Real estate is land plus any property or resources on it. For millions of people, real estate – in the form of their homes – is the biggest investment they will ever make and the most valuable asset they will ever own.
The real estate market can have profound impacts on a nation’s economy as a whole, a fact most demonstrated during the real estate market crash of 2007, which in turn triggered the Great Recession (2008-09).
What is real estate?
Real estate is a form of immovable property, which means it is something you own that is attached to land. It can be used for residential, commercial or industrial purposes and generally includes all land resources such as water or minerals.
Real estate is usually the most valuable asset a person can own, as it usually appreciates over time. Subsequently, the value of real estate is a leading indicator of the health of an economy. Millions of jobs in home improvement, development, lending, insurance and business are directly impacted by the real estate market. The value of real estate is also reflected in rates of homeownership, rental and real estate development.
Types of real estate
Real estate comes in many forms and depending on the type, different levels of regulation or restriction may apply to its purchase and use.
- Residential: Residential real estate is vacant or built-up land that is used for occupancy purposes. It includes everything from single-family homes to multi-family rental units, and can even include portable dwellings like houseboats. Many people own the house they live in, while others may rent houses from the owner of the property under a rental agreement.
Although owning and occupying your own home does not generate income, your property can develop significant equity over time, which can be used to achieve other financial goals. As the value of your home increases and you pay off your mortgage, the equity in your home increases, giving you a valuable asset over time that you can borrow, sell, or leave to someone you know. love.
Multifamily real estate, on the other hand, can generate significant passive income in addition to increasing in value over time.
- Commercial: Used to conduct business or professional activities, commercial real estate is purchased with the intention of generating income through commercial means. This usually means that the property owner allows other businesses to rent a property on the land, which generates revenue, but may also own a business on the property themselves.
- Industrial: Industrial real estate is similar to commercial real estate in that it is also meant to generate profit. Farms, mines and land containing factories are also considered forms of industrial real estate.
- Ground: Undeveloped land may be left vacant for future development or used to generate income through grazing, timber, agriculture or other uses. Even separated from other functional uses, land continues to increase in value over time, making it a constant strategic investment.
How to buy real estate
Buying real estate, such as a traditional single-family home, is usually facilitated by a real estate agent, broker, or attorney who specializes in real estate transactions. If you don’t have the cash to buy real estate, financing options depend on the type of real estate you’re buying and your financial resources.
Most people buy residential real estate with a specific home loan called a mortgage. In the United States, mortgages come in many forms and are traditionally guaranteed by the federal government or a private lender. Mortgages require a down payment from the buyer which typically ranges from 3.5-20% of the purchase price of the home, with some exceptions for special loans, such as VA loans.
The purchase of real estate for investment purposes can be done through traditional lending sources such as banks or sources such as hard money lenders, private money lenders or direct payments, although other innovative solutions – such as real estate crowdfunding platforms – may allow you to acquire estate real estate in other ways.
Real estate can be purchased as a buy-and-hold asset, which aims to generate income through short-term rentals, long-term rentals, or vacation rentals. Flips are another common form of real estate investing, which adds value to a purchased property or asset and sells it for a profit at a higher value. Buy-and-holds and flips are most common with single-family and multi-family assets, but can also apply to commercial-use properties such as storage unit facilities and marinas.
If investing in real estate alone is too risky, you can buy a fraction of a property or asset through a syndication, partnership or investment fund, which diversifies the risks to limited partners and provides equity and distributions to all partners. It’s called passive real estate investing because you don’t directly manage the property; instead, your money is put to use by experienced real estate investors, usually general partners.
Other ways to buy real estate include real estate investment trusts (REITs), real estate limited partnerships (RELPs), and master limited partnerships (MLPs). REITs, which trade like stocks on financial exchanges, are the easiest to find and invest for beginners: most major investment brokerages offer them. All of these options diffuse the risk of investing in real estate as an individual by reducing the initial cost, offering a large portfolio of properties and sharing the risk with a large group of people.
Historic Moments in US Real Estate
- 1908: The National Association of Realtors (NAR) was founded in Chicago.
- 1920s: Multiple Listing Service (MLS), a centralized system for advertising and finding homes for sale, went live and was widely adopted in the United States.
- 1934: The Federal Housing Administration (FHA) was created to revive the home building industry and create lending guidelines. The FHA instituted a policy now known as redlining, which drew red lines around maps of predominantly non-white neighborhoods and designated them as high-risk for lending.
- 1938: The Federal National Mortgage Association, colloquially known as Fannie Mae, was formed as part of Franklin D. Roosevelt’s New Deal. During the Great Depression, banks foreclosed on thousands of properties and were left with very little cash to make new loans. Fannie Mae’s job was to buy mortgages from lenders and repackage them into securities to invest in. By buying the mortgages, Fannie Mae gave the banks liquidity to extend credit to new borrowers.
- 1944: The GI Bill of Rights was enacted, giving veterans returning from World War II access to cheaper government loans for housing. Unfortunately, many black and other non-white military service members have found that redlining and private developer mandates prevent them from taking advantage of the generous terms of the GI Bill.
- Late 1940s-50s: The suburbs grew with the baby boom and the influx of money from the GI bill.
- 1970: The Federal Home Loan Mortgage Corporation, aka Freddie Mac, was created to act as a funder and purchaser of mortgage loans like Fannie Mae; its presence increased the number of mortgages purchased from lenders, giving them even more liquidity to make loans to borrowers.
- 1975: Membership of the NAR has reached 435,485 estate agents, quadrupling the number from just four years ago.
- 2006-07: The subprime mortgage crisis hit, causing a wave of foreclosures, the bankruptcy of several lenders and financial services companies, and a subsequent global recession.
- 2010: The Dodd-Frank Act was passed, creating the Consumer Financial Protection Bureau and reforming mortgages.
Getting into real estate
First-time home buyers have access to a variety of grants, loans, and down payment assistance programs due to their novice status.
Whether buying a home to live in or as an investment property, working with an experienced local real estate agent can help you navigate the market in your area of interest.
Before buying real estate as a home buyer, you will want to assess your finances. Know your credit score (and debt ratio) and take steps to improve it if possible. Keep track of your recurring expenses so you know how much monthly mortgage payment you can afford. Save what you can for a down payment, which directly affects your mortgage payment. If you are flexible in your location, compare the cost of living in different areas to help you decide where to live.
For new real estate investors, joining a real estate investment network in your area can help you identify the most beneficial forms of ownership for your situation and involvement. Whether you are looking to become a passive investor in real estate or want to acquire rental or commercial properties to generate income as an active investor, your network will have the most impact on your net worth. Asking questions, observing other investors, and attending webinars to learn will give you the best idea of where to start on your real estate investing journey.