What To Know About Real Estate Investing
How much do you know about real estate investing? Do you know what it is? Have you heard of it?
Well, whether you have and you've been diving in for a period of time, or just now knowing about it, having more knowledge around the subject doesn't hurt, especially now in this day and age where we're just coming off the heels of a pandemic(or starting to kind of). We're looking to gain a lot of financial security in these uncertain times.
In our first blog, we'll go over what real estate is, why it is important, and what you could do now in your quest to purchase your first real estate property.
What is Real Estate?
As said in Investopedia, the term real estate is the land and any permanent improvements attached to the land, whether natural or man-made. This would include water, trees, minerals, buildings, homes, fences, and bridges.
It is a form of real property and not personal property. If you don't know, personal property is not permanently attached to the land, such as vehicles, boats, jewelry, etc.
There are also five main categories of real estate, which are the following: residential, commercial, industrial, raw land, and special use. Feel good yet? Starting to feel your knowledge increasing? Good because we'll be going into specific terms and how we use them in the context they're supposed to use.
These terms used in the real estate game are land, real estate, and real property. Now you might be thinking, "Well, we already know how these terms are used." However, not necessarily since sometimes we use these terms interchangeably, it is important to understand the specific definitions.
As described on Investopedia, land is the earth's surface down to the center of the earth and upward to the airspace above, including trees, minerals, and water.
As already mentioned above, real estate is the land plus any permanent human-made additions, such as houses and others buildings.
Real Property is one of two main classifications of property, and it means the interest, benefits, and rights inherent in the ownership of real estate.
Learning the specific terms and what they mean will allow you to have a good base to understand real estate, real property, and land. Plus, how it can really help you in a market that has proven consistent success as well. While we all love hearing the success, there is an amount of risk associated with real estate. Let's go over both the benefits and risks in real estate next.
Understanding the Characteristics of Real Estate
Here are some of the characteristics of real estate, whether physical or economical, to help you see more of the intricacies in the field. The more you know, right?
Here are some physical characteristics of real estate to start.
There needs to be an understanding that no two parcels of land are the same. Yeah, they might have similar characteristics, but the geography of the land will differ greatly between the two.
Now there is some part of the land you can move given certain circumstances such as the topography and whatever can be removable. However, ultimately the geography of the land doesn't change.
This is pretty simple and straightforward. Your land is permanent. It can be durable and indestructible.
Now let's look into the economic characteristics of real estate. Knowing how this could influence the value of the investment.
While land isn't entirely considered rare, there is still a fixed supply of it. Meaning that land can come and go like your favorite video game console (I'm looking at you, PS5) given certain circumstances.
This could be any additions or changes to the land or building that affects the property's value. For example, improvements of a private nature such as a house or fences are referred to as improvements on the land. In contrast, improvements of a public nature such as sidewalks, benches, or sewer systems are referred to as improvements of the land.
Permanence of investment
Once the improvements are made on the land, whether private or public, the total capital and labor used to build the improvements represent the sizable fixed investment. Improvements such as drainage, electricity, water, and sewer systems are permanent because they can't be replaced economically.
How The Industry Works
Given the magnitude and complexity of the real estate industry, there seems to be a misconception (believe it or not) that it is made up of only brokers and salespeople. But, in fact, millions of people earn a living through real estate, not only in sales but also in appraisals, property management, financing, construction, development, counseling, education, and many other fields.
It is a critical driver when looking at the economic growth in the U.S. As described on Investopedia; housing starts is a term used to refer to the number of new residential construction projects that begin during any particular month. It is also one of the key economic indicators, and the statistics are released around the 17th of each month by the U.S. Commerce Department.
The report includes data from building permits, housing starts, and housing completions. This report is divided into three different categories:
Homes with 2-4 units
Multifamily units with five or more units. such as apartment complexes.
This can help investors and analysts keep a close eye on the market since it shows the general economic direction of where everything is going with real estate.
Investing In Real Estate
Now, here we are to the part we all actually want to know about. Real Estate investing! Let's go over some of the finer points.
Now there are several ways to invest in real estate. Some of the more common ways include the following:
If or once you buy physical property, there are two ways to generate income: Revenue from rent or leases and appreciation of the real estate's value.
However, unlike other investments, it is dramatically affected by the location. There are factors to keep in mind with the investment, such as employment rates, the local economy, crime rates, transportation facilities, school quality, municipal services, and property taxes. These factors can drive real estate prices up or down.
Now here are the Pros & Cons:
Offer steady income
offer capital appreciation
It can be bought with leverage
Influenced by highly local factors
Require big initial capital outlay
May require active management and expertise
You can also invest in real estate indirectly. The most popular way to do so is through a real estate investment trust or REIT. This is a company that holds a portfolio of income-producing real estate. There are different types of REITs, types that include equity, mortgage, and hybrid REITs. Think of them as a form of stocks you can buy shares on. You can also earn income from them through mutual funds and ETFs or exchange-traded funds.
Low growth/low capital appreciation
Subject to market risk
One more way to invest in real estate is mortgage-backed securities or MBS. To let you know, MBS's received a lot of bad press over the years due to their role in the mortgage meltdown that triggered the global financial crisis in 2007-08. But, even with the bad press, they are still in existence and traded to this day.
You can buy into them via ETFs, and like all investments, they do carry a degree of risk. What's great is that they do allow another form of portfolio diversification. However, you need to make sure you've done your research into the holdings to ensure that those funds specialize in investment-grade mortgage-backed securities, not the dollar store variety that figured into the crisis.
There are two types of ETFs that allow you to have access that are popular to investors:
After everything you read, do you feel you have more of an understanding? If so, awesome, and you're on your way to taking your first steps in a larger world. If not, that is fine as well. This takes a lot of research and your own understanding of where you are in your journey to real estate investing.
We are all in our own journeys, and it's important to know where we're at in that space to make the best decisions for ourselves. But, unfortunately, life has a way of throwing curveballs at us when we least expect it, and we want to make sure that we can handle those curveballs, whatever that may be for you.
Sometimes just knowing is better, so you can make the best-informed decisions for yourselves and your loved ones in the future.