Real estate refers to any land or property, including buildings, structures, natural resources, and mineral deposits.
When you buy real estate, you acquire all associated improvements and the legal right to use and develop the land. The seller transfers their rights to you in exchange for a price.
Before investing in real estate, it’s essential to understand what real estate entails. Let’s delve into the various types of real estate and explore some investment strategies that can clarify this concept.
Types of Real Estate
When considering “What is real estate?” there are four primary types that investors should understand:
Residential
Residential property includes any property where people live, such as single-family homes or multifamily structures like apartment buildings, condominiums, and duplexes. Many investors own rental properties that fall into the category of single-family homes or small multifamily structures with one to four units.
Residential real estate can be an excellent starting point for first-time investors and those looking to build their portfolios. Single-family and multifamily homes are often easier to finance and may be less expensive than commercial properties, making them a practical entry into real estate investment.
Commercial
Commercial real estate encompasses buildings used for business purposes, including office buildings, shopping centers, malls, and retail spaces.
Investing in commercial property can be more expensive, but it has the potential to be highly lucrative due to its high cash flow potential. Commercial properties often have longer leases, less turnover, and lower vacancy rates compared to residential properties. This stability can provide a steady income stream.
Before investing in commercial real estate, it’s important to research the local market to understand the demand and preferences for commercial spaces in the area.
Industrial
Industrial property includes farms, mines, factories, and manufacturing facilities, as well as large parcels of land near key transportation hubs like railways and sea harbors. This type of property is typically used for behind-the-scenes work and is rarely open to the public. Industrial real estate serves a wide range of purposes and can encompass properties over 100,000 square feet.
The growth of the online e-commerce retail market and the shipping industry has made investing in industrial real estate increasingly profitable. However, due to the higher costs associated with these properties, they are often better suited for experienced real estate investors.
Transactions involving industrial properties are subject to more regulations, which can include environmental concerns and other complications. Real estate agents specializing in industrial properties can help investors navigate these complexities and understand the specifics of purchasing industrial-zoned land.
Land
Land refers to vacant or undeveloped lots and offers significant potential for construction and development, which can increase its value.
Investors in vacant land have the right to build structures or make changes within legal limits. They might upgrade utilities by adding power or a well, or they could build homes or retail buildings to generate rental income.
Property taxes on vacant land are usually low, but they increase once improvements are made. Additionally, vacant lots in housing developments may incur homeowners association fees, even if the land remains undeveloped.
It’s crucial to research any associated fees before purchasing land.
Real Estate vs. Real Property
While real estate refers to a tangible asset, real property can be either tangible or intangible. The key difference is that real estate implies ownership of the land and any structures on it, whereas real property may include rights to use the property without actual ownership.
For instance, a person renting a home has the right to use the property but does not own it. Similarly, a leaseholder for a commercial building uses the property but does not own it. Although renters and leaseholders may have some responsibilities for property maintenance, the ultimate responsibility for upkeep lies with the real estate owner.
How Does the Real Estate Industry Work?
To make informed investing decisions, real estate investors need to understand how the real estate market functions from start to finish.
Here’s an overview for those beginning their real estate journey as well as for seasoned professionals:
Constructing and Developing Property
Initially, all property is vacant land. Over time, individuals and development companies decide to improve the land either to sell for a profit or to rent for passive income.
Developments can range from primary residences and single-family homes to apartment buildings and shopping malls. The zoning of the land significantly influences what types of developments can be undertaken.
One major advantage of buying raw land is the ability to construct a building or structure that precisely meets the landowner’s needs. However, working with developers and construction crews can be challenging, which is why many investors prefer purchasing already completed properties.
In some areas, building a home from scratch can be more cost-effective than buying an existing one. In such cases, knowing how to find and retain good contractors is crucial. A reliable construction crew can complete a project efficiently.
Before starting a project, builders need to determine the desired amount of living space or, for commercial buildings, the required square footage. Analyzing the housing market or commercial needs can help investors understand current demand, enabling them to build homes and office or retail spaces that meet those needs.
Working with Brokers and Agents to Find Real Estate
Whether dealing with residential, commercial, or industrial real estate, collaborating with licensed real estate agents can be crucial for success.
A real estate license allows agents not only to buy and sell properties but also to network with industry professionals. This network can provide access to potential buyers, mortgage lenders, and other key contacts in the real estate sector.
Real estate brokers, like agents, serve as intermediaries for buyers and sellers. They often facilitate transactions through real estate firms, handling everything from connecting buyers and sellers to ensuring a smooth closing process.
Unlike agents, brokers can employ other licensed agents, earning a commission from each sale their agents complete. This team-based approach can be advantageous for investors, as it combines the expertise of multiple professionals to provide comprehensive support and advice throughout the buying and selling process.
Working with Lenders to Secure Financing
A crucial aspect of the real estate industry is collaborating with mortgage lenders to obtain financing for transactions.
By leveraging funds from banks and private money lenders, investors can acquire more real estate. Mortgage lenders provide loans to qualified individuals looking to purchase property. The loan proceeds go to the seller, who uses the funds to pay off any existing mortgage. In return, the lender receives monthly mortgage payments from the new owner.
Prospective buyers should get preapproved by their lender before shopping for investment properties. Preapproval demonstrates their ability to close a deal if it goes through.
Having a reliable lender on an investment team ensures that funds are available when needed, facilitating smoother transactions.
Managing Property as a Real Estate Investor
Property management is a key component of real estate investing. While some investors start by managing their properties themselves, most eventually choose to hire a property management company.
A property manager handles the daily operations of managing residential properties, including administrative tasks, rent collection, and preparing houses for new tenants.
Each property management company has its own methods and fee structures. Some include marketing services as part of their fee, while others charge extra for marketing-related costs.
A knowledgeable property manager understands the local housing market, which helps them set appropriate rental rates and attract ideal tenants.
The expertise of a property management company can be invaluable for building a successful real estate investment team. Investors should research reviews and seek recommendations from industry peers to find the right property manager.
Investing in Real Estate
Real estate offers diverse opportunities for savvy entrepreneurs to earn a substantial income. However, there are many factors to consider before choosing an investment strategy.
Private Lending: Some buyers opt to use private lenders to finance real estate purchases. Private lenders can often finalize loans more quickly than traditional banks and may have fewer qualification requirements.
Getting Started in Real Estate
Starting in real estate doesn’t have to be complicated. Many people have built their wealth through property sales and rentals, and there are numerous ways to grow a real estate business.
