Part 1: Real Estate is big money and simple analysis is not too hard
Real estate assets are worth a lot of money: the ScotiaBank building in Toronto recently sold for 1.2 billion dollars. China is investing trillions of renminbi to improve their infrastructure. Governments which are in debt think of selling their assets. This aspect of the real estate business attracts many people. But, with this much money at stake, it is important to get the numbers right: “real risk comes from not knowing what you are doing” (according to Warren Buffet, but many other people have expressed the same idea in different ways, such as Sun Tzu about 2500 years ago)
Some financial analysis is important in all lines of businesses:
- Profit equals revenue minus cost.
- Revenue equals price time quantity.
(Real estate students also need to recognize the conceptual difference between profit (or income) and wealth (or asset value). More on that in later posts.) You would think that these bits of arithmetic would be obvious, and they should be. The evidence shows that, even after these ideas being explained in economics, marketing and accounting classes, they are not. Some business students think that selling more (units) is enough to increase revenue and that any increase in revenue increases profit. Even practical people can become confused to the point of despair.
Various classes show students how to prepare a pro forma profit and loss statement, for one year or longer, and how to collect the information necessary for its preparation. Running a business day-to-day requires operators to find ways to implement those well-intentioned numbers.
Real decisions require somebody to make a trade off and some opportunity costs are not be easy to state in monetary terms. Courses which focus on operational details may not seem terribly exciting to a 20 year old but, especially for somebody new to the industry, they help with tactical decision-making by revealing the real consequences of any action. So, we offer classes on such topics. Many students find jobs in those fields. Even students intending to focus on the financial side of the business find that having a balanced insight helps.