Real estate is a property, land, or building along with its natural resources including water, crops, livestock, and mineral deposits.
The term real estate means ‘real’ or physical, property. “Real” comes from the Latin root res, or ‘things’ other says from the rex meaning ‘royal’.
Real estate business is the profession of buying, selling, or renting real estate (land, buildings, or housing).
Real estate is considered as a tangible asset and a type of real property. Real property include land, buildings, and other improvements, plus the rights of use and enjoyment of that land and all its improvements.
Residential real estate is less costly and more realistic for individuals when it comes to investing, whereas commercial real estate is more expensive and more secure. In general, real estate provides income and capital appreciation as an investment.
Real estate economics is the application of economic techniques to real estate markets. It tries to describe, explain, and predict patterns of prices, supply, and demand. The closely related field of housing economics is narrower in scope, concentrating on residential real estate markets, while the research on real estate trends focuses on the business and structural changes affecting the industry. Both draw on partial equilibrium analysis (supply and demand), urban economics, spatial economics, basic and extensive research, surveys, and finance.
4 Types of Real Estate
- Residential real estate includes both new construction and resale homes. Houses, condominiums, and townhouses are the most popular. The buildings may be single-family or multi-family homes and may be owner-occupied or rental properties.
- Commercial real estate includes non-residential structures such as office buildings, warehouses, retail buildings. Apartment buildings are also often considered commercial, even though they are used for housing. That’s because they are owned to generate revenue.
- Industrial real estate includes factories, business parks, warehouses, mines, and farms. These properties are usually larger in size and locations may include access to transportation hubs for distribution. It is worth mentioning that some buildings that distribute goods are considered commercial real estate. The classification is important because the zoning, construction, and sales are handled differently.
- Land includes vacant land, working farms, and ranches. The subcategories within vacant land include undeveloped, early development or reuse, subdivision and site assembly.
Investing in Real Estate
You may invest directly in real estate by buying land or property, or you may choose to invest indirectly through buying shares in public traded real estate investment trusts or mortgage-backed securities. Investing directly in real estate results in profits or losses in two ways that have not changed throughout the centuries; rental or lease income, and appreciation of the real estate’s value. Real estate
Pros
- Offers steady income.
- Offers capital appreciation.
- Diversifies portfolio.
- Can be bought with leverage.
- Numerous tax benefits.
Cons
- Is usually illiquid.
- Influenced by highly local factors.
- Requires big initial capital outlay.
- May require active management, expertise. Real estate
Why Real Estate is a Great Investment
Remember the simple acronym that real estate investing is I.D.E.A.L.
- INCOME in real estate comes in many forms; however, the biggest generator is the concept of rent payments on the property. As rent is paid each month, and that monthly income flows to the owner.
- DEPRECIATION is an accounting method that allows you to deduct the value of an asset over its useful life. The magic of Real Estate is that you get to depreciate the value of the property, but overtime, Real Estate values will always tend to increase.
- EQUITY is ownership of assets that may have debts or other liabilities attached to them. When a mortgage is paid, a part of it goes toward paying interest on the loan and the other part is for paying the principal value of the property. If you have the property rented, rentals will cover for the mortgage, repairs, maintenance and more.
- APPRECIATION is the increase in property value caused by other factors than the build-up; including inflation, improvements to the property such as discovering valuable materials or natural resources on the land and rise in the market values caused by development around the area; as a neighborhood grows and develops, property values tend to climb up. This is being evaluated as the property’s potential.
- LEVERAGE is the concept of paying for something without coming up with the full cost, while enjoying its capital appreciation. In real estate, leverage is used to a maximum advantage because the property is a tangible asset; it can capitalize on numerous revenue streams. There will always be a value in your land and value on the structure.
In conclusion, buying real estate is an investment strategy that can be both satisfying and lucrative; an investment that has the potential to provide a steady income and build wealth. However, it goes without saying that as with any other investment, each type of real estate investment has potential benefits and pitfalls. So, keep your expectations realistic, and make sure to study and research opportunities well before making any decisions.
Overview of real estate markets
The main participants in real estate markets are:
- Users: These people are both owners and tenants. They purchase houses or commercial property as an investment and also to live in or utilize as a business. Businesses may or may not require buildings to use land. The land can be used in other ways, such as for agriculture, forestry or mining.
- Owners: These people are pure investors. They do not occupy the real estate that they purchase. Typically, they rent out or lease the property to other parties.
- Renters: These people are pure consumers.
- Developers: These people are involved in developing land for buildings for sale in the market.
- Renovators: These people supply refurbished properties to the market.
- Facilitators: This group includes banks, real estate brokers, lawyers, government regulators, and others that facilitate the purchase and sale of real estate.
The choices of users, owners, and renters form the demand side of the market, while the choices of owners, developers and renovators form the supply side. In order to apply simple supply and demand analysis to real estate markets, a number of modifications need to be made to standard microeconomic assumptions and procedures. In particular, the unique characteristics of the real estate market must be accommodated. These characteristics include:
- Durability. Realestate is durable. A building can last for decades or even centuries, and the land underneath it is practically indestructible. As a result, real estate markets are modelled as a stock/flow market. Although the proportion is highly variable over time, the vast majority of the building supply consists of the stock of existing buildings, while a small proportion consists of the flow of new development. The stock of real estate supply in any period is determined by the existing stock in the previous period, the rate of deterioration of the existing stock, the rate of renovation of the existing stock, and the flow of new development in the current period. The effect of real estate market adjustments tend to be mitigated by the relatively large stock of existing buildings.
- Heterogeneity. Every unit of real estate is unique in terms of its location, the building, and its financing. This makes pricing difficult, increases search costs, creates information asymmetry, and greatly restricts substitutability. To get around this problem, economists, beginning with Muth (1960), define supply in terms of service units; that is, any physical unit can be deconstructed into the services that it provides. Olsen (1969) describes these units of housing services as an unobservable theoretical construct. Housing stock depreciates, making it qualitatively different from new buildings. The market-equilibrating process operates across multiple quality levels. Further, the real estate market is typically divided into residential, commercial, and industrial segments. It can also be further divided into subcategories like recreational, income-generating, historical or protected, and the like.
- High transaction costs. Buying and/or moving into a home costs much more than most types of transactions. The costs include search costs, real estate fees, moving costs, legal fees, land transfer taxes, and deed registration fees. Transaction costs for the seller typically range between 1.5% and 6% of the purchase price. In some countries in continental Europe, transaction costs for both buyer and seller can range between 15% and 20%.
- Long time delays. The market adjustment process is subject to time delays due to the length of time it takes to finance, design, and construct new supply and also due to the relatively slow rate of change of demand. Because of these lags, there is great potential for disequilibrium in the short run. Adjustment mechanisms tend to be slow relative to more fluid markets.
- Both an investment good and a consumption good. Realestate can be purchased with the expectation of attaining a return (an investment good), with the intention of using it (a consumption good), or both. These functions may be separated (with market participants concentrating on one or the other function) or combined (in the case of the person that lives in a house that they own). This dual nature of the good means that it is not uncommon for people to over-invest in real estate that is, to invest more money in an asset than it is worth on the open market.
- Immobility. Realestate is locationally immobile (save for mobile homes, but the land underneath them is still immobile). Consumers come to the good rather than the good going to the consumer. Because of this, there can be no physical marketplace. This spatial fixity means that market adjustment must occur by people moving to dwelling units, rather than the movement of the goods. For example, if tastes change and more people demand suburban houses, people must find housing in the suburbs, because it is impossible to bring their existing house and lot to the suburb (even a mobile homeowner, who could move the house, must still find a new lot). Spatial fixity combined with the close proximity of housing units in urban areas suggest the potential for externalities inherent in a given location.
Real Estate by James Chen, 25 September 2019 – www.Investopedia.com
Real Estate, What It Is and How It Works – Four Types of Real Estate by Kimberly Amadeo, December 14, 2019 – www.thebalance.com
The 5 Key Reasons Why Real Estate Investing is Awesome by Jared – www.capablewealth.com
Qatar Monthly Statistics of November 2019 Issue 70 based on the Planning & Statistics Authority
