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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 single most valuable asset they’ll ever own.
The real estate market can have profound impacts on the economy of a nation as a whole, a fact most 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 property, meaning that 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 resources on the land such as water or minerals.
Real estate is generally the most valuable asset a person can acquire as it typically appreciates over time. Subsequently, the value of real estate is a leading indicator of an economy’s health. 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 homeownership, rental and property development rates.
Types of real estate
Real estate takes several forms and depending on the type, various levels of regulation or restriction may apply to its purchase and use.
Residential: Residential real estate is empty or developed land that is used for the purpose of occupation. It comprises everything from single-family homes to multi-family rental units, and can even include portable dwellings like houseboats. Many people own the home they live in outright, while others may lease homes from the owner of the real estate under a rental agreement.
While owning and occupying your own home won’t generate an income, your property can develop significant equity over time, which can be leveraged to further other financial objectives. As your home’s value increases and you pay down your mortgage, your equity in your home rises, giving you a valuable asset over time that you can borrow against, sell, or leave behind to someone you love.
Multi-family real estate, on the other hand, can generate significant passive income in addition to appreciating in value over time.
- Commercial: Used to conduct business or professional activities, commercial real estate is bought with the intent to generate income through commercial means. This usually means the real estate owner allows other businesses to lease property on the land, which provides revenue, but may also own a business on the property themselves.
- Industrial: Industrial real estate is similar to commercial real estate in that it’s also intended to turn a profit. Farms, mines and land containing factories are also considered forms of industrial real estate.
- Land: Undeveloped land can be held vacant for future development, or used to generate income through grazing, timber, agricultural or other uses. Even separate from other functional use, land continues to increase in value over time, making it a consistently strategic investment.
How to purchase real estate
Purchasing real property, such as a traditional single-family home, is generally facilitated by a real estate agent, broker or attorney who specializes in real estate transactions. If you don’t have the cash to purchase real estate outright, financing options depend on the type of real estate you’re buying and your financial resources.
Most people purchase residential real estate with a real estate-specific loan called a mortgage. In the U.S, mortgages come in many forms and are traditionally backed by the federal government or a private lender. Mortgages require a down payment from the buyer that commonly varies from 3.5-20 percent of the purchase price of the home, with some exceptions for special loans, like VA loans.
Purchasing real estate for investment can be done through traditional lending sources like banks or through sources like hard money lenders, private money lenders or out-of-pocket, although other innovative solutions — such as real estate crowdfunding platforms — can allow you to acquire 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 on your own presents too much risk, you can purchase a fractional share of a property or asset through a syndication, partnership or investment fund, which diversifies risk to the limited partners and provides equity and distributions to all partners. This is called passive real estate investing, as 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 purchase 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 brokerage firms offer them. All these options diffuse the risk of investing in real estate as an individual by reducing the upfront cost, offering a large portfolio of properties, and sharing the risk with a large group of people.
Historic moments in U.S. real estate
- 1908: The National Association of Realtors (NAR) was founded in Chicago.
- 1920s: The multiple listing service (MLS), a centralized system for advertising and finding homes for sale, came into use and was widely adopted around the U.S.
- 1934: The Federal Housing Administration (FHA) was established to kickstart the home construction industry and create lending guidelines. The FHA instituted a policy now known as redlining, which drew red lines around maps of predominantly nonwhite neighborhoods and designated them as high-risk for lending.
- 1938: The Federal National Mortgage Association, colloquially known as Fannie Mae, was created 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 with which to extend new loans. Fannie Mae’s job was to purchase mortgages from lenders and repackage them as securities that could be invested in. By buying the mortgages, Fannie Mae gave banks liquidity to extend credit to new borrowers.
- 1944: The GI Bill of Rights was signed into law, giving veterans returning from World War II access to cheaper government loans for housing. Unfortunately, many Black and other nonwhite military service members found that redlining and private developers’ mandates prevented them from taking advantage of the GI Bill’s generous terms.
- Late 1940s-50s: The suburbs expanded with the baby boom and influx of cash from the GI bill.
- 1970: The Federal Home Loan Mortgage corporation, aka Freddie Mac, was created to act as a backer and buyer of mortgages like Fannie Mae; its presence increased the number of mortgages purchased from lenders, giving them even more liquidity to extend loans to borrowers.
- 1975: NAR membership reached 435,485 realtors, quadruple the number of just four years prior.
- 2006-07: The subprime mortgage crisis hit, causing a wave of foreclosures, the bankruptcy of several lenders and financial services firms, and a subsequent global recession.
- 2010: The Dodd-Frank Act was passed, creating the Consumer Financial Protection Bureau and reforming mortgage lending.
Getting started in real estate
First-time homebuyers have a variety of grants, loans and down-payment assistance programs available to them because of 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 shopping for real estate as a homebuyer, you’ll want to assess your finances. Know your credit score (and debt-to-income ratio) and take steps to improve it if possible. Keep track of your recurring expenses so you know what monthly mortgage payment you can afford. Save up what you can for a down-payment, which directly affects your mortgage payment. If you’re flexible in your location, compare the cost of living in different areas to help decide where to live.
For new real estate investors, joining a real estate investing network in your area can help you identify which forms of property may be most beneficial 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 revenue as an active investor, your network is going to have the most impact on your net worth. Asking questions, shadowing other investors and attending webinars to learn will give you the best idea of where to start your real estate investing journey.