Real Estate Principles

Units

1. 1

   Property types and markets

   4 lessons

   1. Property types and the real estate industryName the five main property types and the people who buy, finance, build and sell them, and compare the types by tenants, lease length and how exposed the owner's income is to one tenant leaving.
   2. Space and asset marketsExplain how the space market sets the rent a building earns, how the asset market turns that rent into a price through the cap rate, and how new construction links the two.
   3. What makes real estate differentExplain how immobility, durability, heterogeneity, high transaction costs, illiquidity, income and leverage set real estate apart from stocks and bonds, and compute the effect of costs and of a loan on an investor's return.
   4. Local economic base and demandUse the economic base multiplier to turn a gain in export jobs into total jobs, convert jobs into square feet of space demanded, and read employment growth against absorption on a scatter plot to judge how vacancy will move.
2. 2

   Property rights and ownership

   4 lessons

   1. The bundle of rightsDescribe property as a bundle of rights (use, lease, sell, bequeath, exclude), distinguish fee simple from lesser interests, and show how a lease, a mortgage and an easement each take a stick out of the owner's bundle.
   2. Forms of ownershipCompare sole ownership, tenancy in common, joint tenancy, partnerships, LLCs and corporations on who holds title, who is personally liable and how the income is taxed, with numbers for each.
   3. Government limits on propertyName the four powers of government over private property (police power, eminent domain, taxation and escheat), say when compensation is owed, and compute the effect of a zoning change, a taking and a property tax bill.
   4. Deeds, title and recording basicsExplain how ownership passes by deed, list the elements of a valid deed and the three common deed types, show how recording protects a buyer and builds a chain of title, and explain what title insurance covers and what it costs.
3. 3

   Leases and rents

   4 lessons

   1. Lease structure and key termsRead a lease as a contract with a lessor and a lessee, a term, base rent, a security deposit, a renewal option and rules on assignment and sublease, and compute what a tenant owes at signing and over the term.
   2. Gross, net and percentage leasesContrast gross, modified gross, single, double and triple net leases by who pays taxes, insurance and maintenance, compare a tenant's total occupancy cost with the landlord's net income, and compute percentage rent over a natural breakpoint.
   3. Effective rent and concessionsCompute effective rent as the rent per year left after free rent and a tenant improvement allowance, first simply and then as a present value spread level over the term, and use it to compare two leases.
   4. Escalations, expense stops and vacancyTeaches fixed bumps, CPI escalation and base-year expense stops, and how vacancy and collection loss reduce income, shown as a ten-year rent schedule table with a line chart of scheduled versus collected rent.
4. 4

   Valuation and appraisal

   4 lessons

   1. Value concepts and highest and best useDistinguishes market value, price and cost, and applies the four highest and best use tests (legally permissible, physically possible, financially feasible, maximally productive) with a vacant lot decision table.
   2. The sales comparison approachAdjusts comparable sales for size, age, location and condition, working from adjusted price to an indicated value, in a grid with three comparables and dollar adjustments to the subject.
   3. The cost approachComputes value as land value plus replacement cost new minus depreciation (physical, functional, external), using a worked bar breakdown of land, building cost and each depreciation type.
   4. The income approach and cap rateDerives value V = NOI / R from net operating income and the capitalization rate, with a one-year income statement from gross rent to NOI and a graph of value falling as cap rate rises.
5. 5

   Mortgage basics

   4 lessons

   1. Mortgage and note, parties and termsExplains the promissory note and mortgage or deed of trust, lien priority, principal, rate and term, with a diagram linking borrower, lender and the property pledged as collateral.
   2. Monthly payment and amortizationComputes a fixed-rate payment from the loan amount, rate and term and how each payment splits into interest and principal, as a stacked bar of interest and principal per year over thirty years.
   3. Down payment, LTV and mortgage insuranceDefines loan-to-value LTV = loan / value, down payment, private mortgage insurance and how LTV changes the rate, shown as a bar chart of payment and PMI at 95, 90 and 80 percent LTV.
   4. Closing and settlementWalks a buyer through earnest money, inspection, appraisal, loan approval and closing, with a closing timeline and a settlement statement table of debits and credits for buyer and seller.
6. 6

   Investment metrics

   4 lessons

   1. NOI and a first pro formaBuilds a one-year pro forma from potential gross income, vacancy, effective gross income and operating expenses to NOI, as a table with each line and a waterfall chart down to NOI.
   2. Cap rate, cash-on-cash and GRMComputes cap rate = NOI / price, cash-on-cash = before-tax cash flow / equity and the gross rent multiplier, comparing two apartment deals side by side in a metrics table.
   3. Time value of money for propertyApplies present and future value to a purchase with a cash flow timeline showing the price, annual NOI and sale proceeds, and shows why a dollar of rent today beats one later.
   4. NPV and IRR in briefIntroduces net present value and internal rate of return as the discount rate that makes NPV zero, using a five-year cash flow timeline and an NPV-versus-discount-rate curve crossing zero at the IRR.
7. 7

   The development process

   4 lessons

   1. Stages of developmentWalks through idea, feasibility, site control, entitlement, financing, construction, leasing and sale in order, as a horizontal timeline with the main actors and risk level at each stage.
   2. The development team and rolesIdentifies developer, architect, engineer, contractor, attorney, lender and broker and what each does, in an organization chart linking the developer to each party with contract types noted.
   3. Quick feasibility checkTests whether a project works by comparing total cost to completed value, with yield on cost versus market cap rate, shown as a simple budget table and a bar of cost against value.
   4. Land use planning and public approvalsIntroduces comprehensive plans, zoning districts and subdivision rules and how they separate uses, using a zoning map of residential, commercial and industrial districts with a legend.
8. 8

   Market cycles and risk

   4 lessons

   1. The real estate cycleDescribes recovery, expansion, hypersupply and recession phases and why construction lags demand, drawn as a sine-like cycle chart of occupancy and rent growth with the four phases labeled.
   2. Why supply overshootsExplains long development lags and forecast errors, which cause overbuilding, with a timeline of demand spike, groundbreaking, delivery and rising vacancy, plus a chart of permits against absorption.
   3. Interest rates and property valuesShows how falling interest rates compress cap rates and lift values via V = NOI / R, with a graph of value at cap rates from 4 to 9 percent and a table of a fixed NOI.
   4. Types of risk and diversificationSeparates market, financial, operating, liquidity and development risk, and shows how mixing property types and regions diversifies, with a risk matrix and a chart of return versus risk for property types.