What Is Real Estate?

What Is Real Estate?

Real estate is property that consists of land and any permanent structures or improvements on it or made to it. Let me break it down for you: real estate is defined as the land and any permanent structures, like a home, or improvements attached to the land, whether natural or artificial.

You should know that real estate is a form of real property. It differs from personal property, which is not permanently attached to the land, such as vehicles, boats, jewelry, furniture, and farm equipment.

Key Takeaways

Real estate is considered real property that includes land and anything permanently attached to it or built on it, whether natural or artificial. There are five main categories of real estate, which include residential, commercial, industrial, raw land, and special use. Investing in real estate includes purchasing a home, a rental property, or land. Indirect investment in real estate can be made via REITs or through pooled real estate investment.

Understanding Real Estate

The terms land, real estate, and real property are often used interchangeably, but there are distinctions. Land refers to the earth's surface down to the center of the planet, including the trees, minerals, and water. The physical characteristics of land include its immobility, indestructibility, and uniqueness, where each parcel of land differs geographically.

Real estate encompasses the land, plus any permanent artificial additions, such as houses and other buildings. Any additions or changes to the land that affect the property's value are called an improvement. Once land is improved, the total capital and labor used to build the improvement represent a sizable fixed investment. Though a building can be razed, improvements like drainage, electricity, water, and sewer systems tend to be permanent.

Real property includes the land and additions to the land, plus the rights inherent to its ownership and usage.

Real Estate Agent

A real estate agent is a licensed professional who arranges real estate transactions, matching buyers and sellers and acting as their representatives in negotiations.

What Are Types of Real Estate?

Residential real estate covers any property used for residential purposes, with examples including single-family homes, condos, cooperatives, duplexes, townhouses, and multifamily residences.

Commercial real estate involves any property used exclusively for business purposes, such as apartment complexes, gas stations, grocery stores, hospitals, hotels, offices, parking facilities, restaurants, shopping centers, stores, and theaters.

Industrial real estate includes any property used for manufacturing, production, distribution, storage, and research and development.

Land refers to undeveloped property, vacant land, and agricultural lands such as farms, orchards, ranches, and timberland.

Special purpose covers property used by the public, such as cemeteries, government buildings, libraries, parks, places of worship, and schools.

The Economics of Real Estate

Real estate is a critical driver of economic growth in the U.S. Housing starts, the number of new residential construction projects in any given month, released by the U.S. Census Bureau, is a key economic indicator. The report includes building permits, housing starts, and housing completions data for single-family homes, homes with two to four units, and multifamily buildings with five or more units, such as apartment complexes.

Investors and analysts keep a close eye on housing starts because the numbers can provide a general sense of economic direction. Moreover, the types of new housing starts can give clues about how the economy is developing. If housing starts indicate fewer single-family and more multifamily starts, it could signal an impending supply shortage for single-family homes, driving up home prices.

How to Invest in Real Estate

Some of the most common ways to invest in real estate include homeownership, investment or rental properties, and house flipping. One type of real estate investor is a real estate wholesaler who contracts a home with a seller, then finds an interested party to buy it. Real estate wholesalers typically find and contract distressed properties, but they don't perform any renovations or additions.

The earnings from investing in real estate are generated from rent or leases, as well as an appreciation of the real estate's value. Real estate is dramatically affected by its location, and factors such as employment rates, the local economy, crime rates, transportation facilities, school quality, municipal services, and property taxes can affect the value of the real estate.

Direct investing offers steady income, capital appreciation, portfolio diversification, and the option to buy with leverage, but it is usually illiquid, highly influenced by local factors, requires large initial capital outlay, and may need active management and expertise.

Investing in real estate indirectly is done through a real estate investment trust (REIT), a company that holds a portfolio of income-producing real estate. There are several types of REITs, including equity, mortgage, and hybrid REITs, which are classified based on how their shares are bought and sold. These classifications include publicly-traded REITs, public non-traded REITs, and private REITs.

The most popular way to invest in a REIT is to purchase shares that are publicly traded on a stock exchange. The shares trade like any other security traded on an exchange, making REITs very liquid and transparent. Income from REITs is earned through dividend payments and appreciation of the shares. In addition to individual REITs, investors can trade in real estate mutual funds and real estate exchange-traded funds (ETFs).

Another option for investing in real estate is through mortgage-backed securities (MBS), such as the Vanguard Mortgage-Backed Securities ETF (VMBS), which comprises federal agency-backed MBS with a minimum pool size of $1 billion and a minimum maturity of one year. The iShares MBS ETF (MBB) focuses on fixed-rate mortgage securities and tracks the Bloomberg U.S. MBS Index. Its holdings include bonds issued or guaranteed by government-sponsored enterprises such as Fannie Mae and Freddie Mac.

Indirect investing provides liquidity, diversification, steady dividends, and risk-adjusted returns, but it offers low growth or low capital appreciation, is not tax-advantaged, is subject to market risk, and involves high fees.

Warning

Mortgage lending discrimination is illegal. If you think you've been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report to the Consumer Financial Protection Bureau or with the U.S. Department of Housing and Urban Development (HUD).

What Are the Best Ways to Finance a Real Estate Investment?

Real estate is commonly purchased with cash or financed with a mortgage through a private or commercial lender.

What Is Real Estate Development?

Real estate development, also known as property development, encompasses a range of activities that span from renovating existing buildings to acquiring raw land and selling developed land or parcels to others.

What Careers are Common in the Real Estate Industry?

Common careers found in the real estate industry include leasing agent, foreclosure specialist, title examiner, home inspector, real estate appraiser, real estate agent, and mortgage broker.

The Bottom Line

Real estate is land, any buildings or improvements on it, and any natural resources. There are various types of real estate, including commercial, land, industrial, and residential properties. You can own real estate or invest in it through real estate investment trusts, mutual funds, and exchange-traded funds.