What is Real Estate?
Real estate refers to land and any structures or improvements on it, whether they’re natural or human-made. Unlike personal property like cars, boats, jewelry, furniture, and farm equipment, real estate stays fixed to the land.
Key Points are:
- Real estate refers to land and anything permanently fixed to it, whether by nature or human construction.
- The five primary types of real estate are residential, commercial, industrial, raw land, and special use.
- When you invest in real estate, you might buy a home, rental property, investment property or land. You can also invest indirectly in real estate through REITs or pooled real estate investments.
Meaning of Real Estate in simple words:
People often use the terms land, real estate, and real property interchangeably, but they have distinct meanings.
Land encompasses the earth’s surface extending down to its core and reaching up to the airspace above, which includes plants, trees, minerals, and water. Each piece of land is unique in its geographical location, characterized by its immobility, indestructibility, and distinctiveness.
Real estate includes the land and any permanent structures built on it, like houses and other buildings. We refer to any additions or changes that impact the property’s value as improvements.
When you improve land, the combined labor and capital spent on the enhancements make up a significant fixed investment. While you can demolish a building, features such as drainage, electricity, and water and sewer systems usually remain permanent.
Real property consists of the land, its enhancements, and the inherent rights of ownership and use.
Types of Real Estate:
Residential: People use residential real estate for living. This includes homes like single-family houses, condos, co-ops, duplexes, townhouses, and buildings with multiple apartments.
Commercial: Businesses operate from commercial real estate. Think of places like apartment buildings, gas stations, grocery shops, hospitals, hotels, offices, parking lots, restaurants, malls, shops, and theaters.
Industrial: Manufacturers and researchers use industrial real estate for tasks like making goods, storing them, or conducting experiments.
Land: Land covers undeveloped plots, empty spaces, and farming areas including farms, orchards, ranches, and forests.
Specific Purpose: We all access special purpose properties: cemeteries, government offices, libraries, parks, religious spots, and schools are some examples.
Financial Dynamics of Real Estate Market:
2023 will be tough for commercial real estate due to rising interest rates and a looming recession. Even though inflation slowed down by the end of 2022, it was still a whopping 7%. The Fed aims to bring this closer to its 2% target and will keep pushing up rates until that happens. Because of these financial pressures and the increasing cost of capital, property values will likely drop.
But there’s some good news. This recession won’t hit too hard. Companies are financially stable, and they’ll try to avoid big layoffs to keep their skilled workers, given the competitive job market. People might be feeling cautious about spending, but on average, families aren’t carrying as much debt as they did before past recessions. This means we might see only a slight increase in unemployment, probably not going past 6%. By the latter half of 2023, inflation should dip, leading to decreased interest rates and kickstarting a new economic phase that could stretch into the 2030s.
How and Where to Invest?
Buy Real Estate Investment Trusts (REITs)
REITs let you put your money into real estate without actually buying property. Think of them like mutual funds, but for properties like offices, shops, apartments, and hotels. They usually give out generous dividends, so many people use them for retirement savings. If you don’t want the cash now, you can roll those dividends back into your investment to make it grow even more.
Real Estate Limited Partnerships (REPL)
A real estate limited partnership (RELP) lets investors pool their funds with others to buy, lease, develop, and sell properties. This partnership offers a diverse range of real estate investment opportunities, making it easier for you to invest in properties that might be challenging to manage or purchase on your own.
Just like REITs, RELPs often have a collection of properties. However, they’re different in how they’re set up and organized. First off, RELPs are private equity, meaning you won’t find them on public stock exchanges.
They usually run for a set time, often between seven and 12 years. During this period, RELPs operate like mini-companies. They create a business plan, pinpoint properties to buy or develop, manage them, and eventually sell them, sharing the profits as they go. Once they’ve sold all their properties, the partnership ends.
Think about investing in properties to renovate and sell for a profit (house flipping)
It’s like living an HGTV episode: You buy a low-priced home that needs some TLC, fix it up on a budget, and then sell it for a profit. This approach, known as house flipping, is a tad more challenging than TV makes it seem. With today’s increased costs for building materials and rising mortgage interest rates, it’s pricier than before. As a result, many house flippers prefer to purchase homes with cash.
Lease a space
Consider renting out a section of your home. This approach can significantly cut down on housing expenses, letting homeowners enjoy the rising value of their property.
Inviting roommates can also help younger individuals manage mortgage payments. If you’re hesitant, give platforms like Airbnb a shot. It’s a low-commitment form of house hacking: you won’t deal with long-term tenants, Airbnb somewhat screens potential renters, and they offer a host guarantee to cover damages.
Utilize a digital real estate investment platform
Real estate investment platforms link real estate developers with investors keen to fund projects, either as debt or equity. Investors aim to get monthly or quarterly payouts, but they take on a high risk and pay a fee to the platform in return. Unlike many real estate investments, these are speculative and not easily sold like stocks.