Posted over 3 years ago

Bill's RE 101: "Principles of Economics", Where Your Business Begins

The basics of real estate begins in economics, a scary thought for most but the basics are not difficult. Profits in any business really come from the efficient use of basic "Principles of Economics".

There are four principles of economics; Land, labor, capital and entrepreneurship, these are the ingredients required in any business. Business can not be carried out without land, it is the one element that can not be substituted. Labor must be applied to accomplish the activities required to carry out any business venture. Capital is the availability and use of money or assets needed to advance any business purpose. Entrepreneurship is the managerial oversight to direct efficient uses of the other economic functions, it includes the development of the business vision, directing the mission and ongoing management to generate any benefit.

To have any successful business venture three of the four functions must be present. As mentioned, land can not be substituted as land is always a required function. You must have some location to carry out any activity, you have to be somewhere. I recall one student who tried to come up with some means of conducting business without the use of land. Due to gravity, all goods and services will be connected to the earth at some point!

All other elements mentioned may be substituted, if you lack capital you can increase labor or entrepreneurship to compensate for the lack of capital. If you have plenty of capital you may hire others to perform labor or management. Additional managerial aspects can reduce labor, work harder and you may use less capital, so these three functions may be used in combinations at various levels, but land will always be a function in our economy and conducting business requires entrepreneurship.

While understanding these relationships is pretty simple seeking the most efficient combination can evolve into very complex studies, but in the beginning it's usually about acquiring these factors to use rather than their most efficient use.

Land is the subject or any real estate venture and is basically available to be used by anyone attempting to conduct business, that's pretty much a given. You can conduct your real estate business at your kitchen table or on the hood of your car.

Capital is the one aspect that is always in a shortage with anyone starting off in business. Some may have more capital than others, but it is a limited resource. Capital will always be required to conduct real estate activities, if for nothing else for gas to drive around, or to pay the phone bill, so there are always expenses involved.

That only leaves two other available principles to be applied, labor and entrepreneurship. Remember, it takes at least three of the four principles to be successful and you can certainly utilize all four. Labor must be applied to some extent but entrepreneurship is the most valuable aspect to be used. You know how Tom Sawyer talked Huck into painting the fence, it was Tom's entrepreneurship that got the fence whitewashed!

Entrepreneurship means using brain power! Confused? Land is always a factor, management must be there to direct the business to apply capital and labor efficiently. The greater the degree of entrepreneurship the more profitable your operation will be.

Everyone in real estate uses these principles in conducting their activities. Rehabbing a property consumes labor, acquiring materials takes capital, management is consumed in selecting a property and seeing the project to its conclusion. Wholesaling properties is a popular strategy for beginners as it requires less capital, but the lack of capital must be made up by labor and entrepreneurship, doing it well requires much more knowledge about the land and its improvements than other strategies. In order to wholesale successfully you'll need to make it profitable for another in real estate investor, to do that you really need to understand the business the buyer is in. If your product is not valuable in their business they won't buy it! Buying and holding real estate requires more capital to purchase and meet expenses. Property management is mostly about entrepreneurship and labor, together with the property and a dash of capital completes the principles utilized.

Beginners then need to look to real estate strategies that utilize these principles that are most available to them and that may be applied in the most efficient manner. Regardless of how you combined these principles, the key to making profits in real estate is the degree of entrepreneurship applied, to do that it boils down to knowledge. A manager or entrepreneur who has very little knowledge will have very little to work with, unless you have buckets of money to simply hire expertise you'll need to learn.

Any really good real estate entrepreneur will never concentrate in one small niche of dealing in the business. While they may specialize in certain areas of real estate, such as fix and flips or buy and hold strategies their ability to adapt to market conditions is imperative to success. Being entrepreneurial requires adapting to change, being nimble to act before the competition and applying the most efficient use of the principles of economics. To gain that type of knowledge one must study the basics of real estate.

Next time, we will move on through the basics needed to be a real estate entrepreneur required to profit in the business.

Comments (15)

  1. Tiny 1448386327 avatar financexaminer

    Thank you everyone!

    This is the foundation of any business venture, knowing how to employ these functions is the key to success. 

    More to come, I promise! I'm going to begin working with voice recognition software to see if I can speed up the content process, there is just so much to explain! :)

  2. Tiny 1448386368 avatar tomj16

    Great blog Billy. New to REI and trying to find my way.

  3. Tiny 1454739787 avatar dwryu72

    I like it! Entrepreneurship trumps all. Lots of ways to get into the game ^^

    Great advice. 

  4. No avatar tiny

    "When the Student is Ready, the Teacher Appears."

    It is very true, whether the "teacher" is an event, circumstances, or an actual person, that you often find just what you need, at just the right time.

    Having capital, a thirst for learning, a lifelong interest in REI, but no clear idea how to begin, I  have stumbled across your article(s) here on BP. 

    ...what an amazing resource you have provided.

  5. Tiny 1412724949 avatar orinion

    Enjoyed reading it Bill.  What an amazing concept.  Keep it coming.  

  6. No avatar tiny

    Fantastic article!  I'm looking forward to reading more in the future.

  7. Tiny 1400108325 avatar woola33

    Great content Bill!  Aren't you due for a follow-up?  Patiently waiting!

  8. Tiny 1408763281 avatar tiankhy

    Great Article!

  9. Tiny 1448388753 avatar jdwlaw

    Hey Bill,

        I like the way you are laying the foundation for a more intensive understanding of real estate.  One of the problems with just learning by doing without truly understanding the principals are that when things change you do not have an understanding of how you should react and why.  Very basic but very good article.

    1. Tiny 1448386327 avatar financexaminer
      Thanks Jerry, I've always thought the best place to start something was at the beginning.

  10. Tiny 1409266719 avatar 1000doors

    Real estate "Business can not be carried out without land, it is the one element that can not be substituted." True story.

  11. Tiny 1399687737 avatar kdajm

    Hi Bill, this is a nice article. Thank you.  I am most interested in buy and hold but I hear what you are saying about learning to adapt to the market.  It sounds like you have a lot of great info to share for future articles.  Hope you are having a great summer! 

  12. Tiny 1448579709 avatar nattydread

    Bill: Either no one made it though the article or they are wary of poking the bear ... the article is not that long {by Gulley standards}, so perhaps ... Since my first read through the article I've been carrying around the statement "Business can not be carried out without land, it is the one element that can not be substituted." and having an internal debate whether it is still a universal principal. In the realm of real estate it's an altruism that you cannot have a business without land. However, in the more abstract labour of software design and development, the necessity of land for a successful business is a less certain. Outside from the fact the minds producing the software, or rather their corporal vessels, require a place to live, land is not essential for the business itself.

    1. Tiny 1448386327 avatar financexaminer

      Hi Roy, where does this programmer/operator sit? I didn't invent these, I'm just the messenger ......  LOL


      1. Tiny 1448579709 avatar nattydread

        The programmer may sit in a house; with a mouse; here or there; anywhere....

        My point was that, in certain fields, land need not be within the scope of the business itself.