The real estate industry is a big business generating billions of dollars in revenue annually, and there are ample opportunities for entrepreneurs to turn a profit. Last year there were approximately 210,000 companies operating in the residential brokerage and management field, which generated $200 billion in revenue; there were 35,000 companies operating in the commercial brokerage and management field, generating $35 billion in revenue.
Real Estate Industry Background
Real estate is a cyclical industry, reacting to macroeconomic trends such as interest rates, population growth, and economic strength. Real estate soared in the post-World War II economic boom of the 1950s, sank in the inflation-riddled 1970s, rose again in the early 1980s until the depression at the end of that decade, and was prosperous again by the end of the century. Low interest rates in the mid-2000s allowed residential real estate to boom even when the economy was slow – until the mortgage crisis hit, and prices collapsed.
However, despite what is happening with the greater economy and real estate prices in general, the real estate industry offers diverse opportunities for the entrepreneur, including some hedges against these trends when they’re moving in the wrong direction!
The real estate industry consists of three primary fields: brokerages, leasing, and management.
Real Estate Brokerage
Real estate brokers bring together buyers and sellers of property, assist in price negotiations, and facilitate the work involved in deals from initial interest expressed through money being exchanged at closing. Examples of services provided include property appraisals and inspections. Generally, the seller of a piece of property pays a commission based on a percentage of the sale price (usually 5 or 6 percent). This commission is split between the buyer’s broker and the seller’s broker.
Since commission is based on property value, brokers make more money for higher-priced deals. The value of a real estate investment is determined by many things – but location is key (“location, location, location” as they say!). Factors controlling the value of a location include public transportation access, the quality of the roads and schools, income levels and the strength and stability of the local economy.
Real estate brokers must be licensed in the state in which they work, and while it is estimated that there are over 1 million licensed brokers, most are either inactive or consider brokerage activity as a secondary line of work.
Leasing Agents and Management Companies
Leasing agents work with property owners to handle the complexity involved with finding, vetting and signing tenants for their properties – and handling all the paperwork!
Management companies operate buildings and other properties, making sure they are running properly, paying utilities, hiring staff and performing maintenance. Many management companies will also act as leasing agents for the property. Since most property expenses are fixed, maintaining low vacancy rates is critical to management companies profitability.
State of the Real Estate Industry in 2017
The real estate industry is divided into residential and commercial real estate services, although some brokerages and management companies engage in both. Both the residential commercial segments are quite fragmented. In each, the fifty largest companies make up about thirty percent of the industry’s total revenue.
Real Estate Industry Risks
Before considering an investment in any industry, it’s best to be aware of the risks. In the real estate industry these include (but of course are not limited to!) the following:
- Macroeconomic factors beyond the control of the business owner, such as downturns in the local or national economy
- Changing demand – a location once coveted can change quickly and properties can become less desirable. Of course, the reverse is also true – skilled selection of properties can reap profits in up and coming areas.
- Increased supply – building of new properties, and/or newly for sale properties in the area can drive rental or property prices down as well.
- Changing priorities or requirements for building management companies, particularly for aging properties. For instance, indoor air quality liability can be a serious legal issue, as can required removal of mold growth.
Real Estate Industry Opportunity
More than ninety percent of people use the internet before purchasing real estate, and brokers have embraced online marketing with pictures of properties and virtual tours in order to prime their potential customers. Better educated purchasers, while potentially more discerning, can also speed up the sales cycle by knowing what they want and need.
While there are fears that this will eventually eliminate the need for brokers all together, it’s unlikely to happen anytime soon. There is an expertise and skill to correctly marketing and showing a property – and it takes a lot of time. Property owners, particularly homeowners, can not dedicate the time to sell a home on their own, even with online tools smoothing out the process.