Real estate refers to the land and all permanent structures or improvements that are connected to it, regardless of whether they are naturally occurring or man-made.
Real estate is categorized as real property, distinct from personal property, which includes movable assets like vehicles, boats, jewelry, furniture, and farm equipment that are not permanently affixed to the land.
Recognizing real estate
The terms land, real estate, and real property are frequently used interchangeably, however, there are differences between them.
Land specifically pertains to the surface of the earth, extending from its center all the way up to the airspace above it. This includes everything on the land, such as trees, minerals, and water. Land possesses certain physical qualities which include its inability to move, its indestructibility, and its uniqueness, as each piece of land has distinct geographical features.
Real estate refers to the land and any permanent structures, like houses and buildings, on it. Any changes or additions made to the land that impact its value are called improvements.
When land is improved, it involves a significant investment of both capital and labor to construct the additions. While buildings can be demolished, certain improvements such as drainage systems, electricity, water supply, and sewer systems are typically considered permanent.
Real property encompasses the land, its improvements, and the rights that come with its ownership and use.
What Kinds of Real Estate Are There?
Any property used for residential purposes is considered residential real estate. Single-family homes, condominiums, cooperatives, duplexes, townhouses, and multifamily buildings are a few examples.
Real estate used for residential purposes includes all land and buildings. As examples, single-family homes, condominiums, cooperatives, duplexes, townhouses, and multifamily buildings can be used.
Any property utilized for production, distribution, storage, manufacturing, and R&D is considered industrial real estate.
Any property utilized for production, distribution, storage, manufacturing, and R&D is considered industrial real estate.
Special purpose: Real estate that is used by the general public, such as cemeteries, government structures, libraries, parks, and schools.
The real estate market’s economics
Real estate plays a crucial role in stimulating economic growth in the United States. The U.S. Census Bureau releases monthly data on housing starts, which refers to the number of new residential construction projects initiated in a particular month. This information serves as a significant economic indicator. The report encompasses data on building permits, housing starts, and housing completions for various types of properties. These include single-family homes, homes with 2-4 units, and multifamily buildings with five or more units, such as apartment complexes.
Investors and analysts closely monitor housing starts as the data can offer a broad indication of the economic trend. Furthermore, the nature of new housing starts can provide insights into the progress of the economy.
If housing starts indicate a decrease in the construction of single-family homes and an increase in multifamily starts, it could suggest a potential shortage in the supply of single-family homes, resulting in higher home prices. The chart below illustrates housing starts over a 20-year period, spanning from January 1, 2000, to February 1, 2020.
Investing in Real Estate: A Guide
Investing in real estate offers different options such as owning a home, investing in rental properties or flipping houses. Real estate wholesalers are a type of investor who enters into contracts with sellers to purchase homes and then find interested buyers. They typically focus on distressed properties and do not make any renovations or additions.
Profits from real estate investments come from rental income or lease payments, as well as the appreciation of the property’s value. According to ATTOM, a leading property database in the US, the year-end 2021 report on home sales shows that sellers across the country made an average profit of $94,092. This represents a 45.3% return on investment, which is a significant increase compared to $64,931 in 2020 and $55,000 two years ago.
The value of real estate can be significantly influenced by its location and various factors, including employment rates, the local economy, crime rates, transportation facilities, quality of schools, availability of municipal services, and property taxes.
Advantages
- Provides a consistent source of income.
- Offers the potential for increase in value over time.
- Helps spread risk by adding variety to one’s investment portfolio.
- Can be purchased using borrowed money, increasing potential returns.
Disadvantages
- Often lacks liquidity, meaning it may be difficult to sell quickly.
- Affected by local factors, limiting its performance to specific areas.
- Requires a significant initial investment.
- May necessitate active management and specialized knowledge.
Investing indirectly in real estate involves investing in a real estate investment trust (REIT), which is a company that holds a collection of income-generating real estate properties. There are various types of REITs, including equity, mortgage, and hybrid REITs. These types are determined based on how their shares are bought and sold, which can be through publicly traded REITs, public non-traded REITs, or private REITs.
The most popular way to invest in a REIT is by purchasing publicly traded shares on an exchange. These shares are traded similarly to other securities like stocks, which means REITs offer high liquidity and transparency. Investors earn income from REITs through dividend payments and the appreciation of their shares. Aside from individual REITs, investors also have the option to invest in real estate mutual funds and real estate exchange-traded funds (ETFs).
One alternative for investing in the real estate sector is by investing in mortgage-backed securities (MBS). These securities can be accessed through financial products like the Vanguard Mortgage-Backed Securities ETF (VMBS), which consists of MBS guaranteed by federal agencies. These MBS have minimum pool sizes of $1 billion and a minimum maturity period of one year.
Another option is the iShares MBS ETF (MBB), which primarily invests in fixed-rate mortgage securities and tracks the Bloomberg U.S. MBS Index. Its portfolio includes bonds issued or guaranteed by government-sponsored enterprises like Fannie Mae and Freddie Mac.
What We Appreciate
- Liquidity
- Diversification
- Consistent dividend payouts
- Returns adjusted for risk
What We Disapprove
- Lack of growth and minimal capital appreciation
- No tax advantages
- Exposure to market risks
- High fees
