Real Estate
What Is Real Estate?
Property, as well as any permanent improvements related to the land, whether natural or man-made, such as water, trees, minerals, buildings, dwellings, fences, and bridges, is referred to as real estate. A type of real property is real estate. Vehicles, yachts, jewels, furniture, and farm equipment are examples of personal property that are not permanently tied to the land.
TAKEAWAYS IMPORTANT
Land and anything permanently related to it, whether natural or man-made, is referred to as real estate.
Residential, commercial, industrial, raw land, and special use are the five basic types of real estate.
You can buy a home, a rental property, or another piece of real estate directly or indirectly through a real estate investment trust (REIT).
Real Estate Fundamentals
Although the phrases land, real estate, and real property are sometimes used interchangeably, there are some important distinctions to be made.
The term "land" refers to the earth's surface, including trees, minerals, and water, from the surface to the center of the earth and upward to the airspace above.
The term "real estate" refers to the land as well as any permanent man-made structures such as houses and other structures.
Real property, one of the two basic types of property, refers to the interests, benefits, and rights that come with owning real estate.
The physical surface of the land, what is above and below it, what is permanently attached to it, and all ownership rights—including the right to hold, sell, lease, and enjoy the land—are all included in real estate.
Personal property, which includes all property that does not meet the concept of real property, should not be confused with real property. Personal property has the major feature of being transportable. Vehicles, boats, furniture, clothing, and cellphones are all examples.
Physical Properties of Real Estate
Land has three physical characteristics that distinguish it apart from other economic assets:
Immobility. While some land can be removed and the topography changed, the geographic position of any piece of land cannot be changed.
Indestructibility. Land is long-lasting and unbreakable (permanent).
Uniqueness. There can't be two identical plots of land. Despite their similarities, each parcel is geographically distinct.
Economic Qualities of Real Estate
Land has a number of distinct economic characteristics that determine its investment value:
Land is not regarded rare, yet the total supply is limited.
Improvements: An improvement is defined as any additions or alterations to the land or a building that affect the property's value. The term "improvements on the land" refers to private improvements such as houses and fences. Improvements to the land are improvements of a public character (e.g., sidewalks and sewer systems).
Investment permanence: Once land has been developed, the total capital and labor utilized to construct the improvement represents a significant fixed investment. Even if a structure can be demolished, upgrades like drainage, power, water, and sewer lines are usually permanent since they are too expensive to dismantle (or replace).
Preference for a specific location or area. People's preferences and tastes in a certain location are influenced by factors such as convenience, reputation, and history. One of the most essential economic aspects of land is its location (thus the expression "location, location, location!").
Different types of real estate
Real estate is divided into five categories:
Any property used for residential purposes is referred to as residential real estate. Single-family homes, condos, cooperatives, duplexes, townhouses, and multifamily residences with fewer than five individual units are examples of multifamily housing.
Apartment complexes, gas stations, grocery shops, hospitals, hotels, offices, parking facilities, restaurants, shopping centers, stores, and theaters all fall under the category of commercial real estate.
Any property utilized for manufacturing, production, distribution, storage, or research and development is referred to as industrial real estate. Factories, power plants, and warehouses are just a few examples.
Undeveloped land, unoccupied land, and agricultural land are all examples of land (farms, orchards, ranches, and timberland).
Cemeteries, government buildings, libraries, parks, houses of worship, and schools are examples of special purpose property.
How Does the Real Estate Business Work?
Despite the size and complexity of the real estate market, many people believe it is only made up of brokers and salespeople. However, real estate employs millions of people in a variety of industries, including sales, appraisals, property management, financing, building, development, counseling, education, and a variety of others.
Many professionals and businesses rely on the real estate market, including accountants, architects, banks, title insurance companies, surveyors, and lawyers.
In the United States, real estate is a key engine of economic growth. Housing starts, or the number of new residential construction projects started in a particular month, are a major economic statistic provided by the US Census Bureau. The data in the study is separated into three categories: building permits, housing starts, and housing completions.
Single-family dwellings
Homes with two to four apartments
Apartment complexes1 are multifamily buildings with five or more units.
Housing starts are closely watched by investors and analysts because they can provide a general sense of economic direction. Furthermore, the sorts of new housing starts might provide insight into the state of the economy.
Housing Starts is a good example.
For example, if housing starts show fewer single-family homes being built and more multifamily buildings being built, this could signal an upcoming supply shortfall for single-family homes, potentially driving up home prices. From January 1, 2000, through February 1, 2020, the following graph depicts 20 years of house starts.
What is the Best Way to Invest in Real Estate?
Real estate can be purchased in a variety of ways. The following are some of the most prevalent ways to invest directly:
Homeownership
Property that is rented
Flipping houses
If you buy physical property (for example, rental properties or house flipping), you can make money in two ways: rent or lease revenue and appreciation in the value of the property. Unlike other investments, the location of real estate has a significant impact. Real estate values can be driven up or down by factors such as employment rates, the local economy, crime rates, transit facilities, school quality, municipal services, and property taxes.
You can also invest in real estate through indirect means. A real estate investment trust (REIT)—a firm that owns a portfolio of income-producing real estate—is one of the most common ways to do so. REITs are divided into three categories: equity, mortgage, and hybrid REITs. REITs are further divided into categories based on how their shares are purchased and sold:
REITs that are publicly traded
Non-traded REITs are REITs that are not traded on a stock exchange.
REITs that are privately held
The most common way to invest in a REIT is to purchase publicly listed shares on a stock exchange. REITs are particularly liquid and transparent since their shares trade like any other security listed on an exchange (think equities).
REITs, like many other companies, generate income through dividend payments and share appreciation. You can invest in real estate mutual funds and exchange traded funds in addition to individual REITs (ETFs).
Securities Backed by Mortgages
Mortgage-backed securities are another way to invest in real estate (MBS). Due to their role in the mortgage catastrophe that precipitated the global financial crisis in 2007-08, they garnered a lot of bad attention. MBS, on the other hand, are still in use and traded.
ETFs are the most accessible way for the typical individual to invest in these products. These products, like other investments, come with some risk. They may, however, provide portfolio diversity. Investors should look into the holdings to make sure the funds specialize in investment-grade mortgage-backed securities rather than the subprime version that played a role in the financial crisis.
The following are two prominent ETFs that provide regular investors with access to MBS:
The Vanguard Mortgage-Backed Securities ETF (VMBS) is a mutual fund that invests in mortgage-backed securities. This ETF tracks the Bloomberg U.S. MBS Float Adjusted Index, which is comprised of federal agency-backed MBS with minimum pools of $1 billion and a one-year maturity.
The iShares MBS ETF (MBB) tracks the Bloomberg U.S. MBS Index and focuses on fixed-rate mortgage securities. Bonds issued or guaranteed by government-sponsored firms such as Fannie Mae and Freddie Mac are among its holdings, and they are AAA-rated.