What is 'Real Estate'
Real estate is property comprised of land and the buildings on it as well as the natural resources of the land including uncultivated flora and fauna, farmed crops and livestock, water and minerals. Although media often refers to the "real estate market" from the perspective of residential living, real estate can be grouped into three broad categories based on its use: residential, commercial and industrial. Examples of residential real estate include undeveloped land, houses, condominiums and townhomes; examples of commercial real estate are office buildings, warehouses and retail store buildings; and examples of industrial real estate are factories, mines and farms.
(For more information on buying a home, see: A Guide to Buying a House in the U.S.)
BREAKING DOWN 'Real Estate'
Personal Property and Real Property
Personal property includes intangible property like stocks, bonds and other investments; it also includes chattels, like computers, beds and clothes, as well as fixtures like the dishwashing machine in your apartment – if you bought and installed it with the lessor's permission.
Real estate is a special instance of real property, which is real estate – land and buildings – plus the rights of use and enjoyment that come with the land and its improvements.
Land that has no owner, e.g. land in Antarctica or on the moon, is not considered real estate.
For more, see: Holding Titles On Real Property.
Real Estate and Real Property
Real estate is simply the land and any improvements on it. Renters and leaseholders may have rights to inhabit land or buildings that are considered a part of their personal estate but are not considered real estate.
Home ownership, also known as owner-occupancy, is the most common type of real estate investment in the United States. According to the National Multifamily Housing Council, roughly two-thirds of residents own their home.
Individuals who are in the market to buy a home to live in often need to borrow money in the form of a mortgage because home prices are generally well above the savings of young people starting a household.
For more, see: Mortgage Basics: Introduction.
Individuals shopping for a mortgage to invest in real estate in the form of an owner-occupied home are faced with a variety of options. Mortgages can either be fixed-rate or variable-rate. Fixed-rate mortgages generally have higher interest rates than variable-rate mortgages, which can make them more expensive in the short run. Fixed rate loans cost more in the short term because they are protected from future interest rate shocks (see also: payment shock).
Banks publish amortization schedules that show how much of a borrower's monthly payments go to paying off interest debt versus how much goes to paying off the principle of the loan. Balloon loans are mortgages that don't fully amortize over time: the borrower pays interest for a set period, 5 years for example, and then they must pay the remainder of the loan in a balloon payment at the end of the loan term.
In addition, mortgages can come with sometimes heavy costs, including transaction fees and taxes, that are often rolled into the loan itself. Once potential home owners have proven their eligibility and secured a mortgage from a bank, they must complete an additional set of steps to make sure the property is legally for sale and in good condition.
For more, see: 12 Steps To Closing A Real Estate Deal.
Commercial Real Estate
Buying or leasing real estate for commercial purposes is very different from buying a home or even buying residential real estate as an investment. Commercial leases are generally longer than residential leases, and commercial real estate returns are based on their profitability per square foot, unlike structures intended to be private residences. Moreover, lenders may require more money for a down payment on a mortgage for commercial real estate than for a home loan.
For more, see: Commercial Real Estate Loans.
Investment Real Estate
Unlike other investments, real estate is dramatically affected by the condition of the immediate area where the property is located, hence the well-known real-estate maxim, "location, location, location." With the exception of a national or global recession, real estate values are affected primarily by local factors such as the availability of jobs, crime rates, school quality and property taxes.
For more, see: Exploring Real Estate Investments: Introduction.
Buying real estate directly results in profits (or losses) through two avenues: revenue from rent and appreciation of the real estate's value. Rental money comes from land already developed into residential or commercial real estate. Appreciation can come from either developing raw land or from the appreciation of the area around the land you own, for instance the appreciation of real estate in some American cities due to gentrification in the early 21st century.
For more, see: How You Make Money In Real Estate.
There are key differences in residential and commercial direct real estate investments. On one hand, residential real estate is usually less expensive and smaller than commercial real estate, and so it is more affordable for the small investor. Many thrifty small investors of modest means have increased their and their family's fortunes by buying rental property over decades.
For more, see: Making Money In Residential Real Estate.
On the other hand, commercial real estate is often more valuable per square foot, and its leases are longer than for residential rental properties. With greater revenue comes greater responsibility, however; commercial rental real estate is more heavily regulated than residential real estate, and these regulations can be different not only from country to country and state by state, but also different in each county and city. Even within cities, zoning regulations add a layer of unwanted complexity to commercial real estate investments.
There is also increased risk of tenant turnover in commercial rental agreements. If the lessee's business model is bad, their product is unattractive, or they are simply poor managers, bankruptcy can leave expensive real estate from generating revenue unexpectedly. Moreover, just as land can appreciate in value, it can also depreciate. A formerly hot retail locations have been known to decay into rotten shopping centers and dead malls.
For more, see: Find Fortune In Commercial Real Estate.