Real estate is considered to be one of the oldest and most versatile industries globally. It offers numerous investment opportunities, often leaving even seasoned investors uncertain about where to start.
This article aims to simplify real estate investing by discussing the four main types of real estate. It will also shed light on why many individuals choose to invest in real estate and provide insights into the most effective methods of investing in income-generating properties.
What precisely is real estate?
Real estate comprises of two distinct elements: Land, which refers to a plot of land in a housing development; and Improvements, which include the construction of a property, like a single-family house, on that plot.
Furthermore, real estate possesses specific physical and economic attributes that set it apart from other types of assets:
- Each piece of real estate is distinct and no two are exactly alike.
- Land is limited in availability, and there is a maximum number of structures that can be built on a single plot of land.
- Modifications to the land can enhance its value, such as generating additional income or converting it to a superior and more beneficial purpose.
- Infrastructure, such as water and sewer systems, sidewalks, and streets, once built, becomes permanent and cannot be easily replaced or relocated.
- Immobile: Real estate properties are fixed and cannot be relocated from one location to another.
- Land is eternal and indestructible, excepting instances of erosion.
- Location: User preferences like nice neighborhoods and school districts, population and job growth, and business-friendly governments all have an impact on supply and demand for real estate.
The four principal categories of real estate
When starting out in the real estate industry, it can be daunting due to the numerous available options. To make it easier, it is important to familiarize yourself with the four main types of real estate and their functioning. By doing so, you can identify the real estate asset class that aligns with your investment strategy.
Residential
The residential real estate market in the United States is incredibly vast. As reported by the World Property Journal, the collective worth of the housing market reached a staggering $33.6 trillion this year, surpassing the combined annual GDPs of both the U.S. and China.
Additionally, when considering the various investment opportunities within the residential real estate sector, it becomes clear why the value of the U.S. housing market has experienced a growth of over 50% in the past decade.
There are several types of residential real estate options available, including single-family houses, condominiums, cooperatives (co-ops), townhomes, duplexes, triplexes, fourplexes, and mobile homes.
If you’re looking to find residential real estate, some of the best sources to consider include hiring a real estate agent, checking the local Multiple Listing Service (MLS), browsing through platforms like Craigslist, Zillow, Realtor.com, Trulia, and Redfin. If you’re interested in foreclosures, Auction.com is a good resource. For federal property sales, HUD is a reliable option. Lastly, if you’re specifically interested in single-family investment and rental properties, Roofstock is a recommended platform to explore.
Commercial
The commercial real estate (CRE) market is renowned for its high-end shopping centers in California, prestigious office properties in Manhattan, and influential investors. However, it may come as a surprise to know that the size of the U.S. commercial real estate market was recently estimated to be between $14 trillion and $17 trillion – merely half the size of the residential market.
One of the reasons why the commercial real estate market is comparatively smaller is because not everyone requires a place to shop simultaneously, unlike the need for residential properties. Commercial real estate refers to properties used for business purposes, encompassing areas such as:
- Office space comprises medical centers, suburban office parks, and urban office towers.
- Retail space encompasses fast food outlets, neighborhood strip malls, and regional power centers.
- Apartment buildings and smaller multifamily properties with five or more units.
- Mobile home parks.
- Leisure and hospitality properties.
- Self-storage and mini-storage facilities.
- Parking lots and garages.
- Grocery stores and gas stations.
- Movie theaters.
Due to the specialized nature of commercial real estate (CRE) properties and the high financial stakes involved in transactions, it is common for CRE properties for sale not to be publicly listed. Instead, major CRE firms like Cushman and Wakefield, CBRE, Avison Young, and Marcus & Millichap directly work with buyers, sellers, institutional investors, and lenders.
If you want to learn more about the commercial real estate market, some of the best online sources to explore include Loop Net, CREXi , Realty Mogul, and Fund rise for CRE crowdfunding. You can also visit the U.S. Department of the Treasury Community Development Financial Institutions Fund (CDFI Fund) to learn about Opportunity Zone investments.
Industrial
Industrial real estate is distinct from commercial real estate due to its specific usage for business purposes.
- The Tesla factory, located in Fremont, California, is involved in the manufacturing process.
- Manufacturing plants and food processing facilities.
- Freezer and refrigerated storage facilities refer to designated spaces used for storing perishable items at specifically controlled temperatures.
- The Boeing Everett Factory in Washington is an example of a storage warehouse and distribution center, spanning across 4.3 million square feet.
- Research and development parks, such as the renowned Research Triangle Park located in Raleigh-Durham.
- Power plants refer to facilities that generate electricity through various means, including burning fossil fuels or harnessing renewable energy sources like solar power. Solar generating stations, on the other hand, specifically pertain to facilities that utilize solar energy to produce electricity.
- Data server centers cater to the needs of major corporations like Google and Facebook.
Some of the top online platforms to search for industrial real estate listings are Loopnet, CREXi, and renowned commercial real estate companies like CBRE, Cushman & Wakefield, and JLL.
Land
Unoccupied or undeveloped land is acquired with the intention of future development, and for the rights to utilize natural resources such as minerals, water, or air in urban regions. Investing in land is a commonly adopted long-term approach, as the associated taxes and maintenance expenses are typically minimal when compared to developed properties with buildings and tenants.
- Mixed-use projects are developments that incorporate various types of spaces, such as office buildings, retail establishments, and residential units.
Transit-oriented development (TOD) refers to a specific kind of mixed-use property that is strategically situated in close proximity to mass transit stations.
Car wash services and gas stations.
Recreational facilities like sports arenas, golf courses, and tennis clubs.
are examples of government-owned establishments like courthouses and post offices.
Places where people practice their respective religions or faiths are referred to as places of worship. These places hold great significance for believers, as they provide a sacred space for prayer, meditation, and communal rituals. They come in various forms and are present in nearly every community around the world. Some common examples include churches, mosques, temples, synagogues, and gurdwaras. These places not only serve as a physical location for religious activities, but also foster a sense of spiritual connection, community, and reverence for the divine.
Public and private schools are educational institutions with distinct differences. Public schools are funded and operated by the government, offering education to all students free of charge. On the other hand, private schools are privately funded, with tuition fees paid by students or their families. - Public schools are open to all students within a specified geographic area, ensuring that every child has access to education. The curriculum in public schools is determined by the government, aiming to cover a broad range of subjects and meet the minimum standards set by educational authorities. Public schools typically have larger class sizes due to the high number of enrolled students.
- Private schools, on the other hand, have more flexibility in their curriculum as they are not bound by governmental regulations. They often have a specific focus, such as religious, single-gender, or specialized education. Private schools tend to have smaller class sizes, allowing for more personalized attention and tailored instruction.
- In terms of resources and facilities, public schools often receive government funding, which can vary depending on the location and quality of the school district. Private schools may have access to greater resources due to their tuition fees and potential donations from benefactors.
- The choice between public and private schools depends on individual preferences, resources, and educational goals. Public schools offer a diverse student body and a standardized curriculum, while private schools provide specialized programs and potentially better resources but require a financial commitment. Ultimately, it is important to consider the specific needs and values of the student and their family when making a decision.
Housing options are available for students located in close proximity to prominent colleges and universities.
Senior and assisted living establishments.
How the real estate industry works
The real estate industry is comprised of six key interconnected areas:
Developers are individuals or companies that buy undeveloped land, construct new buildings on that land, and then sell or lease the finished product to end users or tenants.
Sales and marketing firms are responsible for handling the sale of newly developed real estate projects. They use various strategies and techniques to attract potential buyers and close deals.
Real estate brokerage firms employ licensed agents and unlicensed assistants who assist investors and homeowners in buying, selling, and renting different types of real estate. These agents help clients navigate the complex process of real estate transactions.
Property management companies are in charge of the day-to-day operations of rental properties. This includes tasks such as rent collection, arranging repairs through various vendors, and managing tenants.
Real estate lenders provide financing options to individuals or companies looking to acquire property. They can include local credit unions, community banks, large national banks, and mortgage brokers who help property owners find the best loan options available to them.
Professional real estate service providers include accountants and financial planners, attorneys, title companies, and escrow officers. These professionals offer their expertise in various aspects of real estate transactions, ensuring that all legal and financial requirements are met.
Additionally, handymen and general contractors are involved in the real estate industry by providing maintenance and repair services
Job opportunities and career paths in the real estate industry
As your real estate investing business expands, it is likely that you will collaborate with various real estate professionals, such as:
- Accountant, bookkeeper, and CPA
- Evaluator
- Manager of assets
- Officer in charge of escrow
- Contractor in charge of overall project
- Skilled worker for various tasks
- Inspector of residential properties
- Agent responsible for leasing properties
- Person or organization providing loans
- Evaluator of loan applications
- Professional facilitating mortgage transactions
- Technician for pest control services
- Professional surveying properties
- Lawyer specializing in real estate law
- Real estate professional involved in buying and selling properties
The economic consequences of engaging in real estate investments.
The real estate industry plays a crucial role in driving economic growth in the United States. By closely monitoring both short-term and long-term trends, investors can get a general idea of the direction the economy is heading and the potential opportunities that lie ahead.
For instance, if there is a higher number of luxury apartments being constructed compared to affordable single-family homes, it could indicate a shortage of houses in the market. This scarcity could drive up demand and subsequently increase prices.
On a global scale, the U.S. real estate market is considered a secure investment option for foreign investors. Investment properties in the country offer stable and reliable returns, unlike the more volatile returns seen in the equity markets.
Both local and foreign real estate investors benefit from the stable legal system, diverse banking system, transparency, and easy access to information available in the United States. Additionally, the size and liquidity of the U.S. economy provide ample opportunities for investors to make profitable investments in the real estate sector.
The performance of the real estate market in the United States.
- Housing contributes around 15% to 18% of the total U.S. GDP, which amounts to $20.54 trillion.
- Residential investment makes up approximately 3% to 5% of the GDP, totaling over $1 trillion annually.
- The consumption of housing services, such as gross rents, accounts for about 12% to 13% of the GDP, which is over $2.5 trillion annually.
- The U.S. housing market is valued at nearly $37 trillion.
- According to the U.S. Census Bureau’s latest data from May 2021, new housing starts in the U.S. reached a seasonally adjusted annual rate of 1,681,000.
- As per the NAR, single-family resale home sales reached a seasonally adjusted annual rate of 4.28 million.
- Over the past 25 years, rental housing has shown historical annual returns between 10% and 18%, making it a less volatile investment compared to stocks and bonds.
- Single-family rentals have a superior reward/risk ratio of 1.4, while bonds have less than 0.8 and stocks have 0.5.
- Approximately 1.66 million people are employed in the real estate industry, and they earn an average salary of over $61,000 per year.
- The national real estate workforce is expected to grow by nearly 6.9% over the next 10 years.
Investing in real estate can be a lucrative endeavor if done correctly. Here are some steps to help you get started:
- Set your investment goals: Determine what you want to achieve with your real estate investments. Are you looking for long-term growth, immediate cash flow, or a combination of both? Define your objectives clearly to guide your investment decisions.
- Educate yourself: Take the time to learn about real estate investing. Understand the various types of properties, financing options, legal procedures, and market trends. Books, online resources, courses, and networking with experienced investors can provide valuable insights.
- Build a team of professionals: Surround yourself with a team of experts who can assist you throughout the investment process. This may include real estate agents, attorneys, contractors, lenders, and property managers. Their knowledge and expertise will support your investment journey.
- Determine your budget: Assess your financial situation and establish how much you can afford to invest in real estate. Consider your available funds, potential loans, and ongoing expenses such as property taxes, insurance, and maintenance costs.
- Choose a real estate investment strategy: Decide on the type of real estate investment that aligns with your goals. Options include residential properties (single-family homes, condos, duplexes), commercial properties (office buildings, retail spaces), industrial properties, or even raw land. Each type has its own considerations and returns.
- Conduct thorough market research: Evaluate the local real estate market where you plan to invest. Look for areas with potential for growth, rental demand, and economic stability. Analyze property values, demographics, job markets, school districts, and any other factors that influence property prices and demand.
- Find suitable properties: Once you know your strategy and market, start hunting for properties that match your investment goals. Utilize online listings, work with real estate agents, attend property auctions, or engage in direct marketing to find potential deals.
- Conduct due diligence: Before finalizing any purchase, thoroughly investigate the property. Conduct inspections, assess repair and renovation needs, review the property’s history and financials, and analyze the potential return on investment. This process helps ensure you make an informed decision.
- Secure financing: If you require financing, approach lenders to obtain a mortgage or other suitable loans. Compare interest rates, terms, and repayment options to choose the best fit for your investment.
- Make the purchase: Once you have completed all necessary inspections and due diligence, negotiate the price, and close the deal. Sign the required legal documents, transfer funds, and officially become the owner of the property.
- Manage the investment: Whether you decide to self-manage the property or hire a property manager, ensure you have a plan in place to handle ongoing responsibilities. This includes finding and screening tenants, collecting rents, maintaining the property, and handling any necessary repairs or issues.
- Monitor and adjust: Regularly review the performance of your investment. Monitor market trends, rental rates, and property values. Assess if any adjustments or improvements are needed to optimize your returns. Consider diversifying your real estate portfolio over time to spread risks and increase potential gains.
Remember, investing in real estate requires patience, knowledge, and active involvement. Continuously educate yourself, adapt to market changes, and maintain a long-term perspective to maximize your chances of success.
