What Is Real Estate?

Real estate refers to the land as well as any permanent structures, such as an apartment, or any improvements on the property, whether made of natural or artificial materials.

It is the kind made up of actual property. It is different from personal property that isn’t permanently connected to the land, like boats, vehicles, furniture, jewelry, or farm-related equipment.

KEY TAKEAWAYS

• Real estate is a property that includes land and any permanent structures connected to it or constructed upon it, whether artificial or natural.
• The five main types of real estate include industrial, commercial, residential raw land, and special-purpose.
• The investment in real estate involves the purchase of a rent-to-own property, even land.
• Direct investment in real estate may be done through REITs or pooled real estate investments.

Understanding Real Estate

Terms like property, land, real estate, and the term real estate are frequently used interchangeably. However, there are differences.

Land refers to the surface of the earth from the bottom to the middle of the planet and then upwards towards the airspace above, including trees as well as minerals and water. The physical features of the land are its inertia as well as its indestructibility and distinctiveness in that each piece of land is distinct geographically.

Real estate is the land and any permanent additions made by humans, including homes and other structures. Any changes or additions made to the land that impact the value of a property are termed an improvement.

When land is upgraded, the total cost of investment in capital and the labor required for the construction of the improvement is an impressive fixed investment. Although a structure can be demolished, modifications like water, drainage, electricity, and sewer systems are more likely to last for a long time.

Real property is the land, as well as other land improvements, as well as the rights that come with its use and ownership.

Real Estate Agent

An agent for real estate is a licensed professional who organizes deals in real estate, coordinating buyers and sellers and acting as their representative in negotiations.

What Are the Types of Real Estate?

Real estate for residential use: Any property used for residential services. Examples include single-family houses, duplexes, condos, cooperative townhouses, and multifamily dwellings.

Real estate for commercial use: Any property that is used solely for business-related purposes, including gas stations, apartment complexes, supermarkets, Hotels, hospitals, offices, restaurants, parking facilities sho, shopping centers, shops, and theatres.

Industrial real property: Any property that is used for manufacturing, distribution, production, storage, and research and development.

Land: Includes vacant land, undeveloped property, and agricultural land such as orchards, farms, and ranches, as well as timberland.

Special use: Property that is used by the public, for example, cemeteries and libraries, government buildings, places of worship, parks, and schools.

The Economics of Real Estate

Real estate is the primary driving force of development in the U.S., and housing begins are the number of residential construction projects that are new each month published through the U.S. Census Bureau, is an important economic indicator. The report also includes construction permits, housing start-ups, and data on housing completions for single-family houses that have four or more units, as well as for multifamily structures with more than five units, including apartments. 1

Analysts and investors pay close attention to home starts as the figures can provide a general idea of the direction that economic activity is heading. Furthermore, the kind of newly-built housing developments may reveal the direction in which the economy is growing.

If housing starts show fewer single-family homes and more multifamily start-ups, this could indicate an imminent shortage of supply for single-family homes, which could increase the cost of homes. The chart below shows 20 years of housing start-ups starting from January. 1st, 2000 until February. 1 2020. 2

Twenty years of housing starts. Source: Federal Reserve Bank of St. Louis.

How to Invest in Real Estate

The most popular methods of investing in real estate include homeownership, investment or rental properties, as well as flipping houses. One kind of investor in real estate is a wholesaler of property who contracts a place with a seller and locates a buyer to purchase the property. Wholesalers of real estate typically find and buy distressed properties, but they don’t make any improvements or extensions.

The income from investments in real estate comes through rent or leases, as well as the appreciation of the property’s value. According to ATTOM, which manages the country’s most comprehensive database of property, the 2021 year-end U.S. home sales report states that home sellers across the nation earned the sum of $94,092, which is a 45.3%return on investment, an increase of 45percent from the $64,931 rated in 2020, and up by 71 percent over $55,000 two years earlier. 3

Real estate is greatly affected by its location, as well as other factors like unemployment rates, the local economy and crime rates, transport facilities, quality of schools, municipal services, as well as property taxes can impact the value of real property.

• ProsProvides a steady source of income
• Offers capital appreciation
• Diversifies portfolio
• Can be purchased using leverage
• ConsIs typically illiquid
• The influence of local factors is highly regional.
• It requires a large initial capital investment.
• It may require active management and expert knowledge.

Directly investing in real estate is carried out via a Real Estate Investment Trust (REIT), which is an entity that manages an income-generating portfolio of real estate. There are a variety of REITs. They include mortgage, equity, and hybrid REITs and are classified according to the way in which their shares are purchased and sold; for example, REITs that are traded publicly, public REITs that are non-traded, as well as private REITs.

The most well-known method to invest in REITs is to purchase shares that are traded through an exchange. They sell just like other securities through a business, for example, stocks. This makes REITs accessible and transparent. The REIT’s income is derived through dividends and the growth of its shares. In addition to REITs as individual REITs, investors are able to trade in mutual funds for real estate and property ETFs. (ETFs).

Another method of investing in real estate through mortgage-backed securities (MBS), which are available as the Vanguard Mortgage-Backed Securities ETF ( VMBS), comprised of federal agency-backed MBS that have minimum pool sizes of $1 billion and a minimum duration of one calendar year. Four or the iShares MBS ETF ( MBB), which is focused on fixed-rate mortgage securities. It also is a part of the Bloomberg U.S. MBS Index. The portfolio of securities includes bonds guaranteed or issued by government-sponsored entities like Fannie Mae and Freddie Mac.