What is meant by real estate?

Real estate means ownership of land along with the assets and natural resources that exist on the land. These properties are in real/physical form which is tangible. Real estate simply means land or addition made to land permanently like constructing a residence or different buildings. People invest in real estate to either reside or for wealth creation. Many people investing in real estate further lend the place for occupation or businesses in return for a monthly payment.

Features of real estate

• Real estate investments are tangible and feature a physical existence.
• It is a durable investment and the maturity period is not fixed.
• Investors will not have access to all information as the market lacks transparency.
• It is an enormously illiquid asset as it can’t be easily sold within a short period of time.
• It generates wealth for the investor and the price of the property appreciates from year to year.
• It is a universally accepted collateral security for obtaining loans from financial institutions.

Types of real estate

The investment made in real estate may be benefitted from an excessive return however it requires large cash for funding. There are distinctive styles of real estate property investment such as land, residential, commercial, crowdfunded platforms, industrial, and real estate investment trusts. These real estates are discussed below:

Residential real estate

Residential real estate is wherein the investor buys property for a living. It can be a single home, villas, or vacation home. Investors buy those properties either to reside or for renting to tenants. By investing in residential real estate, investors get a regular income and in the long run, the property value will be appreciated. Thus, they are able to promote the assets for profit in the future without accruing any loss.

Commercial real estate

Real estate property lent for business operation is known as commercial real estate. An investor owns a property and earns profits from renting for business operations. If the building has many rooms, for each occupied room he might get a rental fee or leased amount. For example, office buildings, malls, restaurants, etc., would come under commercial real estate. Usually, commercial property has higher rent and long lease period than residential property.

Land

Investors purchase land to either construct a residential building or a commercial building. While buying a land, investors should have a piece of proper knowledge about the area where the land is located and identify whether it is demanded for commercial purposes or residential purposes. If invested land is no demand for residential or commercial purposes then investment made in such a land will be a waste. Proper knowledge about the locality is important while investing in real estate. Generally, this type of investment will be made by persons who have large capital and sound knowledge of the real estate market.

Real estate investment trust (REIT)

The real estate investment trust is the companies that own commercial properties like hotels, offices, malls, etc. These companies trade their shares publicly in the stock exchange. The investors can directly own real estate by buying shares in such companies with minimum risk. Every year these companies ought to give ninety percent of their taxable earnings to their shareholders. So, shareholders will receive a dividend every year without losing their investments. Real estate shares are more liquid than real estate property investment. It can be easily bought and sold in the stock market for cash.

Real estate crowdfunding platform

Crowdfunding platforms are a source of investment that comes from real estate investment trust that is not always traded at the stock exchange. It carries a high risk and high returns compared to other investments. Some platforms require the investor to have a minimum net worth of one million dollars except their annual income and value of home either individually or joint with a spouse. There are also platforms that don’t need a requirement for such investments. Once investments are made investors cannot sell in the market, it will be held for several years. Many crowdfunding platforms are not functioning well as it has a very short record track. 

Advantages of real estate

All investment comes with its own merits and demerits. The ultimate goal for any investment decision is to earn profit without losing its principal amount. The following are some of the advantages of real estate:

Easy understanding

In real estate, the process of buying and selling a property is easier to understand, in contrast to different investment options which have complex concepts.

Controllable

Real estate investment deals with physical property, hence, it is easy to control with good management. The value of the property will increase year by year and also the wealth of the investor tends to grow year by year.

Positive towards inflation

When inflation increases, the value of the house will go up. When it comes to rental property the investor can increase the rental fee even during the inflation period. Real estate investment reacts positively during the inflation period.

Market inefficiency

As the market for real estate lacks transparency, investors can gain more profits because of market inefficiency. An investor who has sound knowledge of the real estate market can bargain for the best prices.

Appreciable investment

Even though a heavy investment amount is needed for real estate, every year the value of the asset increases. In real estate, the invested amount paybacks the principal amount while selling the property and also adds profit because of asset appreciation. Thus, it is a very safe investment option than the stock exchange.

Disadvantages of real estate

The following are the disadvantages of real estate investment:

High cost

Acquiring a real estate property involves a huge amount which might be unaffordable for many people in the market. There are other investment options that require far less initial investment compared to real estate investment.

Low Liquidity

Real estate investment cannot be sold within a brief duration without loss. Investors ought to maintain the property for years to finally sell it in profit. It is a low-liquid asset because it takes many years to be profitable.

High maintenance

After purchasing a property, it should be properly maintained and managed by the investor. Real estate taxes, finance payments, insurance, maintenance cost, and management fee are added to the investment cost for its maintenance.

Inefficiencies

The real estate market has high inefficiency. Most investors may not be aware of the property’s original value and market rate. Excessive research is needed to make a good deal.

Create liability

Real estate investments can sometimes be a liability for the investor as it needs a huge amount along with additional maintenance costs periodically.

Context and Applications

The above topic can be used for undertaking professional exams for courses like,

• Certificate in Real Estate Development
• Master of Management in Real Estate
• Master of Law- Real Estate and Land Use
• Master of Science in Real Estate Development
• Master of Business Administration in Real Estate

Practice Problems

Question 1: Real estate means acquiring _________ .

1) Land, property, building

2) Common stock

3) Preference share

Answer: Option 1 is correct.

Explanation: Real estate means the acquisition of land, property, or building. The acquired land can also be used for building commercial or residential complexes. These properties are in real or physical form which is tangible.

Question 2: What is the expansion of REIT?

1) Reserve earning income trust

2) Real estate Investment trust

3) Repurchase estate Investing trust

Answer: Option 2 is correct.

Explanation: The real estate investment trust is the companies that own commercial properties like hotels, offices, malls, etc. These companies trade their shares publicly in the stock exchange.

Question 3: Land and building bought for the rental use of business operation are called _________.

1) Stock exchange real estate

2) Residential real estate

3) Commercial real estate

Answer: Option 3 is correct.

Explanation: Real estate that rents or lease a space for business operation is called commercial real estate. An investor owns a property and earns income from renting for business operations.

Question 4: Real estate shares that are not traded in the stock exchange is called__________.

1) Real estate investment trust

2) Crowdfund Platform

3) Residential platform

Answer: Option 2 is correct.

Explanation: Crowdfunding platforms are an investment that comes from real estate investment trust that is not traded on the stock exchange.

Question 5: Choose the advantages of real estate investment.

1) Appreciable investment and positive reaction towards inflation

2) Appreciable investment cost and high maintenance

3) Appreciable illiquid investment and inefficiency

Answer: Option 1 is correct.

Explanation: Even though a heavy investment amount is needed for real estate, every year the value of the asset increases. When inflation increases the value of the house will go up. If it’s a rental property then the investor can increase the rental fee. Real estate reacts positively during the inflation period.