Real estate is simply any land or property. It can encompass buildings, structures, natural resources, and mineral deposits.
When you purchase real estate, you’re buying any and all improvements and the legal right to use and improve the land. A seller is trading their right to use or develop the property for a price.
Before investing in real estate, an investor needs to be able to answer the question, “What is real estate?” Let’s explore the different types of real estate and some real estate investing strategies that can help answer this question.
Types of Real Estate
When asking, “What is real estate,” there are four different types of real estate investors need to be aware of:
Residential property includes any property where people can live, such as single-family homes or multifamily structures—i.e., apartment buildings, condominiums, and duplexes. Many investors own rental properties that are single-family homes or small multifamily structures with one to four units.
Residential real estate can be a good place for first-time real estate investors and those trying to build their portfolios to start. Single-family and multifamily homes can be easier to get financing for and may be less expensive than commercial real estate, making this a good way to purchase real estate when just getting into the game.
Commercial real estate includes structures such as office buildings, shopping centers, shopping malls, and retail space.
It can be more expensive to invest in commercial property, but this area of real estate can become quite lucrative because of its high cash flow potential.
Many commercial properties have longer leases and less turnover and vacancy than residential properties. The stability that comes with owning commercial buildings can provide a steady income.
It’s always a good idea to look into the local market before investing in commercial real estate to understand what people in the area need and want in a commercial space.
Industrial property includes farms, mines, factories, and manufacturing facilities. It also includes larger pieces of real estate that might be found near key transportation hubs, such as railways and sea harbors.
This type of property is where behind-the-scenes work takes place and is rarely open to the public. Industrial real estate encompasses a wide range of uses, and properties can encompass over 100,000 square feet.
Economic growth in the online e-commerce retail market and shipping industry has made investing in industrial real estate increasingly profitable. However, this type of property can come at a higher cost, often making it better suited to real estate investment professionals.
Real estate transactions involving industrial property involve more regulations that need to be met. This type of property could have environmental concerns or other issues that complicate the deal.
Real estate agents who handle industrial properties can help investors understand what goes along with purchasing a particular property with industrial-use zoning.
Land includes vacant or undeveloped lots, and it can offer the greatest potential for construction and development options that can increase its value.
With vacant land, an investor has the right to build structures or make changes to the space—within legal limits, of course. The landowner could upgrade the utilities by adding power or a well, or they might build a home or retail building and rent it out to generate income.
Property taxes for vacant land can be inexpensive, but once improvements are made, taxes on the land will increase. A vacant lot in a housing development may have homeowners association fees due as well, even if the land is undeveloped.
It’s important to research any fees associated with owning land before buying it.
Real Estate vs. Real Property
While real estate is a tangible asset, real property can be tangible or intangible, such as an investment. The main difference is real estate implies ownership of the land and structures that are on it, while real property might include a right to live in a house without having actual ownership.
For example, a person renting a home has a right to use the property, but they don’t own the real estate. On the same note, a leaseholder for a commercial building is using the property but doesn’t own it. These people may have some responsibility for caring for the property, but in the end, the real estate owner must ensure the property is kept up.
How Does the Real Estate Industry Work?
A real estate investor who wants to make smart investing decisions needs to understand how the real estate market works from the beginning to the end of the process.
Here’s a little more about navigating the real estate industry, for those just starting their real estate journey and real estate professionals alike:
Constructing and developing property
At one point, all property was vacant land. Eventually, individuals and development companies decide to improve land to either sell for a profit or rent to make a passive income.
They might build anything from a primary residence or single-family home to apartment buildings or shopping malls. How the land is zoned will play a big part in what developments the owner can make.
Constructing a building or structure that meets the exact needs of the landowner is one of the biggest benefits of buying raw land to develop. However, working with developers and construction crews can be a challenge. This is why many people looking for an investment property choose something that’s already completed.
In some locations, though, it can be less expensive to build a home from the ground up than to purchase an existing home. This is when it’s helpful to know how to find good contractors and keep them. The right construction crew can get a project done in no time.
Before getting started, builders need to know the exact amount of living space desired, or square footage if it’s a commercial building. Checking the housing market or commercial needs can help investors understand what people are looking for, so they can build homes and office or retail space that fills those needs.
Working with brokers and agents to find real estate
Whether it’s for residential real estate, commercial real estate, or industrial real estate, working with licensed real estate agents to find the right property can be the key to success.
A real estate license opens up the ability to not just buy and sell real estate but also to network with individuals in the industry. This network can provide access to potential buyers, mortgage lenders, and other real estate professionals.
Like real estate agents, real estate brokers are real estate professionals who work as an intermediary for those looking to buy and sell property. These individuals often facilitate a real estate transaction through a real estate firm, performing everything from bringing the buyer and seller together to ensuring the closing goes smoothly.
Brokers, unlike agents, can have other licensed agents working for them, making a commission from the sales of each person they manage. These agents could work together as a team, which can be beneficial for investors.
Because several people with knowledge of real estate come together, they can use their varied skills to provide help and advice throughout the buying and selling process.
Working with lenders to get financing
Another key element of the real estate industry is working with mortgage lenders to get financing for deals.
Leveraging the money available through banks and private money lenders allows an investor to purchase more real estate. A mortgage lender may provide a loan to someone who wants to buy property if they meet the qualifications.
The money from the loan goes to the seller, who pays off any previous mortgage. In return for the loan, the lender expects a monthly mortgage payment from the new owner.
Buyers should get preapproved by their lender before shopping for investment property. With preapproval, buyers prove they have the ability to close if the deal goes through.
Having the right lender on an investment team can help ensure that funds are available when they’re needed.
Managing property as a real estate investor
Part of real estate investing is property management. Some investors start out managing their properties themselves, but eventually, most decide to use a property management company.
A property manager is there to handle the day-to-day operations of managing residential property, including administrative tasks, rent collection, and prepping houses for new tenants.
Each company has its own way of doing things, and fee schedules vary from one company to the next. Some companies may market properties as part of their fee, while others charge extra for marketing-related costs.
A property manager should be familiar with the local housing market, helping them understand how to set rental rates and where to find the ideal tenants.
The expertise of a property management company can be an asset for those looking to build a solid real estate investment team. Investors can research reviews and talk to others in the industry to find the right property manager.
Investing in Real Estate
Real estate is a varied field where savvy entrepreneurs can earn a good income. Of course, there are many things to know about investing in real estate before choosing a strategy.
It’s important for investors to familiarize themselves with the SMARTER investing phases if they want to take their business to the next level. These phases can help make investing a process that can be repeated over and over.
Here are some of the main strategies investors are using to generate income:
- Rentals: Renting residential real estate is a popular method for anyone getting into real estate investing. Single-family rentals are accessible to many, thanks to government-backed housing loans from agencies such as the Federal Housing Administration and the Department of Veterans Affairs.
- Fix and flip: House flipping is when an investor buys a home that needs work, fixes it up, and sells it for a profit. The important thing to remember when doing a fix and flip is to perform an analysis to make sure the property is worthwhile to repair.
- BRRRR: With the BRRRR method, investors are essentially buying properties, rehabbing them, and then refinancing for the equity. The money from the equity loan goes toward investing in the next great deal.
- House hacking: Living in one unit and renting out the rest of the units in a multifamily property is one form of house hacking. Basically, house hacking is any form of making money off of a property where you live and also create an income.
- Wholesaling: When wholesaling real estate, an investor makes an offer for the right to a contract on a property. They then sell the right to buy the property—the contract—to another party for a higher price than what they offered for the original contract.
- REITs: Real estate investment trusts are companies that own income-producing property in a variety of sectors. These real estate investment trusts are modeled after mutual funds and allow investors to pool their money to own real estate they couldn’t otherwise afford.
- Private lending: In some cases, a buyer may want to use a private lender to obtain financing to buy real estate. A private lender can often finalize a loan faster than a traditional bank, and they may not have the same stipulations for qualification.
Getting Started in Real Estate
Getting started in real estate doesn’t have to be complicated. Many people have built their wealth through house sales and rentals, and there are tons of ways to grow a real estate company.
It starts with getting advice and knowledge from investors who have been there. The team at BiggerPockets is a great place to start your investment journey.
Our investors have a wealth of information and experiences they love to share to help others make their personal finance dreams come true. From offering advice on a variety of strategies to providing rental property calculators and rehab estimators, you can count on BiggerPockets to have the answers you’re looking for.
Ready to succeed in real estate investing? Create a free BiggerPockets account to learn about investment strategies; ask questions and get answers from our community of +2 million members; connect with investor-friendly agents; and so much more.
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.