- Residential: Homes, multifamily property, and condos
- Commercial: Office and retail buildings
- Industrial: Factories and farms
- Land: Vacant, undeveloped property
Industrial includes farms, mines, factories, and manufacturing facilities. It also includes larger pieces of real estate that might be found near key transportation hubs, such as railways and sea harbors.
Land, such as vacant or undeveloped lots, can offer the greatest potential because it offers the potential for construction and development to increase value.
REITs are a unique investment vehicle that allows investment in a portfolio of income-producing properties. With these investments, the owners sell shares and then pay at least 90 percent of the income to investors. REITs can be specialized, such as focusing on retail or shopping centers.
MBSs are an investment in a pool of mortgages where investors collect the principal and interest payments. These investments, like REITs, trade like stocks.
In terms of outright ownership, buying residential real estate tends to be less expensive and more feasible for individuals. Commercial real estate is pricier but more stable—overall, it’s more valuable per square foot than residential and offers longer lease terms. However, it does come with more regulations.
When buying real estate for investment purposes, there are two key investing strategies—flipping and rentals. In addition to standard property rentals, this category also includes royalties, which are payments for the extraction of natural resources (for example, if there is oil on your property).
One of the key draws to real estate investing is the steady appreciation of value. Appreciation is when the value of the property rises, which can happen because of neighborhood improvements, such as gentrification.
Sales and marketing includes agents, who help facilitate the buying and selling of properties. Agents work alongside brokers, who have more stringent licensing requirements. A Realtor is a member of the National Association of Realtors (NAR).
Lenders help finance properties, including developments.
Property managers help owners rent and maintain their properties. For a percentage of rent, property managers handle core rental functions, such as finding and vetting tenants, collecting rent, and handling maintenance and repairs.
Supply and demand drives real estate prices. Demand is affected by a number of economic factors, such as unemployment and interest rates. If people don’t have jobs or the cost of financing is too high, they won’t buy. That a lack of demand can push home values down.
These loans will have either fixed or variable interest rates. Fixed-rate loans charge a set interest rate for the life of a loan. Variable-rate loans have a rate that changes when an underlying interest rate changes, such as the prime rate. Loans may also require balloon payments, where a sizable payment or the entire balance is due at a certain time, such as at the five-year anniversary date of the loan. This is particularly common with home equity lines of credit.
Buying real estate also allows you to leverage your cash, which means you only pay a portion of the purchase price and borrow the rest. FHA loans allow you to take out a mortgage with as little as a 3.5 percent down payment. Property owners can also leverage their properties by tapping into equity, which can be used to buy more properties or refinance debt. It’s also worth noting that mortgage interest, as well as maintenance costs for rentals, is tax-deductible.
But real estate does have downsides. It’s illiquid—which means properties can take time to sell. They can also be expensive and require active management. Dealing with difficult tenants can be a headache. There’s also the chance that real estate values fall or a natural disaster damages or destroys the property.
A word with deep legal origins, “estate” has been consistently defined for centuries while adapting to the needs of the times. In essence, one’s estate is everything they own; it’s everything that belongs to a person.
Depreciation is how goods and assets lose value. But that’s not a bad thing—for savvy investors, it’s a tax strategy. Learn more about depreciation here.
Appreciation is the rise in value of an asset over time, typically relating to the value of an entire asset class, such as real estate, stocks, bonds, and currencies.