What Is Real Estate and How Does It Work?

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What Is Real Estate and How Does It Work?

For sale sign in front of house.
Photo by Andy Dean Photography – Shutterstock.com

What is real estate, actually? To put it simply, it is much more than just a property, a house or an apartment. Real estate includes land, the air rights above said land and the underground rights below it.

With that being said, let’s look at the four types of real estate.

1. Residential real estate

Homes, particularly single-family ones, are the most common category of residential real estate. This category also includes townhouses, duplexes, condominiums, high-value homes, multi-generational homes, co-ops, vacation homes, triple-deckers, and quadplexes. Furthermore, this category includes both resale homes and new constructions.

2. Commercial real estate

Despite the fact that apartment buildings are used for residential purposes, they actually fall into this category since they are owned to produce income. Other types of commercial real estates include strip malls, medical and educational buildings, shopping centers, offices and hotels.

3. Industrial real estate

Buildings that are used for production, storage, research and the distribution of goods fall into this category, such as warehouses and manufacturing properties.

Of note is the fact that some buildings that are used to distribute goods may be considered commercial real estate. It’s really important to make a distinction here due to the fact that construction, zoning, and sales will be handled differently for each category of buildings.

4. Land

This category is pretty cut and dry. Working farms, ranches and vacant land all fall under this term. Though, keep in mind that in the case of vacant land there are 5 subcategories: early development, site assembly, subdivision, undeveloped, or reuse.

How the Real Estate Industry Works

Confused business woman.
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Real estate, being a critical driver of economic growth in the U.S., refers to producing, buying and selling real estate that falls under one of the categories mentioned above.

To use 2018 as an example of how our nation’s economic output is impacted by real estate construction, that year alone saw $1.15 trillion added to the country’s coffers. That’s an increase from 2017’s $1.13 trillion but a decrease from the $1.19 trillion peak in 2006. In other words, real estate construction represented 6.2% of U.S. gross domestic product in 2018 compared to 8.9% in 2006.

New home building is in a category of its own and considered critical. It oversees the construction of condominiums, townhouses, and single-family homes compared to real estate construction which includes residential, commercial, and industrial buildings.

Data on home sales as well as average prices are provided by the National Association of Home Builders, also known as NAHB, as it is a leading economic indicator. Of note is the fact that it takes four months to establish a trend for the sale of new houses.

You can’t so much as think about buying or selling property without real estate agents coming to mind. They assist businesses, investors, and homeowners when they’re interested in any of the four types of properties and are generally divided into groups of specialists for each.

Don’t confuse sellers’ agents with real estate agents, though it may sound like their jobs overlap in some areas. Also, don’t confuse them with buyers’ agents, but we’ll get more into that later.

Sellers’ agents find buyers either through professional contracts or the Multiple Listing Service, help price your property. They do this by using comparative listings of recently sold properties. They also help negotiate with a buyer and it’s in their best interest for you to get the best possible price. In order to achieve this, they may even spruce your property up.

So, if you’re looking to sell a property, it’s best to assume that a sellers’ agent will be on ‘your side’. On the other hand, a buyers’ agent will assist a home purchaser. In addition to finding a suitable property, they will also compare prices and guide interested parties towards areas that are affordable while also meeting their requirements.

If you’re planning on buying a home, your agent will negotiate on your behalf and, finally, he or she will help with the legal aspects of the purchase.

Now, we all know that home buyers and sellers can become overly enthusiastic about future sales. In that regard, the National Association of Realtors provides monthly reports on the homes sold in a certain area, followed by their average price. Realtors are, therefore, real estate agents who have ‘increased’ their professionalism.

Real Estate Investing

Real estate gears.
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Many Americans falsely believe that real estate investing does not include buying a home they intend to live in. In truth, everyone who buys (or alternatively sell) a property engages in real estate investing.

You can read this article for an in-depth analysis of different types of real estate investing. Right now we’ll just go over them briefly.

If you want to get started in the real estate market with a more hands-on approach you could buy a property in order to rent it out. Platforms like Airbnb, Home Away and VRBO are perfect for short term rentals too.

If your house has accumulated value over time with various refurbishings and alterations then, with the right amount of capital, you may become a very successful house flipper. A house flipper typically buys underdeveloped properties, makes improvements and sells them at a profit, often over a very short period of time.

Finally, there are real estate investment groups and real estate investment trusts, REIGs and REITs, which are perfect for those who want in on the action without the hands-on approach.

So, did that clear the air about real estate? Are you ready to start investing?

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