Real Estate Entrepreneurship
Real estate entrepreneurship can be very profitable, but it also involves many risks. In developing countries, real estate development and real estate transactions are highly regulated and very involving; these factors have led to the evolution of a very sophisticated and dynamic industry sector. The high cost of most real estate transactions has led to the creation of various forms of financial support and investment through a range of public and private means.
Keywords Corporate Venturing; Entrepreneur; Entrepreneurship; Investment; Leverage; Real Estate; Real Estate Entrepreneurship; Real Estate Investment Trust (REIT); Strategic Renewal; UPREIT
Entrepreneurship: Real Estate Entrepreneurship
Entrepreneurship is a factor of production, risk taking, and innovation. In macro terms, the term "entrepreneurship" is synonymous with the advancement of an economy, and in micro terms, it refers to the process by which an individual or organization pioneers, innovates, and takes risks for growth and development. Although there is no universally accepted definition of entrepreneurship, it is widely accepted that entrepreneurship encompasses acts of organizational creation, renewal, or innovation that occur within or outside an existing organization (Sharma and Chrisman, 1999).
There are two types of corporate entrepreneurship: strategic renewal and corporate venturing. Strategic renewal refers to the corporate entrepreneurial efforts that result in significant changes to an organization's preexisting business or corporate-level strategy or structure. Corporate venturing, on the other hand, refers to corporate entrepreneurial efforts that lead to the creation of totally new business organizations within preexisting corporate organizations (Sharma and Chrisman, 1999).
Entrepreneurs are individuals or groups of individuals, acting independently or as part of a corporate system, who create new organizations or instigate renewal or innovation within an existing organization (Sharma and Chrisman, 1999). Entrepreneurs carry out new business permutations out of a quest for growth through innovation.
In most societies, rich or poor, a significant fraction of the total wealth is in the form of land and buildings. Dealing in real estate can be very profitable, due to factors such as the rising demand for property, which is a result of worldwide population expansion; growth in specialty real estate; and property appreciation. Buying property can be a wise strategy for entrepreneurs who have money to invest and are looking to diversify; interestingly, the largest number of millionaires in the period after the Second World War made their money from real estate development (Hayes and Harlan, 1968).
Real estate can be defined as land, together with land improvements. Land improvements refer to anything permanently fixed to a piece of land, as well as items attached to structures on the land, including buildings, fences, and things attached to buildings, such as plumbing, heating, and light fixtures. Real estate is also known as "realty" or "real property," and excludes personal property such as furniture and draperies, which are not fixed to land or land improvements.
In the United States and in many developed countries, the sale and lease of real estate are major economic activities and are heavily regulated by laws to ensure that property sellers are licensed and home buyers are protected. Legislation also regulates property development in general, taking into consideration issues such as health, safety, and zoning.
The two major types of real estate entrepreneurship are commercial and residential real estate entrepreneurship. Commercial real estate entrepreneurship involves the sale and lease of property for business purposes. Residential real estate entrepreneurship involves the sale and rental of land and houses to individuals and families for daily living.
Other types of real estate include Internet real estate and luxury real estate. The term "Internet real estate" has been used to describe the use of the Internet to promote, advertise, and view commercial and residential real estate for lease or purchase; this term has also been used to describe revenue-generating online properties such as domain names or websites.
"Luxury real estate" describes land and land improvements in prime locations, often with special views or amenities such as proximity to golf courses, school districts, and the downtown district. Along with higher prices, luxury real estate entails greater responsibility for those who handle transactions than ordinary real estate.
The real estate sector is composed of many distinct fields of specialization, and this has given rise to several categories of entrepreneurs. These include appraisers, who offer professional valuation services; brokers, who assist buyers and sellers in transactions; developers, who improve land for use by adding or replacing buildings; property managers, who manage properties for their owners; real estate marketers, who manage the sales side of the property business; and relocation service providers. Some architects also double as real estate developers and undertake their own projects. Within each field, an individual or business may specialize in a particular type of real estate, such as residential, commercial, or even industrial property. In addition, almost all construction businesses have a connection to real estate.
A real estate developer, or property developer, is one who makes improvements of some kind to real property, thereby increasing its value. The developer may be an individual but is more often a partnership, limited liability company, or corporation. There are two major categories of real estate development activity: land development and building development (also known as project development).
Land developers typically acquire natural or unimproved land and improve it with utility connections, roads, earth grading, agreements, contracts, and entitlements (the right to develop land with government approval). Once these improvements have been made to the raw land, it is typically subdivided and sold piece-by-piece at a profit to building developers or individuals.
Building developers, on the other hand, usually acquire raw land, improved land, or redevelopable property in order to construct building projects. The buildings are then sold entirely or in part to others, or retained as assets to produce cash flow via rents and other means. Some building developers have their own internal departments for designing and constructing buildings; this is more common among smaller developers. Others subcontract these parts of the work to third parties; this is typical of larger developers.
The real estate development process, though varying from project to project, roughly comprises the following phases: market research, site selection and feasibility analysis, due diligence and preliminary pro forma, property acquisition, project design and refined pro forma, obtaining of entitlements, financing and final pro forma, construction, leasing or sales, and operation (in cases where the project is retained as an asset).
The degree of hands-on involvement in real estate varies. Some entrepreneurs pay rental agents to fill vacancies and handle maintenance issues on their behalf. Others, who might enjoy the hands-on aspect of being a landlord, prefer to have more personal control of their investments. However, no matter the method or style of a real estate entrepreneur, he or she must consider and put into practice the entrepreneurial elements of organizational creation, renewal, and innovation in order to cope with challenges such as acquisitions and mergers, new competition, and emerging trends in technology, among others.
Real estate is, by its nature, an expensive non-liquid asset. Expense is high, sale is difficult, and the return on investment is delayed. As such, compensation for entrepreneurial efforts in real estate is tied to uncertainty and profits. Risk and choice are key aspects of real estate entrepreneurship; the entrepreneur must understand risk, how to measure it, and how to weigh its consequences ("Real Estate Managers as Entrepreneurs," 1999).
Buyers incur many additional costs over and above the sale price of a property. These costs usually include the cost of property surveys, appraisals, title searches, brokers' fees, and administrative and processing charges. In developed countries, most individuals, businesses, and small company buyers take out mortgage loans as capital to purchase and improve land and buildings. Real estate developers have to take care of the additional costs of any improvements (known as "hard costs") and the fees of various consultants (known as "soft costs") by themselves.
Steiner (2003) describes seven corporate identities among small real estate businesses companies. These are:
- Gamblers — This group of small businesses considers real estate to be a capital investment activity.
- Investors — This group of small businesses also considers real estate to be a capital investment activity.
- Service Managers — This group views real estate business as facilities management,...
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