Real Estate Investing

Published: 12/23/2022

What Is Real Estate?

Real estate is the land and any structures permanently attached to it, such as a home or business.

Real estate is considered to be one of the most important assets in the world. People use real estate as a place to live and an investment to make money. Real estate is also a way for people and businesses to earn money by renting or selling their properties.

The value of real estate depends on many factors, including location, size, condition, improvements, and amenities. There are many types of real estate, including residential homes and apartments, commercial buildings (such as office space), warehouses, and undeveloped land that can be developed into housing developments or shopping centers.

Real estate is the land and any permanent structures built on it, like a home or business.

How Do You Invest in Real Estate?

When it comes to real estate, there are two main ways to invest:

Buying a home or condo. If you're looking for a place to live, buying a home is the best way to save money and build equity. A well-chosen home can also provide significant appreciation over time.

Buying commercial property. This can be done through an individual building purchase or by investing in a REIT that owns hundreds of properties. Commercial property can be lucrative — but it's also risky, because it requires more management than residential properties and can have more tenant turnover.

The best investments are those that help you reach your financial goals while providing an income stream from rents or capital appreciation from asset appreciation (or both).

Purchasing physical property and real estate investment trusts (REITs)

Land vs. Real Estate vs. Real Property - What's the Difference?

Land, real estate, and real property are often used interchangeably, but they differ greatly.

Land is the natural surface of the earth. Land includes everything in its natural state — trees, rocks, minerals, and other natural elements.

Real estate is a broader term that refers to any physical property. Real estate includes land as well as anything built on top of it. For example, houses, stores, factories, and office buildings are considered real estate.

Real property is another term for real estate. The difference between these two terms is that real property also refers specifically to land or any other natural resource with value, like minerals or oil reserves in the ground.

Land Is the Natural Surface of the Earth, Real Estate Included Land and the Buildings on Top of It, Real Property Is Another Term for Real Estate

What are the Types of Real Estate?

There are many different types of real estate. When you start looking at properties, you may see them referred to as residential, commercial, industrial, land, and special-use real estate. These terms refer to the use of a property, not the kind of ownership.

Residential

The residential property market consists of single-family homes, townhouses and condominiums. The residential market has always been a significant component of real estate because it is the largest market segment in most areas.

The residential property market also has several types of home buyers — first-time buyers, move-up buyers, and downsizers. Each type of buyer has different needs and wants when purchasing a home.

Commercial

Commercial real estate is the most common type of property used in business operations. Real estate investors, developers and brokers buy and sell commercial properties to make a profit.

Commercial properties are usually larger than homes or apartments and can be used for many different purposes. For example, commercial property may serve as office space for businesses, warehouses for storing goods or retail space for selling products.

Industrial

Industrial real estate is the use of land and buildings to manufacture goods. It can be used for various industries, including manufacturing, storage, and warehousing. Industrial real estate is often located near major roadways or railways that can help transport goods quickly and efficiently.

Land

Farmland and mining land are two types of industrial real estate that can be used for business or personal purposes. The main difference between the two is that farmland is used to grow crops, while mining land is used to search for natural resources such as gold and oil.

Special Purpose

Special purpose real estate is an area of commercial real estate that focuses on a specific part of the market. The special purpose category includes properties such as: medical office buildings, retirement communities, hospitals and nursing homes, malls and shopping centers, and residential subdivisions.

How Does Real Estate Effect the Economy?

Real estate is a big part of the economy. It touches almost every aspect of our lives, from paying for our homes and apartments to our cars, the clothes we wear, the food we eat, and even our entertainment.

Real estate can have both positive and negative effects on the economy. When more houses are being built than are needed, this can create an oversupply which drives prices down. This can make it difficult for homeowners who want to sell their house because they may not be able to get top dollar for it (if they even get any offers at all). On the other hand, if there aren't enough houses being built, then this creates an undersupply which drives up prices until there are enough houses available again. So although real estate has both positive and negative effects on the economy, overall it tends towards being neutral regarding its impact on economic growth.

Real Estate can have both positive and negative effects on the economy. When there are more houses being built than are needed, this can create an oversupply which drives prices down.

What Are the Stages to a Drop in Housing Prices?

Sourced from Reventure Consulting.

  1. Lower Sales Volumes

Sales volume is a measurement of how much property is sold in a given period of time. For example, if you have 100 houses in your portfolio and 20 sold during the last quarter, your sales volume is 20%.

You can see your sales volume as a percentage of total inventory or total market value. This will help you determine how much inventory has been sold. In real estate terms, sales volume is also known as listing velocity or listing productivity.

The formula for calculating sales volume is: Sold Inventory / Total Inventory x 100 = Sales Volume

  1. Incentives to Entice Home Buyers

Homebuyers will be more likely to purchase a home if they are presented with incentives. Here are some incentives that could entice a home buyer:

Lower price tags. One of the most common incentives for buyers is a lower price tag. Sellers may offer discounts on their homes in hopes of attracting more interest from buyers. This can be done through either a special sale or by lowering the initial asking price.

Extra features and amenities. Another incentive for buyers is to include extra features and amenities in the home, such as granite countertops, walk-in closets, or an upgraded kitchen appliance package. Extras like these can help attract buyers looking for something different than what is standard for homes in their area.

Newer appliances and fixtures. Another common incentive for homebuyers is newer appliances and fixtures throughout the house, especially if they were recently installed within the last few years. Many people prefer to get new appliances when buying a new house because they don't want to replace them immediately after moving in.

  1. Drop in Housing Prices

A drop in housing prices is a decline in the value of homes relative to their replacement cost and also an increase in the number of foreclosures.

In economic terms, a drop in housing prices is referred to as deflation, which means prices are falling. That's why homeowners and renters alike need to know what causes a decrease in housing prices and what can be done to minimize its effects on your finances.

How Long Do Housing Crashes Take to Play Out?

According to Reventure Consulting, housing market crashes often take 5-6 years to play out.

Housing market crashes are like snowballs rolling downhill: they start slowly, pick up speed and momentum, and then become unstoppable. It usually takes five to six years to play out before prices bottom out and begin rising again. But there's no way to know when that will happen.

Housing Market Crashes Often Take 5-6 years to Play Out

How Does Interest Rate Affect Housing Prices?

The conventional wisdom is that rising interest rates will lead to lower housing prices.

However, this isn't always the case. The chart below shows the relationship between 30 year fixed mortgage rates and median home prices since 1981. The correlation is not very strong, but there is a slight positive relationship between them.

In other words, when interest rates fall, home prices tend to rise; when interest rates rise, home prices tend to fall. But there are many other factors that affect housing prices: unemployment rate, income growth, population growth and more.

Source: FRED

Conventional Wisdom States That Rising Interest Rates Lowers Housing Prices

Where Can I Find Data on Housing Prices?

The Case-Shiller index is the most widely used index for tracking housing prices in the United States. It is published on a monthly basis with data going back to 1987.

The National Housing Survey is a survey conducted every other year by HUD (the Department of Housing and Urban Development) that provides information on the condition of America's housing stock, homeownership rates and housing affordability.

Case Shiller Home Price Index

The S&P/Case-Shiller U.S. National Home Price Index measures the value of the residential real estate market in 20 major U.S. cities and is considered a leading indicator of the housing market, reflecting the overall economic conditions of these cities and the broader economy. The index provides an accurate picture of changes in residential values by tracking repeat sales of single-family homes, condominiums, and cooperatives, using data from approximately 50 complete sets of data points collected monthly from each city pair. The home price index includes all significant components of home sale prices, including capitalization rates, taxes, and insurance costs.

Source: FRED

National Housing Survey

The National Housing Survey was first conducted in 1973 as part of a study on housing affordability. The survey is conducted every other year and is designed to provide data on the number of rental and owner-occupied homes, their characteristics, and the quality of housing in the United States.

The survey is based on a sample of approximately 8,000 households nationwide. These households are asked questions about their housing needs, income level, life expectancy, and other demographic information. The data collected from these questions shows how Americans live in their homes today.

End of Lesson

Real estate is the land and any structures permanently attached to it, such as a home or business. Real estate can also include temporary structures, such as those used in construction. The term real estate is derived from the Latin word res, which means "things," and the Latin word ager, meaning "land."

Real estate investments generally have a low correlation with other financial assets, making them an attractive asset class for diversification.

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