Real estate investing refers to the purchase of property as an investment to generate income rather than using it as a primary residence. In simple terms, it can be understood as any land, building, infrastructure, and other tangible property which is usually immovable but transferable.
Some examples of real estate are a house, office buildings, agricultural land, commercial plot, etc. It is considered to be a secured form of investment.
Types of Investment Properties
Residential real estate
Residential real estate is virtually anywhere that people live or stay, such as single-family homes, condos, and vacation homes. Residential real estate investors make money by collecting rent (or regular payments for short-term rentals) from property tenants, through the appreciated value their property accrues between when they buy it and when they sell it, or both.
Investing in residential real estate can take many forms. It can be as simple as renting out a spare room or as complicated as buying and flipping a house for a profit.
Commercial Real Estate:
The properties or office buildings such as a complex are parted into multiple small units. These are rented out or used to run various businesses. Therefore, they are known as commercial real estate.
Industrial Real Estate:
A large-scale property utilized to build factories, manufacturing units, warehouses, distribution centers, etc. is categorized under industrial real estate.
A mixed-use property can be used simultaneously for both commercial and residential purposes. For instance, a building may have a retail storefront on the main floor such as a convenience store, bar, or restaurant, while the upper portion of the structure houses residential units.
Features of Investment in Real Estate
Real estate or properties are one of those investments which have a physical existence and can be touched and seen. A result of this attribute is that you have a certain degree of physical control over the investment – if something is wrong with it, you can try fixing it. You can’t do that with a stock or bond.
Because real estate is tangible, it needs to be managed in a hands-on manner. Landscaping must be handled. And, when the building starts to age, it needs to be renovated. With some exceptions, real estate requires ongoing management at two levels.
First, you require property management to deal with the day-to-day operation of the property.
Second, you need strategic management of the property to consider the longer-term market position of the investment. Sometimes the management functions are combined and handled by one group. Management comes at a cost; even if it is handled by the owner, it will require time and resources
Costly to Buy, Sell and Operate:
For transactions in the private real estate market, transaction costs are significant when compared to other investment classes. It is usually more efficient to purchase larger real estate assets because you can spread the transaction costs over a larger asset base. Real estate is also costly to operate because it is tangible and requires ongoing maintenance.
Investing in properties can provide dual benefits to the investors. On the one hand, real estate generates rental income, and on the other hand, its value keeps on increasing in the long run.
MEANS OF EARNING THROUGH REAL ESTATE
Raw Land Income
Depending on your rights to the land, companies may pay you royalties for any discoveries or regular payments for any structures they add. These include, for example, pump jacks, pipelines, gravel pits, access roads, and cell towers. Raw land can also be rented for production, usually agricultural production, and land tracts with trees may be valuable for the timber that can be periodically harvested.
Real estate management companies, agents, or brokers can make money in the form of commission by facilitating the exchange of property between the buyer and the seller.
Buy and Hold
This is one of the more traditional ways of earning income from real estate. There are some ways to accomplish this: You can buy a single-family home and rent it out; buy a multi-family home and live in one of the units while renting the others ideally to cover the contract and your housing expenses; or purchase a multi-family home and rent all of the units either managing the property yourself or hiring a management company to handle renting units, collecting rent, addressing needed repairs, and so on.
Benefits of Investing in Real Estate
Real estate returns are directly linked to the rents that are received from tenants. Some leases contain provisions for rent increases to be indexed to inflation. In other cases, rental rates are increased whenever a lease term expires and the tenant is renewed. Either way, real estate income tends to increase faster in inflationary environments, allowing an investor to maintain its real returns.
A real estate investor is free to make his or her own decision, similar to running any other business entity. In short, the investor is his or her boss.
The positive aspects of diversifying your portfolio in terms of asset allocation are well documented. Real estate returns have relatively low correlations with other asset classes (traditional investment vehicles such as stocks and bonds), which adds to the diversification of your portfolio.
Ability to Influence Performance:
Real estate is a tangible asset. As a result, an investor can do things to a property to increase its value or improve its performance. Examples of such activities include: replacing a leaky roof, improving the exterior, and re-tenanting the building with higher quality tenants. An investor has a greater degree of control over the performance of a real estate investment than other types of investments.
Real estate investment is the purchase of property that encounters capital appreciation in the long run.