Le Knapp: What Are The 4 Types Of Real Estate?

Real estate is real property, land, buildings, air rights above the land and underground rights below the land. The term real estate means real, or physical, property. Real comes from the Latin root res, or things. Others say it’s from the Latin word “rex,” meaning “royal,” since kings used to own all land in their kingdoms. The U.S. Constitution initially restricted voting rights to only owners of real estate.

Four Types of Real Estate

There are four types of real estate:

•

Residential real estate

includes both new construction and resale homes. The most common category is single-family homes. There are also condominiums, co-ops, townhouses, duplexes, triple-deckers, quad lexes, high-value homes, multi-generational and vacation homes.

•

Commercial real estate

includes shopping centers and strip malls, medical and educational buildings, hotels and offices. Apartment buildings are often considered commercial, even though they are used for residences. That’s because they are owned to produce income.

•

Industrial real estate

includes manufacturing buildings and property, as well as warehouses. The buildings can be used for research, production, storage, and distribution of goods. Some buildings that distribute goods are considered commercial real estate. The classification is important because the zoning, construction, and sales are handled differently.

• Land includes

vacant land

, working farms, and ranches. The subcategories within vacant land include undeveloped, early development or reuse, subdivision and site assembly.

How the Real Estate Industry Works

Real estate also refers to producing, buying and selling real estate. Real estate affects the U.S. economy by being a critical driver of economic growth. Construction of new buildings is a component of gross domestic product. It includes residential, commercial, and industrial buildings. In 2018, real estate construction contributed $1.15 trillion to the nation’s economic output. That’s 6.2% of U.S. gross domestic product. It’s more than the $1.13 trillion in 2017 but still less than the 2006 peak of $1.19 trillion. At that time, real estate construction was a hefty 8.9% component of GDP. New home building is a critical category. It includes the construction of single-family homes, townhouses, and condominiums. The National Association of Home Builders provides monthly data on home sales and average prices. The data on new home sales is a leading economic indicator. It signals how the housing market will do in nine months. That’s how long it takes to construct new homes. The NAHB also reports new home starts, those are the number of home construction projects on which ground is broken.

Real estate agents assist homeowners, businesses and investors buy and sell all four types of properties. The industry is typically divided up into specialists that focus on one of the types. Sellers’ agents help find buyers through either the Multiple Listing Service or their professional contacts. They price your property, using comparative listings of recently sold properties known as “comps.” They can help you spruce up your property so it will look its best to customers. They assist in negotiations with the buyer, helping you get the highest price possible. Here are more sellers’ agent services. Buyers’ agents provide similar services for the home purchaser. They know the local market. That means they can find a property that meets your most important criteria. They also compare prices, called “doing comps.” It allows them to guide you to areas that are affordable. Buyers’ agents negotiate for you, pointing out reasons why the seller should accept a lower price. They help with the legalities of the process, including title search, inspection and financing. Real estate agents who want to increase their professionalism become REALTORS.

The National Association of realtors publishes provides monthly reports on the number of homes resold and their average price. It’s a better indicator of the health of the overall housing industry than new home construction. That’s because new home builders can be overenthusiastic about future sales and overbuild. They can also cut prices to force sales. Individual homeowners must follow the market’s supply and demand. They don’t have the clout to manipulate the market. NAR provides the current housing market statistics.

Real Estate Investing

Everyone who buys or sells a home engages in real estate investing. That means you must consider several factors. Many people do so well with investing in their homes they want to buy and sell homes as a business. There are many ways to do that. First, you can flip a house. That’s where you buy a house to improve then sell it. Many people own several homes and rent them out. You can also invest in housing without buying a home. You can buy stocks of homebuilders. Their stock prices rise and fall with the housing market. Another way is with Real Estate Investment Trusts, called REITs. These are investments in commercial real estate. Their stock prices lag behind trends in residential real estate by a few years. Statistics about new home construction are important leading economic indicators. That means they will give you a heads up on the future of the housing market. If mortgages are declining, the homebuilder will end up with an inventory of unsold homes for sale.

It also means demand is high, but homeowners can’t get mortgages. Rising home starts might seem like an indicator of housing strength. But it might be a bad sign. Declining home closings mean the housing market is weak. The new home sale is the first step in a nine to twelve-month process. If new home sales pick up, then you know closings will rise in about a year. However, all of the remaining three steps must be completed. A new home sale is when the buyer signs the paperwork and gives the homebuilder a deposit. That’s because most new homes are not constructed until there is a buyer. The exceptions are spec homes that are used as model homes. The Census Bureau releases monthly estimates of new home sales. They are given as an annual rate. Two months after the paperwork is signed, the local housing regulators grant the permit. It is an early indicator, but not always accurate. Builders can go bankrupt and never build the permitted units. They can change the number of units built in a multi-family. In fact, 22.5% of multi-family permits aren’t built, or are changed to single-family units. Finally, developers often receive permits for a large portion of a complex that could take months and month to build. Three months later is the new home start. It occurs when the builder breaks ground. The National Association of Home Builders reports on this monthly. It’s very accurate because the new home start only occurs when the builder is confident enough to break ground. Six to nine months later is the closing.

The homebuyer must receive a mortgage before the home can close. If the homebuyer doesn’t qualify, the house remains in inventory. If this statistic is lower than the home sale figure, it means the new home market will start to slow down. There are too many homes being built, and not enough qualified home buyers. It can also mean builders will begin lowering prices to clear their inventories. Fannie Mae releases the report on all mortgages.

There are three other important indicators to watch.

• Inventory – This is the total of homes that are available for sale, but unsold. The NAHB reports this monthly.

• Months of Supply: This is how many months it would take to sell all the houses in inventory. It’s based on the sales rate and inventory. The NAHB also reports this monthly.

• Sales Prices – The Census Bureau reports on both the median and average new home sales price.
Commercial real estate is any property owned for the purpose of producing income. There is about $6 trillion worth of commercial real estate in the United States. Here are the five largest categories of commercial real estate.
• Retail includes indoor shopping malls, outdoor strip malls, and big box retailers. It also includes grocery stores and restaurants. Its value is around $2.1 trillion or 36 percent of the total value of commercial real estate. It consists of at least 9.5 billion square feet of shopping center space.

• Hotels include motels, luxury resorts, and business hotels. This category does not include homes that rent out rooms through Airbnb. There are roughly 4.4 million hotel rooms worth $1.92 trillion.

• Office buildings include everything from Manhattan skyscrapers to your lawyer’s office. There are roughly 4 billion square feet of office space, worth around $1.7 trillion or 29 percent of the total.

A Real Estate Investment Trust is a public company that develops and owns commercial real estate. Buying shares in a REIT is the easiest way for the individual investor to profit from commercial real estate. You can buy and sell shares of REITs just like stocks, bonds, or any other type of security. They distribute taxable earnings to investors, similar to stock dividends. REITs limit your risk by allowing you to own property without taking out a mortgage. Since professionals manage the properties, you save both time and money. Unlike other public companies, REITs must distribute at least 90 percent of their taxable earnings to shareholders. This saves them the business tax cost, which is paid by the shareholder at the capital gains tax rate.

Pros and Cons of REITs

Since commercial real estate values are a lagging indicator, REIT prices don’t rise and fall with the stock market. That makes them a good addition to a diversified portfolio. REITs share an advantage with bonds and dividend-producing stocks in that they provide a steady stream of income. Like all securities, they are regulated and easy to buy and sell. Keep in mind that the value of your REIT reflects more than just the underlying real estate. It’s also affected by the demand for REITs themselves as an investment. They compete with stocks and bonds for investors. So even if the value of the real estate owned by the REIT rises, the share price could fall in a stock market crash.

When to Buy and Sell REITs

When investing in REITs, be sure that you are aware of the business cycle and its impact on commercial real estate. During a boom, commercial real estate could experience an asset bubble after residential real estate decline. During a recession, commercial real estate hits its low after residential real estate.

REITS versus Real Estate ETFs

Real estate exchange-traded funds track the stock prices of REITs. Investors are attracted to ETFs because they have very low fees. But they are one more step removed from the value of the underlying real estate. As a result, they are more susceptible to stock market bull and bear markets.

The Risks of Real Estate Sector Funds

For many securities-oriented investors, real estate provides an ideal way to diversify their overall portfolios (and indeed, real estate comprises one of only two asset classes that have outperformed inflation over the long term). However, owners of individual properties face the same risk as owners of individual stocks: If the value of the asset declines, then they can lose big. Fortunately, investors have an alternative method of participating in the real estate market through real estate sector funds (see An Introduction to Sector Mutual Funds). This article examines the risks and rewards inherent in real estate funds, as well as some of the winners and losers in this category.

Here are some things you can do to make real estate low risk for you:

• Do your homework – Everyone needs to do their due diligence before purchasing a property. You need to know about the market, the building type, the rents, the renovations etc. before going in. If you do your homework right, the risk is much lower. You may need a power team of realtors, lenders, inspectors, appraisers, contractors, mortgage brokers etc. to help you do your homework. You typically can’t do it alone.

• Get educated – Most people try to skip school when it comes to real estate investing, but an ounce of sweat can save a pint of blood. I recommend taking some classes, hiring a coach and getting a mentor if you are serious about real estate investing. Typically, the cost of a good education is the same as the profit you will make on one good deal, so the cost is negligible in the long run.

• Be diligent – Above all things do not be negligent. Stay on top of what is happening. There are always changes happening in real estate and you must be aware of what’s going on. Negligence is expensive in the real estate field.

• Be a good manager or hire a good manager – Someone must manage your asset, either you or someone else. If you are managing, make sure you are educated and know what you are doing. If you don’t want to manage the property yourself, find a good manager. Typically a good property manager is harder to find than you may think so you may have to go through several.

• Don’t over-leverage – Leverage is one of the reasons why people get rich in real estate and also a reason why people go bankrupt. When you are leveraging, be responsible and don’t over-leverage. Make sure you can survive if something goes wrong.

• Have a strong income going in – Real estate is somewhat of a rich man’s game. If you don’t have a strong income going in, perhaps you need to increase your income by going into sales or something else that can become high income. When I started in real estate I had no income and it was very hard to manage. Today I have a very high income and it’s much easier to operate in the real estate field.

• Keep cash on hand – Always keep a strong cash cushion. I tell my students if you don’t have $100,000 cash on hand, don’t do buy and hold. You need cash just in case things go wrong. In real estate, something always goes wrong so you need to have large cash reserves to be able to sustain disasters as they happen.

Real estate, when speaking of the ownership of land, refers to the land – not the improvements (house or structures on the land) and usually the land extends to the center of the earth and into space. Real estate is unique as no two pieces of land can be identical, therefore value is determined by the desirability of the land and the location (often based on proximity to a desirable geographical feature such as a City or body of water). The improvements are what most people think of when they are thinking of buying or selling real estate, when in fact most of the value is actually in the land.

The cost of the improvement can vary based on obsolescence, condition and wear/tear. This is why in some parts of the world, people will pay huge amounts of money for land and then tear down the improvement that exists there. The cost to tear down a structure isn’t that high, and surprisingly the cost to build a new house on a piece of real estate is much more reasonable than many would expect.

Real Estate Lawyer Free Consultation

When you need legal help with real estate in Utah, please call Ascent Law LLC for your free consultation (801) 676-5506. We can help you with boundary disputes. Easements. Real Estate Development. CC&Rs. HOAs. Condominium Developments. Commercial Real Estate. Residential Real Estate. Vacant Land. Zoning. Quiet Title Actions. Evictions for Landlords. And Much More. We want to help you.