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 largest investment they will ever make and the most valuable asset they will ever own.
The housing market can have a profound impact on a nation’s economy as a whole, a fact most clearly demonstrated during the housing market crash of 2007, which in turn triggered the Great Recession (2008-09).
What is real estate?
Real estate is a form of real estate, meaning it is something you own that is attached to a piece of land. It can be used for residential, commercial or industrial purposes and typically includes any resource on land such as water or minerals.
Real estate is generally the most valuable asset a person can acquire as it usually increases in value over time. Consequently, the value of real estate is a leading indicator of the health of an economy. Millions of home improvement, development, lending, insurance and corporate jobs are directly affected by the real estate market. The value of real estate is also reflected in home ownership, rental and development rates.
types of real estate
Real estate takes different forms, and depending on the type, different levels of regulation or restriction may apply to its purchase and use.
- Residential: Residential real estate is undeveloped or developed land that is used for the purpose of acquisition. It includes everything from single-family homes to multi-family rental units, and can even include portable dwellings like houseboats. Many people fully own the home they live in, while others may rent homes from the owner of the property as part of a lease.
While owning and using your home does not generate income, over time your property can develop significant equity that can be used for other financial goals. As the value of your home increases and you pay off your mortgage, your equity in your home increases, giving you a valuable asset over time that you can mortgage, sell, or bequeath to someone you love.
On the other hand, in addition to increasing in value over time, multi-family properties can also generate significant passive income.
- Commercially: Commercial real estate used for the exercise of business or professional activities is purchased with the intention of generating income through commercial means. This usually means that the property owner allows other businesses to lease properties on the property, which brings in revenue, but may also own a business on the property themselves.
- Industry: Industrial real estate is similar to commercial real estate in that it also aims to make a profit. Farms, mines, and lots containing factories are also considered forms of industrial real estate.
- Country: Undeveloped land can be kept vacant for future development or used to generate income through grazing, logging, agricultural or other purposes. Even separated from other functional uses, land continues to appreciate in value over time, making it a consistently strategic investment.
How to buy real estate
Buying real estate such as A traditional single family home, for example, is generally facilitated by a real estate agent, broker or solicitor who specializes in real estate transactions. If you don’t have the money to buy a property outright, financing options depend on the type of property you are buying and your financial resources.
Most people buy residential property with a property-specific loan called a mortgage. There are many forms of mortgages in the United States that are traditionally secured by the federal government or a private lender. Mortgages require a down payment from the buyer, which typically varies between 3.5 percent and 20 percent of the home purchase price, with some exceptions for special loans, such as VA loans.
Buying real estate for investment can be done through traditional sources of credit like banks, or through sources like coin lenders, private moneylenders, or out of pocket, although other innovative solutions — like real estate crowdfunding platforms — may allow you to acquire real estate in other ways .
Real estate can be acquired as a buy-and-hold investment that aims to generate income through short-term rentals, long-term rentals, or vacation rentals. Flips are another common form of real estate investment, in which a purchased property or asset is upgraded and sold at a higher value for a profit. Buy-and-hold and flips are most common in single-family and multi-family properties, but can also apply to commercial properties such as storage units and marinas.
If investing in real estate on your own is too risky, you can purchase a fraction of a property or asset through a syndication, partnership, or mutual fund that spreads risk among limited partners and provides equity and distributions to all partners. This is called passive real estate investing because you don’t directly manage the property; Instead, your money is put to work for you by experienced real estate investors – typically the general partners.
Other ways to acquire 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 for beginners to find and invest in: most major investment firms offer them. All of these options mitigate the risk of investing in real estate as an individual by lowering the initial cost, offering a large real estate portfolio, and sharing the risk with a large group of people.
Historic moments in the US housing market
- 1908: The National Association of Realtors (NAR) was founded in Chicago.
- 1920s: The Multiple Listing Service (MLS), a centralized system for advertising and searching for homes for sale, came into use and became widespread in the United States
- 1934: The Federal Housing Administration (FHA) was created to stimulate the housing industry and create lending policies. The FHA instituted a policy now known as redlining, drawing red lines around maps of mostly non-white neighborhoods and designating 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 had very little cash left to make new loans. Fannie Mae’s job was to buy mortgages from lenders and turn them into securities to invest in. By buying the mortgages, Fannie Mae gave the banks liquidity to lend to new borrowers.
- 1944: The GI Bill of Rights was enacted, giving veterans returning from World War II access to cheaper government housing loans. Unfortunately, many black and other non-white military personnel found that Redlining and private developer mandates prevented them from taking advantage of the generous terms of the GI Act.
- Late 1940s-50s: The suburbs expanded with the baby boom and the influx of cash from the GI bill.
- 1970: The Federal Home Loan Mortgage Corporation, also known as Freddie Mac, was formed to act as a lender and buyer of mortgages like Fannie Mae; Its presence increased the number of mortgages purchased by lenders, giving them even more liquidity to lend to borrowers.
- 1975: NAR membership reached 435,485 real estate agents, four times the number four years ago.
- 2006-07: The subprime mortgage crisis hit, causing a spate of foreclosures, the bankruptcy of several lenders and financial services firms, and a subsequent global recession.
- 2010: The Dodd-Frank Act created the Consumer Financial Protection Bureau and reformed mortgage lending.
Entry into the real estate industry
Because of their novice status, first-time home buyers have a variety of grants, loans, and down payment assistance programs available.
Whether you are buying a home for living or as an investment, working with an experienced local real estate agent can help you navigate the market in your area of interest.
Before you buy real estate as a home buyer, you should assess your finances. Know your credit score (and debt-to-income ratio) and take steps to improve it where possible. Keep track of your recurring expenses so you know what monthly mortgage payment you can afford. Save what you can for a down payment that goes directly into your mortgage payment. If you are flexible in your location, compare the cost of living in different areas to decide where to live.
For new real estate investors, joining a real estate investment network in your area can help you determine which forms of ownership are most beneficial for your situation and commitment. Whether you’re looking to become a passive real estate investor or looking to acquire rental or commercial properties to generate income as an active investor, your network will have the greatest impact on your wealth. Asking questions, observing other investors, and attending webinars to learn will give you the best idea of where to begin your real estate investment journey.