Last night I had an insightful first class for PROP6100 – Real Estate Investment & Finance taught by Andre Kuzmicki. Andre is a great professor because he knows how to engage the students by asking the right questions that prompts students to think in a practical manner while making it fun with his clumsy humour. Here are my key takeaways for the class:
Key Takeaways
1. Real Estate Investment and Finance is all about Math
2. In Real Estate you need to make a lot of assumptions. There are always unknowns. Analysts need to make assumptions on things to figure out how feasible it is to invest in the property.
3. There are lots of risks to a deal and you also get compensated for taking risks
4. Cap Rate is a metric used in the industry to tell how much a property is worth. It enables us to compare and estimate property values by expressing it as a function of forward annual net operating income
Cap Rate = NOI / Value
This class was insightful because it prompts students to make assumptions when there is uncertainty. This applies to many things in general. The interesting thing with the real estate industry is that each asset is unique. Its original. Its one of a kind based on the fact that each property occupies a unique location. This is good because it creates room for opportunity. Someone may view a property in a certain way. Another investor may have a completely different view of the same property. For example, if you are looking at a property that looks like it may be a good rental prospect you may be drawn to it. If you have never rented out a property before and gone through the trouble of finding tenants, drawing up lease agreements and collecting rent each month, you may be willing to pay say $100,000 for it. However, someone who sees the same property that DOES have experience renting out properties may be willing to pay $130,000 for since to him its easy money. This is the unique thing about the real estate industry. Its different from the Stock Market because in the stock market the value of a property is clearly known based on the current stock price.
Photo by 3dpragmatik
