Real estate Industry is a big business generating billions of dollars in revenue annually, and there
are several 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 Industry is a cyclical industry, reacting to macroeconomic trends such as interest rates,
population growth, and economic strength. It 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 2016
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.