The real estate industry is among the key drivers of economic growth across the world. Due to the huge potential of the real estate sector, more people are joining the industry. Most people focus on the financial aspects of this industry. However, there is more to real estate business than just money. In fact, there are many things that you should know to succeed in this industry. So, what is real estate and what does it entail?
Real estate refers to property in terms of land, buildings and rights of air, both above and beneath the land. In simple terms, real estate is physical property. This article highlights the key elements of real estate. It focuses on enhancing your understanding of this industry and how it works.
Residential real estate refers to the property that is developed for living in. There are various property types that are categorized under residential real estate. They include single family houses, mobile home parks, and apartments. In fact, all types of properties that are meant for living in like condos, town homes, cooperatives, single and multi families’ houses are residential properties. However, apartments that consist of less than five units do not qualify to be called residential real estate.
In some cases, residential real property can be used for commercial purposes. This is mainly the case where a business operates on appointment only services, has fewer employees, and doesn’t generate automobile traffic. Nevertheless, residential property is governed by zoning laws. These laws can put limitations on the types and numbers of residential units to be developed in some areas. They may also regulate whether one can operate a business from their home and type of animals that are allowed in the living areas among other things.
It’s important to familiarize with zoning laws to answer the “what is real estate?” question in regards to residential property.
Residential property is one of the most valuable investments to own. While some people buy residential properties to live in, others acquire them to make money. Some common ways are: selling for profit, leasing for rent, wholesaling, and fixing & flipping. Regardless of the reason to obtain residential real property, the value is subject to changes in the market. Whether the market is going down, up, or neutral, there is always a way to make income from residential property.
Many people that buy residential real property often take out mortgages. These are loans that are issued exclusively for buying homes. Unlike commercial properties, loans for the acquisition of residential real property typically last 30 years.
Now that you have hints on what is real estate, it’s important to keep in mind the fact that there are several categories of real estate. Commercial real estate is one of the main types of real estate. This refers to a property that is exclusively used for business or profit making and it includes retail stores, hotels and restaurants, shopping malls, gas stations, industrial parks and office spaces. This type of real estate mainly works through lease.
An example is when a retailer wants to open up a store at a mall that is owned by an investor or a real estate company. Instead of paying the huge sums of money that is linked to buying the building, the retailer leases the space from the company and pay rent on a monthly basis.
Commercial real estate offers business spaces for individuals and companies to conveniently serve their customers in exchange for a fee. Most businesses lease spaces for flexibility and cost reduction purposes. To investors and companies that provide real estate for commercial purposes, there is greater potential for profitability.
Take for instance McDonalds, one of the leading fast food chains in the world. In addition, their products, the brand owns tens of thousands of properties in prime locations across the globe too. Instead of closing up the property in areas that it does not operate, it leases out the spaces to other businesses. In fact, most of the company’s profits are derived from the lease of assets.
Leases for commercial property can range from one to ten years or more. Retail and office buildings leases usually have an average of five to ten years. The main types of commercial property leases include single net lease, double net lease, triple net lease and gross lease. To clearly understand what is real estate, with regards to commercial property you need to remember that property is further categorized into three classes. These a class A, class B and class C.
This is another key type of real property that you should know to effectively answer the “what is real estate?” question. Although many people confuse it with commercial real property, industrial real estate is quite different. Industrial real estate refers to land and buildings that are best suited or used for industrial activities. These activities include production, assembly, research, warehousing and light storage, distribution as well as certain office-related needs.
Industrial real estate is mainly targeted at wholesalers, suppliers and manufacturers. Unlike commercial and residential real property, industrial property is not freely accessible to the public. The most common types of industrial property include stand-alone buildings, industrial parks, strata title, and distribution centers. These properties are grouped into two zoning categories. These are Industrial 1 and Industrial 2.
Industrial 1 category is for the manufacturing of toxic substances and special activities while Industrial 2 comprises of spaces for warehousing and light manufacturing.
Individuals and companies that invest in industrial real estate can benefit from the investments in many ways. One of the best ways to generate revenue from industrial real estate is by leasing out the spaces. Lease for industrial property usually lasts three years or more. This ensures generation of stable revenue to the investors. Going by the current standards of the real estate sector, industrial real estate investments generate a net income of about 7 to 10 percent compared to the 2 to 5% net returns on residential real property.
In industrial real estate, the lease agreements often require the tenant to cater for all outgoings. These include taxes, rates, and insurance, as well as water and sewage bills. This leaves the owner of industrial property with a huge potential for profitability.
When seeking answers to the question “what is real estate?”; you also need to understand how real estate works with mobile homes. Generally, mobile homes can be classified as real or personal property based on where they are located and their relationship with the land on which they are erected. According to most legal systems, property referred to as real is immovable or permanently built on land. On the other hand, personal properties are not permanently attached to land.
Mobile homes are often classified under personal properties. As their name suggests, these are temporary structures like trailer homes that can easily be moved from one place to another. As a result, they are governed by similar laws with those of automobiles in terms of titling and licensing. However, trends in mobile homes have significantly changed over the years. Today, most housing units are only moved from the maker to the user once.
In an attempt to keep up with these changes, most states allow owners of mobile homes to convert them into real properties under certain conditions. According to the U.S. Department of Housing, all mobile homes that were constructed before June 1976 do not meet the minimum standard building requirements for real estate. Therefore, such mobile homes are not eligible for conversion.
The conversion process for mobile homes is outlined in the Uniform Manufactured Housing Act. To facilitate the reclassification of mobile homes under real properties, the owners are required to file for certification of location with their relevant county records office and pay the stipulated fees. Certification of location shows that the mobile home permanently sits on land and it’s eligible for conversion. To be awarded the location certification, you should remove the wheels and axels of the mobile home and give evidence of its electric utilities.
Additionally, owners of mobile homes must possess the legal rights to the lands where the structures are erected to have them reclassified.
This is a crucial aspect to consider when asked to answer the “what is real estate?” question. Vacant land in real estate refers to a piece of land that is bare and not in use. The land can either be improved or unimproved. Unimproved land lacks some basic services that are required for a land to be operational. These include telephone street address, electricity and water. The definition might seem simple. However, there are varying aspects that potential buyers look out for when looking for raw land properties.
In real estate, the land market is quite different from that of other real properties. Unlike that of vacant homes, commercial or industrial spaces, the market for unimproved land is relatively less active. In fact, selling a vacant piece of land usually takes longer. Additionally, selling vacant tracks of land can also be quite challenging especially for beginners. However, the procedures of selling and buying vacant pieces of land are more or less similar to those of other real properties.
If you want to sell vacant lands, understand your target customers and their unique needs. Also prepare the land first to ensure better first impression and choose your rates carefully. Additionally, engage real estate pros when selling or buying vacant pieces of land. This will give you an easy time in navigating the murky waters of the land market.
A real estate agent is someone that is licensed to negotiate and transact the sale or acquisition of a property. Also known as real estate salespeople, agents help clients buy and sell plots, lands, homes, offices and other types of buildings. In addition to facilitating the sale and purchase of properties, real estate agents help clients that need rental solutions. However, their main focus is on buying and selling properties. As the need for buying and selling properties continues to increase across the world, there is a dire need for agents.
The key administrative tasks of an agent in real estate include:
Difference between Seller’s Agents and Buyer’s Agents
There are different types of agents in the real estate industry. Seller’s agents and buyer’s agents are the most common. Also called a listing agent, a seller’s agent is tasked with the responsibility of assisting clients sell properties. A buyer’s agent on the other hand, helps a client to buy a property.
What is a Real Estate Broker?
Most people tend to confuse a real estate agent with a real estate broker. Generally, real estate brokers are considered superior to agents. Real estate brokers are also qualified to facilitate the sale or purchase of a property. A licensed real estate broker can operate independently or hire agents. However, agents cannot operate as brokers. To become a licensed real estate broker, there are conditions that you must meet. These conditions vary from one state to another. However, most states require individuals to complete a four-year college degree and eight level college real estate courses. That means real estate brokers are more educated.
Real estate lending is an integral concept that you should learn when trying to understand what is real estate. Real estate lending refers to the issuance of loans by banks and other financial institutions for the sole purpose of buying property. To individuals that want to buy property for the first time, it is very important that they acquaint themselves with all aspects of real estate lending. That’s because most first-time property buyers require loans or mortgages to make their dream come true.
As a first-time buyer, you will require support when making an application for real estate lending. A good agent will be useful in helping you understand the unique lending requirements. Whether you need a loan for buying residential, commercial or industrial property, there are key lending guidelines that you should keep in mind. The first one is determining how much you can borrow.
In determining the amount of money that a lender can offer you, most banks and financial institutions look at the credit score, employment history, financial goals, income, and debt situation. You also need to know the monthly installments that you can afford based on the prevailing interest rates.
Real estate lending is also based on pre-qualification for financing. This is determined by the applicant’s credit report as well as their residential and employment history, income, assets and debt. To complete the lending process, the lender will review the value of the property using appraisals and data on recent sales of similar properties. Once the loan is approved, you will need a title company or escrow to handle matters that relate to funding.
Known to most people simply as the housing market, the real estate market basically refers to the platform where property buyers and sellers meet. Just like other markets, the housing market experiences demand and supply. These are determined by property sellers and buyers needs. When responding to the “what is real estate?” question, you should know how the housing market works.
Generally, the housing markets operate based on the laws of supply. If the supply of properties for sale is higher than demand, prices are likely to fall. But, if demand for properties is higher than supply, properties are likely to sell much faster and at higher prices. Understanding the supply and demand concepts is the key to determining the behavioral patterns of sales and prices in the market.
While the housing market shares a lot with other markets, it operates quite differently. Liquidity is one of the main aspects that distinguish the housing market from other markets. Another element is seasonality. The sale of homes usually varies from one season to another. Sales tend to go up in spring and drop in fall. Also important to note is the fact that the housing market operates like a ladder. Whenever market leaders go out of business or downsize, they create new opportunities for move up sellers.
In trying to answer the “what is real estate?” question, recognize the importance of financing in the housing market. In fact, more than 80% of home buyers require mortgages to actualize their dreams. In the housing market, price is usually not the same as value. Property is worth what the appraisers say and even lenders issue loans based on the values stipulated by appraisers.
Another important element of the housing market is medians and averages. A median is whereby half of the properties sold in the past month were cheaper and the other half were expensive. Average on the other hand, refers to the total of those numbers divided by the numbers of items in that particular set.
Rental property is a key component of the housing market that you should know when answering the “what is real estate?” question. Rental properties are among the most lucrative investments in the housing sector. These refer to properties that are acquired by tenants in exchange for a monthly fee. Investors or landlords buy land or buildings for residential, commercial and industrial activities then issue them to individuals or companies that use them for a specified period.
The fee that tenants pay to the owners to use the properties is called rent. If you want to invest in rental properties, there are things that you should know before buying a property. One is the expected amount of income that the property will generate. The rates can be based on a number of factors including the location of the property and its value or condition.
Another thing to consider when investing in property for rent is the annual expenses of operating the property. Expenses for rental properties can be classified into either fixed or variable expenses. Fixed expenses are the costs incurred from yearly property taxes, routine maintenance and repairs, insurance premiums and property management services. Variable expenses result from unplanned spending like the costs of replacing air con systems, water heaters, roofing, plumbing and fencing.
While rental properties can deliver a steady stream of income to investors, understand what you are getting into beforehand. Similar to other investments, rental properties have some risks. Understanding these aspects combined with proper planning will ensure that you put your money into something worthwhile.
To properly answer the “what is real estate?” question, you should understand the concept of a real estate investment trust. Simply abbreviated as REITs, real estate investment trusts are companies that own, operate and finance properties for the purpose of generating income. REITs trade on major exchanges and provide investors with a portion of the revenue. A company that qualifies to be called a REIT must meet certain regulations.
A real estate investment trust is not something new in the financial sector. In fact, they have been around since 1960 when they were established by Congress. Companies that can be identified as REITS operate the way mutual funds do. They allow individual investors to own commercial real property that generate revenues. Such properties include apartments, offices, land, warehouses, health facilities, shopping centers and hotels.
Although the real estate sector is wide, REITS focus on specific real estate segments. For instance, there are office REITS. These specialize in office spaces only. Essentially, these companies buy and run the holdings as part of their portfolios. The revenues that are generated from the investments are shared with the investors in form of dividends.
The most common types of REITS include equity REITS, Mortgage REITS and Hybrid REITS. Equity REITS invest in and have ownership of real estate properties that generate income. 90% of the revenues generated are awarded to shareholders. Mortgage REITS finance real estate owners and operators through the purchase of mortgage backed securities. They get their revenues from the net interest margins that are impacted by the interests of the loans and cost of financing. Hybrid REITS invest in both real estate properties and mortgages.
Individuals can make investments in REITs through purchase of their shares directly on open exchanges or investing in mutual funds that specialize in public real estate. Some REITs are privately owned and run while others are public and registered with SEC. However, some public REITs are not listed in exchanges.
This form of investing has been around since the beginning of human civilization. Real estate investing entails the generation of income through ownership, buying, selling, managing and renting out real properties. There are numerous ways of earning money from real estate investments.
Common among them include:
Investing in real estate occurs when an investor, also known as the landlord, acquires residential, commercial or industrial property. The investor then finds someone that is interested in using the property or a tenant and signs an agreement. After striking an agreement, the tenant is required to pay rent for using the property.
When a corporation uses money from investors to buy and operate properties for income, it forms a real estate investment trusts REITS. Similar to stocks, these are traded on major exchanges. The corporation must pay out 90% of its taxable returns to investors in the form of dividends. As a result, REITs do not pay corporate income tax. However, investing in real estate comes with lots of responsibilities in terms of preserving the investments.
Considering the broader nature of the industry, answering the “what is real estate?” question might seem challenging. However, a careful study of the points discussed in this article and further research can make all the difference!
If you want to get started in real estate with little to no money, and little to no risk, then we recommend “Wholesaling.” Wholesaling is a type of real estate investing where you get a property under contract and then sell the rights to that contract to an investor that wants to do the work on the property. This is how many investors get their start at real estate investing! For a free in-depth training on how to wholesale houses go here.
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