Real Estate Investment Banking Basics
In spite of what the current financial markets may look like, real estate can be a stable field over time. After all, people always need property to live on and open businesses on, and they’ll need someone to help them find and finance that property. It’s a field that’s stable in its basic principles but also regularly changing.
You can learn about basic real estate investing from this course, but first read on to learn more of the smaller-scale principles used in banking deals.
What Real Estate Investment Bankers Do
Investment banks play a major role in raising capital for large-scale development projects. There are a few different ways that they get involved in real estate.
REITs: Real Estate Investment Trusts, or REITs, are equity firms that buy and sell, as well as operate and improve, properties. They can specialize either geographically or by property type, like residential or retail, or may work in broader areas. They’re structured as a corporation, trust or association, and some are listed publicly. They tend to issue high levels of their income as dividends, and typically have low cash on hand, with large amounts coming in and going out at any one time. Cash flow and the ability to raise capital are frequent concerns here, because of regulations concerning the level of dividend payouts as well as the sourcing of capital.
Internal divisions: In the residential sector, home building companies, which are often concentrated within a geographic region, will sometimes have an internal financing division, the same way that major car companies like GM do. In good real estate markets, this is an important way that home purchases get financed, although it can then become a weakness when the home market slows down.
Some investment bankers will deal not in the properties or buildings but in the material used, known as aggregates.
Larger individual properties: Along with residential, retail, other commercial, and industrial real estate, gaming and lodging (meaning casinos and hotels, which are often connected) also depend on large-scale investment to get started, especially since revenue tends to be heavily seasonal. Property value here depends on getting people to stay and to spend money within the hotel, especially if it includes a casino, which drives amenity investment.
Real estate groups within investment banks typically don’t get involved with individual properties. They’re more likely to get involved with larger scale REITs, internal financing divisions, or chains of properties, dealing in larger-scale broad financing deals. They approach business from a financing and accounting, rather than a development, perspective. Udemy’s equity research course can show you the type of analysis usually done for real estate investment.
Variations in Geographic Areas
Larger, more diversified funds will often have investments throughout a number of different areas—this is an important aspect of insulating their portfolios from troubles with local markets. The major differences between regions tend to be the opportunities available, whether because of differences in residential markets or the different types of business properties available. Tourist-heavy areas will have more hotels, and more high-end hotels, than places that don’t depend on drawing and keeping visitors, for example.
The opportunities available for investment in different areas can also depend on legal restrictions. For example, casino development is often heavily limited if not completely disallowed, which limits the types of lodging and entertainment development available for banking divisions to get involved with.
Legal Standards and Limitations
In the United States, REITs are defined and clearly regulated under the Internal Revenue Code. Whether they’re public or not, the owners are considered shareholders and investors, which means that if 90% of the company’s taxable income is distributed as dividends, the REIT can avoid liabilities for corporate income tax. This is intended to provide a similar structure to that of mutual funds in the stock investment world.
Other investment banking regulations are federal, such as the formerly applicable Glass-Steagall Act and current Volcker Rule that separate investment banking from commercial banking. Generally, these tend to be more concerned with the company as a whole rather than real estate divisions. However, the Volcker Rule is indicative of other federal regulations concerning cash flow and where investment divisions, including real estate, can get the income needed to disburse into their investments. Typically, money from individuals can’t be directly used as capital. Check out Udemy’s course on safely investing in real estate to learn more.
Local restrictions, such as casinos (as mentioned above), can sometimes limit the real estate investment options available. While developers are sometimes able to work around those regulations, it’s important to be careful getting involved in deals that risk antagonizing the community.
Getting Involved With Real Estate Investment Banking
There are direct ways to break into this area of banking, including a variety of direct recruiting and application processes. For some applicants, diversity programs can be a useful way to get noticed. When you’re still in school, it’s important to keep an eye out for these types of opportunities and to be able to describe the skills and training you already have in order to make yourself look like an attractive potential employee.
Networking, whether with school alumni or current employees in the field, is as important here as in any other field, and can also be helpful for getting yourself noticed and trusted.
However, if you’re having trouble finding the job you were going for directly, there are indirect ways to make it into the field. Other roles in either an investment bank or a real estate firm can be helpful if you find a way to help out a colleague doing the kind of work you’re more interested in as a way to get a transfer or create a new role for yourself. Try an Udemy course to learn more about investment banking and look for good career paths.
The important thing, above all, is to show not just ability but passion. If you’re interested in getting a start in investment banking as a way to work in real estate investing, you can read more here about starting your career.
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