What Is Real Estate?

real estate encompasses land and property—plus any buildings, structures, mineral deposits, or natural resources. When you purchase real estate, you’re buying any and all improvements and the legal right to use and improve the land. There are four key types of real estate: residential, commercial, industrial, and land. 

Types of Real Estate

  • Residential: Homes, multifamily property, and condos
  • Commercial: Office and retail buildings
  • Industrial: Factories and farms
  • Land: Vacant, undeveloped property 

Residential includes any property where people can live, such as single-family homes or multifamily structures—i.e. apartments, condominiums, and duplexes. Commercial includes such structures as office buildings, shopping malls, and retail space. 

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. 

What Is Real Property? 

Real estate is different from real property. Real estate is a tangible asset, but real property can be tangible or intangible, such as an investment. Here’s the main difference: Real estate implies ownership of the land and structures, but real property might include a right to live in a house without actual ownership.

Real Estate Investing

Homeownership is the most common way to own real estate. However, there are ways to invest without actually owning properties, including real estate investment trusts (REITs), mortgage-backed securities (MBSs), and online real estate investment platforms, such as crowdfunding real estate sites.

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">gentrification. 

What Is the Real Estate Industry?

Developers are one of the most important components in the United States real estate industry. Development includes purchasing undeveloped land and improving the property. Improvements come in the form of rezoning, construction, and renovating buildings, with the ultimate goal of selling or leasing the finalized units.

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. 

What Is the Housing Market?

When you hear someone mention the “housing market,” they’re typically referring to the local residential real estate market. This market directly affects other markets, such as commercial. For example, shopping centers will open in proximity to highly populated residential areas.

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. 

How to Finance Property

If you can’t pay cash for a property, you might consider financing, which can be provided by government institutions, private lenders, or banks. When a bank loans money to purchase real estate, it’s called a mortgage.

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.

Advantages and Disadvantages 

Real estate can help diversify a portfolio, adding value outside of stocks, bonds and other assets. Rental properties also offer steady income, and rent increases can hedge against inflation">inflation. Properties may also appreciate—meaning their value steadily rises over time.

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.
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Related terms
Depreciation
This term is the opposite of appreciation when considering a real estate property. Depreciation is when a property decreases in value.
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Foreclosure
Foreclosure is the legal process in which a lender or bank takes control of a property, evicts the homeowner, and sells the home after a homeowner is unable to make full principal and interest payments on his or her mortgage, as decided upon in the mortgage contract.
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Appreciation
Appreciation is the increase in a home’s value over time. A home’s appreciation can be calculated based on the fair market value of comparable homes in the neighborhood of the property in question. Appreciation of a home can come through the natural appreciation of the value of the home over time or can be forced into the home through upgrades, remodels, or renovations that add value to the home.
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