What Is Real Estate?
Real estate is defined as the land and any permanent structures, like a home, or improvements attached to the land, whether natural or man-made.
It 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.
What Are Types of Real Estate?
Residential real estate: Any property used for residential purposes. Examples include single-family homes, condos, cooperatives, duplexes, townhouses, and multifamily residences.
Commercial : 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 : Any property used for manufacturing, production, distribution, storage, and research and development.
Land: Includes undeveloped property, vacant land, and agricultural lands such as farms, orchards, ranches, and timberland.
Special purpose: Property used by the public, such as cemeteries, government buildings, libraries, parks, places of worship, and schools.
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 generally find and contract distressed properties but don’t do any renovations or additions.
The earnings from investment in real estate are garnered from revenue from rent or leases, and appreciation of the real estate’s value.
It 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.
The most important factors for real estate investing
What’s the most important thing to look for in real estate? While location is always a key consideration, there are numerous other factors that help determine if an investment is right for you
1. Property Location
It is the most important factor for profitability in real estate investing. Proximity to amenities, green space, scenic views, and the neighborhood’s status factor prominently into residential property valuations. Closeness to markets, warehouses, transport hubs, freeways, and tax-exempt areas play an important role in commercial property valuations.
A key when considering property location is the mid-to-long-term view regarding how the area is expected to evolve over the investment period.
2. Valuation of the Property
Property valuation is important for financing during the purchase, listing price, investment analysis, insurance, and taxation.
3. Investment Purpose
- Buy and self-use. Here you will save on rent and have the benefit of self-utilization, while also getting value appreciation.
- Buy and lease. This offers regular income and long-term value appreciation.
- Buy and sell (short-term). This is generally for quick, small to medium profit—the typical property is under construction and sold at a profit on completion.
- Buy and sell (long-term). This is generally focused on large intrinsic value appreciation over a long period.
4. Expected Cash Flows and Profit Opportunities
Cash flow refers to how much money is left after expenses. Positive cash flow is key to a good rate of return on an investment property
5. Be Careful with Leverage
Loans are convenient, but they may come at a big cost. You commit your future income to get utility today at the cost of interest spread across many years. Be sure you understand how to handle loans of this nature and avoid high levels of debt or what they call over-leverage. Even experts in real estate are challenged by over-leverage in times of adverse market conditions and the liquidity shortages with high debt obligations can break real estate projects.
6. New Construction vs. Existing Property
New construction usually offers attractive pricing, the option to customize, and modern amenities. Risks include delays, increased costs, and the unknowns of a newly-developed neighborhood.
Existing properties offer convenience, faster access, established improvements (utilities, landscaping, etc.), and in many cases, lower costs.
7. Indirect Investments
Managing physical properties over a long-term horizon is not for everyone. Alternatives exist that allow you to invest in the real estate sector indirectly.
8. Your Credit Score
Your credit score affects your ability to qualify for a mortgage, and it impacts the terms your lender offers. If you have a higher credit score, you may get better terms—which can add up to substantial savings over time.
9. Overall Real Estate Market
As with other types of investments, it’s good to buy low and sell high. Real estate markets fluctuate, and it pays to be aware of trends.
Real estate can help diversify your portfolio. In general, it has a low correlation with other major asset classes—so when stocks are down, real estate is often up. A real estate investment can also provide steady cash flow, substantial appreciation, tax advantages, and competitive risk-adjusted returns, making it a sound investment.