Real estate is property that includes land and structures like houses, office buildings, apartment towers or strip centers. It also includes natural resources like water and crops or minerals.
Million Dollar Listing, Property Brothers and Flip or Flop are just a few of the many reality shows that highlight the real estate business. Real estate is attractive to investors and those who want to swap paying rent for owning a home.
Definition
Real estate is property that consists of land and everything attached to it, including buildings and natural resources. It differs from personal property, which includes items that are not permanently attached to the ground like cars, boats, jewelry and furniture. There are five main types of real estate: residential, commercial, industrial, vacant land and special purpose.
Many people invest in real estate for a variety of reasons. Investors can purchase property directly and rent or sell it, or they can invest in REITs and other real estate funds. Real estate professionals can help investors with the buying and selling of properties.
Homes are the most common type of real estate. Other types include shopping malls, office buildings, and warehouses. Some real estate is used for special purposes, such as amusement parks and zoos.
Types
Residential real estate includes single-family homes, townhomes and condominiums. Multifamily real estate refers to apartment buildings with five or more units. Commercial real estate consists of structures and land used for business services or income generation. It may include shopping malls, restaurants and offices. Industrial real estate includes warehouses and processing plants.
Property investors can earn money by purchasing properties and renting them to businesses. They can also hold onto properties until they increase in value and sell them for a profit.
Location is one of the most important characteristics that affects a property’s value. For example, a home located in an area with a strong job market and good schools will have higher value than a home in a poor neighborhood. This is why analysts and investors often keep a close eye on housing starts, which provide clues to the direction of the economy.
Value
Real estate is a valuable asset that can be used as an investment. Residential properties generate income through rent payments from tenants and can increase in value by being in an evolving neighborhood with new schools, shopping centers, parks or other improvements that make it a desirable place to live. Commercial property values can be increased through development of the land, such as building houses or other businesses in a location that is currently underdeveloped.
Accurate real estate valuation is important to mortgage lenders, investors and insurers. Investors often value real estate using strategies similar to those used for valuing liquid assets such as stocks and bonds. These include capitalization rates and the net operating income (NOI) valuation model. Discounting future NOI and calculating the gross income multiplier are other methods for real estate valuation.
Taxes
Property taxes are a large component of real estate expenses. They are calculated based on the taxable assessment and exemptions. They increase as the value of the real estate increases. Many real estate investors take advantage of tax deductions, such as depreciation on property improvements.
The tax rate on real estate differs by property type and the location of the property. The tax rate also depends on the value of other comparable properties in the area.
Many municipalities offer a property tax exemption for senior citizens and disabled homeowners, which reduces or freezes the real estate taxes. In addition, some cities offer a property tax abatement for new construction. These programs are often designed to encourage real estate investment. Moreover, they help to boost the overall economy and create jobs.
Investment
Real estate investments can include homeownership, rental properties and property flipping. The latter involves purchasing and quickly reselling a piece of real estate, often after major renovations that boost value.
Investors can use their investment real estate to generate capital gains, increase cash flow and diversify their portfolios. Well-chosen real estate appreciates over time and usually outpaces inflation.
However, it’s important to assess your own risk tolerance and level of involvement before investing in real estate. Ownership is hands-on and requires a significant amount of maintenance, finding and vetting tenants, and addressing problems that arise. Investors can reduce these issues by hiring a property management company. Investment real estate is also available through REITs and crowdfunding platforms, which provide more passive investing opportunities. These may be less volatile than direct ownership but have a lower ROI potential.