Most people look at a property and see a building. Maybe they notice the kitchen, check out the neighborhood, or calculate what the mortgage would cost. But that's barely scratching the surface of what makes a property a smart investment or a risky one.

Harvard Business School Professor Arthur Segel developed what he calls the Real Estate Diamond Framework, and it's one of the clearer ways I've seen to break down how real estate investments actually work. The framework considers four factors that all influence each other: the product itself, the people involved, the external environment, and capital markets. Think of it like a diamond with each factor at one corner, and arrows connecting them all.

The brilliance of this approach is that it forces you to look at everything that matters, not just the price tag and square footage.

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The Product: What You're Actually Buying

Start with the obvious. The product is the building and the land underneath it.

One advantage real estate has over stocks or bonds is that you can physically walk through it. You can see the cracks in the foundation, test the water pressure, count the parking spots. But looking at a property the right way means going deeper than a quick walkthrough.

You need to think about infrastructure. Is the building sound? Are there design flaws that make spaces hard to rent or use? I've seen beautiful buildings that nobody wants because the floor plan doesn't work, or the ceiling height is wrong for modern needs, or the walls are too thin. These things matter.

Physical location extends beyond just the address. How close is this property to highways, transit, good schools, shopping, or wherever the tenants or buyers would actually need to go? You're not just buying a building. You're buying a spot in a specific place at a specific time.

And then there's the market around you. What are vacancy rates doing? How fast are spaces getting absorbed when they hit the market? Are rents climbing or falling? You can have a great property in a terrible market and still lose money.

Don't forget the less exciting stuff either. Property taxes, maintenance costs, required improvements. These numbers add up fast. A property that looks like a deal based on purchase price can become expensive in a hurry once you factor in everything else.

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The People: Real Estate Runs on Relationships

Here's where real estate gets interesting. And complicated.

Professor Segel points out that real estate has a flexible deal structure, which means pretty much everything is negotiable. But that also means success depends heavily on the relationships you build and maintain.

Think about everyone involved in a typical property investment. You need the fire chief to approve your plans. You need the building inspector on your side. You need good contractors who show up and do quality work. You need lawyers who understand local regulations. You need architects who can solve problems creatively. You need neighbors who won't fight every little thing you try to do.

The list keeps going. Roof inspectors, elevator inspectors, subcontractors, local officials, property managers, leasing agents. Each one of these relationships can make or break your investment.

And because everything in real estate is negotiable, your ability to negotiate matters more than in most other investments. You're not just clicking "buy" on an app. You're sitting across from people, working through details, finding compromise. If you're terrible at that, or if you've burned bridges with key players in a market, you're at a serious disadvantage.

When you're analyzing a potential investment, think about the people. Do you have good relationships with the key players? If not, maybe this isn't the right deal for you, regardless of how the numbers look.

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The External Environment: What You Can't Control

Every investment has risk. Real estate just makes that risk more visible because you're dealing with a physical structure sitting in a real place.

Weather and natural disasters can wreck your investment overnight. A flood, wildfire, or earthquake doesn't care about your business plan. And with climate change, areas that were historically safe are seeing new risks. Insurance companies are noticing too, which is why premiums keep climbing in certain markets.

Then you have regulatory changes. Local governments can change zoning laws, raise property taxes, implement rent control, or pass new building codes that force expensive upgrades. These decisions happen above your head, and you just have to deal with them.

Demographics shift. The neighborhood that's hot today might empty out in five years as people move to different areas or new developments pull tenants away. Economic slowdowns hit differently depending on what type of property you own and where it sits.

Technology is changing real estate faster than most people realize. 3D-printed homes are already being built in places that need housing fast. Remote work changed office real estate probably forever. Retail has been reshaped by e-commerce. Every property type faces disruption from technology in some form.

You can't control any of this. But you can think about it. You can try to spot trends early. You can avoid putting all your money into markets or property types that are especially vulnerable to changes you see coming.

The external environment is the wildcard in every real estate investment. The best you can do is stay informed and be realistic about what could go wrong.

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Capital Markets: How You're Paying for All This

Real estate takes a lot of money upfront. That's just the nature of it. So understanding how you'll fund your investment matters as much as understanding the investment itself.

Capital markets are the channels that connect people who have money with people who can put that money to work. In real estate, that usually means debt (mortgages) or equity (buying ownership shares).

Most investors use debt because real estate lends itself well to leverage. You borrow against the property itself, which reduces how much cash you need upfront and can amplify your returns if things go well. Mortgages make up the largest asset class in the United States, which tells you how common this approach is.

Equity investing means you buy a share of the property and participate in its profits. You typically see returns when the property gets refinanced or sold. Equity gives you more skin in the game but also potentially higher rewards if the property performs.

Both debt and equity can come through private channels (direct deals between parties) or public channels (REITs and other structured investments). Private transactions give you more control but less liquidity. Public transactions offer easier entry and exit but less control over individual properties.

The capital markets available to you depend on local laws, market conditions, and your own financial situation. Interest rates matter enormously here. When rates are low, debt is cheap and real estate investments look more attractive. When rates climb, like they did in 2022 and 2023, everything gets more expensive and returns compress.

Transaction volumes dropped hard during the recent rate spike, but they're starting to recover now that rates have come down from their peak. The capital markets are opening back up, which means more deals are getting done.

When you're looking at an investment, think carefully about how you'll fund it and what that funding will cost you over time. The best property in the world is a bad investment if you can't afford to hold it.

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How the Four Factors Work Together

The diamond shape isn't just visual. It represents how these four factors constantly influence each other.

Changes in capital markets (like rising interest rates) affect what products become attractive and which ones become too expensive. The external environment (like new zoning laws) can change what you can do with a product. The people involved can open doors to better financing or help you navigate regulatory challenges. And the product itself determines which people you need to work with and what external risks you're exposed to.

A good example is how remote work (external environment) changed office real estate (product), which affected financing options (capital markets) and forced building owners to work with new types of tenants and brokers (people). Everything connected.

When you're analyzing an investment, you can't look at just one factor and feel confident. You need to consider all four and how they interact. That's what makes the framework useful. It forces you to think comprehensively.

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Applying This to Real Investments

So how do you actually use this framework when you're looking at a property?

Start by honestly assessing each corner of the diamond. Write it down if that helps. For the product, visit the property multiple times at different hours. Talk to current tenants if there are any. Pull public records on comparable sales and rental rates in the area. Check the inspection reports carefully.

For the people, map out who you'll need to work with and what those relationships look like. If you're new to a market, spend time building connections before you invest. Talk to local contractors, property managers, and officials. Get a sense of who's reliable and who's not.

For the external environment, research local trends. Are people moving to this area or leaving? What industries drive the local economy? Are there any major regulatory changes on the horizon? What climate risks exist? Look at demographic data, economic forecasts, and local news to get a full picture.

For capital markets, understand your financing options completely. Shop around for rates. Know what terms are available. Understand the total cost of capital over the life of your investment. And be realistic about what you can afford if things don't go perfectly.

Then look at how these factors interact for this specific investment. Does this product fit well with the current capital markets environment? Do you have the right people in place to handle the external risks you're facing? Are there any obvious conflicts or problems where the factors don't line up?

This kind of analysis takes time. But that's the point. Real estate investing isn't something you rush into based on a feeling or a single number that looks good. The framework helps you slow down and think through all the dimensions that actually matter.

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What This Means Right Now

The real estate market in late 2025 is at an interesting point. Interest rates have come down from their peak, which is helping capital markets open back up after a tough couple of years. Transaction volumes are recovering. But there's still uncertainty around inflation, economic growth, and policy changes.

Different property sectors are in completely different positions. Industrial and data centers are seeing strong demand. Multifamily housing faces supply challenges in some markets but oversupply in others. Office real estate is still working through the remote work transition, with quality space getting scarce in some places while older buildings struggle. Retail is surprisingly strong in core locations but weak in secondary markets.

The external environment factors are particularly unpredictable right now. Trade policy, interest rate trajectories, climate events, and technological disruption are all creating more uncertainty than usual. That doesn't mean you shouldn't invest. It means you need to think even more carefully about the scenarios that could play out.

The people factor is getting more complex too. Labor shortages in construction and property management are affecting costs and timelines. Regulatory environments are shifting as cities and states respond to housing shortages, climate goals, and changing work patterns.

If you're looking at real estate investments right now, the diamond framework is especially useful because it forces you to account for all this complexity. You can't just look at the building and the price anymore. You need to consider everything.

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The Bottom Line

Professor Segel's framework isn't magic. It's just a structured way to think about investments that are inherently complicated. Real estate involves physical products, messy human relationships, unpredictable external forces, and complex financing. Trying to analyze all that without a framework is how people make expensive mistakes.

The diamond forces you to be comprehensive. It reminds you that everything connects. It prevents you from getting too focused on one attractive feature while ignoring serious problems in other areas.

Good real estate investing isn't about finding the perfect property. It's about understanding all the factors that make a property succeed or fail, and making informed decisions based on that complete picture.

Whether you're buying your first rental property or your fiftieth commercial building, start with the four corners of the diamond. Look at the product honestly. Think about the people carefully. Consider the external environment realistically. Understand your capital options completely.

Then, and only then, decide if the investment makes sense.