses Distribution Centres

Manufacturing Specialty
 Real Estate
Ownership

Real Estate Ownership

Direct Indirect
Single Co-
Partnership Corporation REIT
owner ownership
https://www.imcapital.com/investing

Taxation and liability are important factors

in determining the ownership structure.
 Real Estate Functions –
Building and Operating
Development Development deals with identifying an appropriate
site, conceptualizing and designing the project,
securing zoning and permits and the management
of the project. The developer usually hires the
construction company.
Construction Construction is the actual building of the structure
and any ancillary infrastructure. This could include
roadwork to access the site, underground parking
and landscaping.
Property Management Day to day operations of a revenue generating
property. This could include security, billing and the
collection of rents, maintenance, accounting, etc.
Leasing Leasing agents identify perspective tenants and
negotiate the lease terms. Leasing agents can be
hired by the owners or property managers and can
sometimes represent more than one landlord.
 Real Estate Functions –
Investment Management

Brokerage Real estate brokerage involves the sale or

purchase of properties by matching buyers and
sellers. The broker usually creates the marketing
material including the property data.
Asset Management Asset managers are responsible for developing
and implementing the strategic plan to maximize
the value of a property. This includes the
development and timing of exit strategies.
Portfolio Management Portfolio managers buy and sells RE assets to
form a portfolio that meets the return to risk
relationship targeted by the investors.
 Real Estate Functions –
Other Players
• Bankers and lenders
• Lawyers and notaries
• Accountants and tax professionals
• Appraisers
• Insurance brokers and companies
• Architects
• Engineers
• Surveyors
• Municipalities and governments
Real Estate Investment (REI) Process
 Real Estate
Investment (“REI”)Process

1. Determine your objectives

and constraints

2. Analyze the investment Repeat process

& market environment

3. Develop a financial
analysis

4. Apply decision-making
criteria

5. Make an investment
decision
 Real Estate
Investment (“REI”)Process
1. Determine your objectives and constraints
• “Know” your investment goals:
• Are your willing to risk losing your investment for the possibility of a high return?
• Do you prefer more modest returns but a safer investment?
• Are you willing to put in “sweat equity” or do you want a turn-key investment?
• What is the duration of your investment? (Long-term vs Short-term)
• Are you looking for a steady cash flow or is the growth of the value of your investment more
important?
 Real Estate
Investment (“REI”)Process
1. Determine your objectives and constraints (continued)
• It is equally important to know your constraints:
• What funds do you have available to invest?
• Are you willing to borrow in order to increase the size of your investment?
• How much time do you have to manage your investment?
• What is your level of expertise?
• Will you be working with partners that have similar objectives and constraints?
 Real Estate
Investment (“REI”)Process
2. Analyze the Investment and Market Environment
• A thorough analysis of the investment environment is required for any
investment decision, including real estate. This would include an analysis of the:

• Market environment
• Legal environment
• Financing environment
• Tax environment
 Real Estate
Investment (“REI”)Process
3. Develop a Financial Analysis
• The financial analysis deals with determining the expected cash flows of your
real estate investment. At the end of the analysis you will be able to answer
questions such as:
• How much will I invest?
• Determining a fair price
• How much cash will be generated annually?
• Rents
• Expenses
• How much are the mortgage payments?
• How much is the profit when I sell?
• Anticipated value
• Selling expenses
 Real Estate
Investment (“REI”)Process
4. Apply Decision-Making Criteria
• Determine the required rate of return given the risks and rewards as analyzed in
the previous steps.

• Calculate the Net Present Value (NPV) and Internal Rate of Return (IRR) of the real
estate investment and compare them to these hurdle rates.

5. Investment Decision
• The previous steps give you the necessary information to make your investment
decision
• The analysis process is repeated for various REIs in order to find one that meets
the investors’ goals and constraints
Investment and Market
Environment Analysis
 Real Estate
Investment (“REI”)Process

1. Determine your objectives

and constraints

2. Analyze the investment Repeat process

& market environment

3. Develop a financial
analysis

4. Apply decision-making
criteria

5. Make an investment
decision
 Investment and
2. Market Environment Analysis- Market Environment
• The fundamental principal of supply and demand also applies to real
estate
• In commercial real estate tenants demand space for offices, stores,
manufacturing, etc. and landlords create space to satisfy these demands
• The percentage of the space that is “in use” is known as the occupancy rate.
• Conversely, the percentage of space “not in use” is known as the vacancy rate.
• A sustained increase in occupancy rates puts upward pressure on rents,
motivating landlords to build or acquire new space to rent out.
 Investment and
2. Market Environment Analysis- Market Environment
• Economic factors that can influence demand include:
• Global and national economy
• GDP
• Inflation

• Consumer confidence
• Employment levels
• Population growth and density
• Age trends
• Changes in technology or manufacturing processes (productivity)
 Investment and
2. Market Environment Analysis- Market Environment
• Local and competitive factors that must also be considered:
• Local supply and competing space
• Competing projects currently under development
• Education level and skills of local workforce
• Local population growth and density
• Income levels
• Infrastructure (roads, services, etc.)
• Transportation
• Age trends
 Investment and
Market Environment Analysis - Legal Environment
• A complex legal system regulates real estate investment and the
relationships between its participants.

• Analyzing the legal opportunities and limitations that a real estate

investment may entail will play an important role in the both the
acquisition decision and the investment process.

• This can be extended to local and environmental regulations.

• Foreign investments are particularly susceptible to legal restrictions or
additional requirements.
 Investment and
Market Environment Analysis -
Financing Environment

• Both the availability of financing and its cost must be analyzed

as part of the investment decision.
• The type of financing is important:
• Construction loan
• Mortgage loan
• Corporate loan

• Cost will include:

• Interest
• Fees
• Legal fees
• Appraisals
• Environmental studies or updates
 Investment and
Market Environment Analysis-
Tax Environment

• The tax rules and compliance regulations will have an important impact
on the profitability of a real estate investment. A clear understanding of
these rules and probable changes is necessary.
• Tax rules at every level should be assessed:
• Federal
• Provincial/state
• City
• Municipality
• Cross-border issues
 Investment and
Market Environment Analysis-

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