Real estate is a parcel of land and everything that belongs to it permanently, be that its natural resources like water, ground and trees, or any man-made additions - such as buildings, communications, fences, etc. Real estate is associated with real property, contrasted with personal property. While real property is permanently attached to a certain geographic location, personal property includes movable things that can be removed from the land - e.g. furniture pieces, vehicles, equipment, etc.
There are two other terms used interchangeably with “real estate”: ‘land’ and ‘real property’. In casual conversations, all of them refer to the land in someone’s ownership, yet there are subtle differences.
Land means a physical space from below the ground to the airspace above, including everything there is - from underground water and minerals to grass and trees.
Real estate refers to the land with all the existing additions attached to it permanently, like houses, fences, warehouses, swimming pools, etc. When used in a broader sense, it also suggests the ownership rights inherited by a person with the purchase of real estate - e.g. the right to possess, control and sell it, or derive income from.
Real property stands for one of the two main categories of property and covers interests, benefits and rights attributed to real estate owners. While real property includes units that stay permanently on the land, the primary characteristic of personal property is the opposite. Things in this group can be replaced or carried and basically include everything that doesn’t fall to the real estate class.
Physical features of Real estate
Real estate is an economic asset and differs from any other type of asset by 3 features:
- Immobility. Despite the possible alterations of landscape, any parcel of land sits at an exact geographic location, and its position on earth can never be changed.
- Indestructibility. Land is undestroyable and can be used at all times.
- Uniqueness. Despite the shared features, each parcel of land is geographically unique and cannot be the same with any other one.
Economic concept of Real estate
Apart from the physical aspects of Real Estate, its concept as an asset is shaped by economic characteristics that define its investment value:
- Scarcity. Even though land isn’t perceived as a scarce resource, its availability is limited.
- Improvements. Any works performed to make a positive change to the real estate like a repair or house renovations affect the property’s value and help the land owner to make a productive use of their asset. Such changes are called improvements either on or to the land. Improvements on the land have a private nature (buildings and fences). Improvements to the land are of a public nature (sewage systems, cable communication).
- Permanence of investment. After improvements have been put in place, the total capital and labour used in construction works become a fairly large fixed investment for the landowner.
- Location or area preference. The value of real property greatly depends on the location. As one of the major economic aspects of land, it represents people’s preferences regarding a certain area. When making decisions, most look at such factors as convenience, social environment, or history.
Types of Real Estate
There are 5 major types of real estate depending on the purpose of use:
- Residential real estate. All properties used as a living space, like multifamily apartment blocks, single-family homes, duplexes, townhouses, condos, cooperatives.
- Commercial real estate. All kinds of property used to conduct business activities, like hotels, office blocks, restaurants, gas stations, parking facilities,
- Industrial real estate. All properties that serve the purpose of manufacturing, storage and distribution of goods, as well as research and development of those goods. Those include factories, plants, warehouses, water treatment facilities, boiler rooms, etc.
- Land. Raw undeveloped land, vacant areas and agricultural fields (farms, ranches, timberland and other types).
- Special purpose. All kinds of property used by the public, e.g. cemeteries, parks, squares, government buildings, institutions like schools, hospitals, museums, libraries.
Make-up of Real estate industry
Real estate industry has many more fields and players than it is generally assumed. To an average man, the real estate market is made up of merely brokers and agents. In reality, however, the real estate segment offers a whole range of opportunities to make a living. It provides thousands of professionals with work in construction, property financing, appraisals, property maintenance, development, counseling and recruiting. All of it proves the magnitude and complexity of the real estate industry. Real estate also affects a number of institutions indirectly. Banks, insurance companies, and lawyers make a good example. Anyone wishing to start a career in real estate may think of a home inspector, leasing agent, mortgage broker, title examiner, foreclosure specialist, real estate appraiser, real estate agent.
Real estate has higher importance than any other sector for the economic development of the US. According to the report from the U.S. Census Bureau, housing starts is a key contributor to the economic growth of the country. The report investigated the number of residential construction projects by month through data analysis. The figures showed totals of building permits, housing starts, and housing completions for different housing types.
Housing starts is useful statistics to track for investors and analysts because the number of projects in progress at a given time can show a general picture as to the economic direction, while housing types reveal supply and demand patterns for the future. For instance, when the breakdown of housing starts indicates fewer single-family houses against a greater number of multifamily starts, it could mean the upcoming supply shortage for single-family homes that will push up prices in future.
Real estate investing
People seeking to put money into real estate may consider several different ways to do it directly or through funds and trusts. Most common strategies of direct investment include the following options:
- home ownership;
- buying a rental property;
- house flipping;
While owners of rental properties enjoy passive income from regular payments of their tenants, house flippers and wholesalers make money on sales. Wholesaler is a type of investor who looks for house sellers, contracts a house with them and finds them a buyer for sales commission. They usually target property in financial distress but do not do any repair or renovation works, as in the case of house flipping, that deals with real estate development.
As described above, Real estate investors gain profit from rent or leases and increased property value. ATTOM, a provider of nationwide property records, published a home sales report that showed the rising profit from real estate investments. End of 2021, investments resulted in the profit of $94,092, making a 45.3 percent return - 45 percent higher than 2020, and 71 percent higher compared to 2019 gains.
Real estate is the only asset dependent on location, meaning that its price level, as well as the benefits are determined by such aspects as employment rate, public transportation, crime rates, schools and hospitals availability, quality of municipal services and property taxes.
You can also use the opportunity of indirect investing. Indirect investments into real estate are done via real estate investment trusts (REIT). Such organizations offer portfolios of real estate assets:
- Equity REITs deal with equity funds, when shareholders buy into rental housing and receive dividends from the REIT that owns and operates commercial properties and leases them to tenants.
- Mortgage REITs offer mortgage bundles or mortgage-backed securities and earn income from the interests on these investments.
- Hybrid REITs do both.
REITS also differ by how they go about selling their shares, which breaks them into 3 groups:
- publicly traded, or stock exchange listed REITs;
- public non-traded, or public non-listed REITs;
- private REITs.
Individuals can invest into REIT by simply purchasing their shares from stock exchange. Since REIT shares are listed there and sold to the public amongst any other securities, publicly-traded REITs are the most reliable and liquid.
REIT investors earn income like any other shareholders - by regular dividend payments and appreciation in value of the shares in the global market. Apart from individual investments into real estate, financial markets offer collective investment opportunities through real estate mutual funds and real estate exchange traded funds (ETFs).
Mortgage-backed securities are a special investment tool, known to have caused the mortgage crisis in the U.S. beginning of 2007 that led to the global financial crisis of 2008. Despite a lot of mistrust MBS received with the bad press, they are still present and traded in financial markets.
The easiest way to buy into MBS is via ETFs. Investors should keep in mind that the degree of risk when dealing with MBS is high and closely examine ETF holdings to make sure that the securities they are buying are investment-grade, not the subprime variety below this level that was traded in the crisis.
To freely access MBS, ordinary investors can address one of the two leading ETFs: Vanguard Mortgage-Backed Securities ETF (VMBS) or iShares MBS ETF (MBB). These funds’ holdings include MBS with sizeable mortgage pools and maturation period, issued by federal agencies or government- sponsored enterprises.