Basics to know in real estate investment
Real estate is the land along with any permanent improvements attached to the land, whether natural or man-made—including water, trees, minerals, buildings, homes, fences, and bridges. Real estate is a form of real property. It differs from personal property, which are things not permanently attached to the land, such as vehicles, boats, jewelry, furniture, and farm equipment.
Understanding Real Estate
People often use the terms land, real estate, and real property interchangeably, but there are some subtle distinctions.
Land refers to the earth’s surface down to the centre of the earth and upward to the airspace above, including the trees, minerals, and water.
Real estate is the land, plus any permanent man-made additions, such as houses and other buildings.
Real property—one of the two main classifications of property—is the interests, benefits and rights inherent in the ownership of real estate.
Broadly speaking, real estate includes the physical surface of the land, what lies above and below it, what is permanently attached to it, plus all the rights of ownership—including the right to possess, sell, lease, and enjoy the land.
Real property shouldn’t be confused with personal property, which encompasses all property that doesn’t fit the definition of real property. The primary characteristic of personal property is that it’s movable. Examples include vehicles, boats, furniture, clothing, and smartphones.
Physical Characteristics of Real Estate
Land has three physical characteristics that differentiate it from other assets in the economy:
While some parts of land are removable and the topography can be altered, the geographic location of any parcel of land can never be changed.
Land is durable and indestructible (permanent).
No two parcels of land can be exactly the same. Even though they may share similarities, every parcel differs geographically.
Economic Characteristics of Real Estate
Land also has some distinct economic characteristics that influence its value as an investment:
Scarcity: While land isn’t considered rare, the total supply is fixed.
Improvements: Any additions or changes to the land or a building that affects the property’s value is called an improvement. Improvements of a private nature (such as homes and fences) are referred to as improvements on the land. Improvements of a public nature (e.g., sidewalks and sewer systems) are called improvements to the land.
Permanence of investment: Once land is improved, the total capital and labor used to build the improvement represent a sizable fixed investment. Even though a building can be razed, improvements like drainage, electricity, water, and sewer systems tend to be permanent because they can’t be removed (or replaced) economically.
Location or area preference. Location refers to people’s choices and tastes regarding a given area, based on factors like convenience, reputation, and history. Location is one of the most important economic characteristics of land (thus the saying, “location, location, location!”).
Types of Real Estate
There are five main 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 with fewer than five individual units.
Commercial real estate: 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 real estate: Any property used for manufacturing, production, distribution, storage, and research and development. Examples include factories, power plants, and warehouses.
Land: Includes undeveloped property, vacant land, and agricultural land (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 the Real Estate Industry Works
Despite the magnitude and complexity of the real estate market, many people tend to think the industry consists merely of brokers and salespeople. However, millions of people in fact earn a living through real estate, not only in sales but also in appraisals, property management, financing, construction, development, counselling, education, and several other fields.
Many professionals and businesses—including accountants, architects, banks, title insurance companies, surveyors, and lawyers—also depend on the real estate industry.