What Is Real Estate and How it Works?

Table of Contents

Real estate is all immovable property around us. It consists of land, buildings, and all physical property attached to the land; [1] Namely, land, buildings, homes, air rights, roads, and natural resources such as minerals and crops.

The word “Real” comes from the Latin term ‘Royal’ as in ‘owned by royalty’. This is because when countries were formed, the King owned all land, and individuals referred to as landlords, were granted rights to live in the land.

The word ‘Estate’ means an interest in real property. Another way to think of real estate is as ‘immovable property’.

Real = Immovable

Estate = property

Real estate = immovable property (land, plus things to the land)

Real estate is also referred to as Real property, which differs from personal property.

While real property refers to an interest in land and improvements attached to the land, personal property is an interest of property that can be easily moved such as a car, furniture, or other chattels.

What Does it Take to Become a Real Estate Investor?

There are four main types of real estate and each plays an important part in the economy. Here are the main categories:types of real state

 

  1. Residential real estate assets consist of houses, apartments, condominiums, townhouses, and vacation homes. The vast majority of buildings structures are private homes; thus, it’s the most common type of real estate available in the marketplace. 
  1. Commercial real estate accounts for office buildings, warehouses, retail buildings, shopping malls, hotels, individual stores, and medical offices.
  1. Industrial real estate includes factories, farms, mines, business parks; these properties often are large and include hubs such as harbors, and docks.
  1. Land is undeveloped land, which is owned by the state or acquired by developers with the intent of developing the land or to hold it for future price appreciation.

Read: What Are the Types of Real Estate Ownership?

Types of Residential Real Estate Properties

We often hear that someone wants to buy a home, but they are not necessarily clear about the type of property they want to buy. Home types vary in terms of physical characteristics, structure, as well as buyers’ lifestyle and preferences.

Here are the main types of residential properties you’ll likely be choosing from:

  • Multi-family dwelling is a housing unit where multiple families live, separated by units. For example, a condo building is a multi-family home.
  • Single-family dwelling is a stand-alone property with no common areas owned by other families/owners.
  • Detached house is a free-standing single-family home that is not attached to other building structures.
  • Semi-detached house is a single-family home that shares a wall with a neighboring house.
  • Townhouse is a multi-floor home that is adjacently attached to one or more homes.
  • Condominium (Condo) is a living unit like an apartment within a building. Common areas such as gym and hallways inside the building are owned jointly by all condo owners.

What is the Real Estate Market?

The real estate market is a combination of all properties available for sale within a specific area. That specific area could be a city, a state/province, or even a neighborhood.

So, for a city or town, the real estate market can be made of a combination of thousands of smaller real estate markets that make the whole. 

No two real estate markets are the same.

For example, the San Francisco real estate market is very different than the New York real estate market. Similarly, a few roads down the street from my house can also be a completely different market than on my street.

This happens because home prices respond to the laws of supply and demand. Buyers may like some neighborhoods more than other neighborhoods and that affects home prices in those areas.

In other words, if more buyers are looking to buy homes in a particular area, demand for housing increases there, and that pushes home prices higher.

What is the Real Estate Market

Equilibrium in real estate is achieved when demand for housing matches the available homes for sale in the market.

Rising home prices encourage builders to increase supply (build more homes), and current homeowners are tempted to sell so they can cash out their gains. 

What drives supply and demand for real estate?

The real estate market is driven by factors that exert pressure to either buy, sell, or build new homes. The most common drivers are employment, mortgage interest rates, demographics, accessibility to credit, and home affordability.

Thus, balancing supply and demand is not as easy as it sounds. To move the market, you typically need a combination of factors going in the same direction.

For example, if local employment is strong, but interest rates are high, that may not be enough to increase demand.

Read: Home Prices are Driven by These Four Factors

From the supply side, it takes time to build new homes or to fix existing ones, just like it also takes time for people to save money so they can buy homes.

How the Real Estate Industry Works

The real estate industry works in market cycles that are tied to consumer spending. As a result, the higher the flow of money in the economy, the more confident people are to buy and sell their homes. 

These are the main sectors that represent the real estate industry:

  • Buying and selling of homes (residential real estate)
  • Property developers and property management
  • Mortgage lending
  • Building new properties
  • The construction industry

The term residential real estate applies to properties built for people to live in, and they can be either single-family or multi-family homes. [3]

When home prices increase, homeowners feel more confident to spend on renovations, and they tend to buy more goods and services. Conversely, when home prices decline, homeowners pull back on their spending.

Thus, the real estate industry is driven by these three factors. 

  1. The number of properties available for sale.
  2. Buyer’s ability to acquire properties
  3. Accessibility to mortgage financing

What Does a Real Estate Agent Do?

Real estate agents help people buy, sell, and/or rent properties. When selling a home, a real estate agent’s main goal is to sell the property for the best possible price, with the fewest number of conditions.

When buying, it is to find a suitable property and negotiate the best price, at favorable terms for the buyer. The best agents specialize in either buying, selling, or renting, but not on all things combined, so keep that in mind when deciding the agent you want to hire.

Buyer Real Estate Agents

These are referred to as buyer agents; their main responsibilities are to research and explain to buyers essential information about neighborhoods, market trends, demographics, find the right property, and negotiate while preserving the interests of the buyer.

Here are other tasks buyer real estate agents perform daily:

  • Help buyers look for homes that meet buyers’ requirements
  • Schedule appointments for viewing homes, for home inspections, real estate appraisals, and other activities related to the purchase of a home.
  • Explain all documents, and what to expect at each step of the way.
  • Draft offers on behalf of the buyer.
  • Negotiate with the sellers on behalf of the buyer.
  • Assist the buyer throughout the home buying journey until the buyers get their keys.

Sellers Agents

Seller real estate agents are also referred to as listing agents and their main role is to market and sell homes at the highest possible price with the fewest number of conditions.  If you have good communication skills, you are a good marketer, and you’re a good negotiator, you can do well as a seller agent.

Here are other tasks that a buyer real estate agent performs a daily basis:

  • Make an unbiased evaluation of your home
  • Prepare an in-depth comparative market analysis
  • Vet buyers on behalf of the seller
  • Negotiate with buyers or the buyer’s agent.

Is Real Estate a Good Investment ?

I often hear so-called financial gurus say that investing in the stock market is better than buying real estate assets; so, I went ahead and did the math. The answer will surprise you.  

Yes, investing in the stock market has historically been more financially rewarding than investing in real estate, but you need to be an experienced investor; after all, you’ll be competing with sophisticated people that want a share of your money.

The question is, can an average person make money in the stock market?

Let me put it this way, how many people do you know who have made good money owning homes? Then, compare that with how many people do you know who have made good money in the stock market?

The answer is clear!

Investing in real estate is a great investment and there are many ways to get in. The most common way to invest in real estate is homeownership. Why? Because you’re replacing an expense you already have; that expense being rent, with the expense of paying the mortgage.

Even if the mortgage payment is slightly higher than the rent payment, a big chunk out of the mortgage payment goes towards paying the principal; that means you’re building equity with each mortgage payment.

As Mark Twain said, “Buy land, they are not making it anymore”.  Everyone needs a place to live, so investing in real estate never goes out style.

Benefits of Owning Real Estate and Home Ownership

When you buy a property either to live in or as an investment, location means everything.

While you’re paying down the mortgage, the property’s value appreciates based on the full value of the property, which means you’re making money using the bank’s money.  

Pros of owning real estate

  • Ability to leverage (using the bank’s money to make more money)
  • If you hold the property long term, you will make money.
  • No capital gains tax if the property is your principal residence
  • Offers steady income if you’re renting out.

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Cons of owning real estate

  • Requires an initial down payment
  • Might have to be cash poor for a few years
  • You need to take your time and do your homework to make sure you’re buying the right property.
  • You have to pay property taxes

You can invest in real estate in the following three ways:

  1. Buy a property for you to live in. You make money when the property appreciates in value and by paying down the mortgage by the amount that you would have otherwise paid as rent.
  2. Buy an investment property. With an investment property, you make money when the property appreciates in value, and by collecting monthly rent.
  3. Buy shares in REIT companies. Another way to invest in real estate, although indirectly, is by buying shares of publicly traded real estate investment trusts

(REITs). These shares are highly correlated to the real estate market and you can invest as little as a few hundred dollars.

Real Estate Apps to Search for Homes

Real estate is a game that is won by the best-prepared person; real estate apps can be a great resource for that.  With just a few clicks, you can learn about neighborhoods, nearby amenities, and get real-time information about available homes.

Even real estate AI-powered tools are now also offering enhanced home search capabilities.

For instance, while some websites allow users to search for homes using attributes like location, price, and the number of rooms, AI-powered tools take it a step ahead by identifying personalized preference to then provide tailored suggestions that better match users’ preferences.

Whether you’re buying or selling, here are 5 of the best apps that will help you in your real estate needs:

The best way to find your dream home at the best price is to spend time learning about homes and about what to expect at each step of the home buying process.

You don’t want to rely exclusively on your real estate agent to teach you everything you need to know to buy a home.

Using real estate apps is a great way to learn about what to expect during the Homebuying journey and give you the path to deliver a home run.

Careers in Real Estate

Working in the real estate industry can be lucrative. We can classify most professions in the industry into these six major sectors:

  1. Sales and Marketing
  2. Brokerages
  3. Property Management
  4. Real Estate Developers
  5. Mortgage Lending
  6. Professional Services (real estate law, account, etc.)

Also, there are promising careers within each of the above main sectors. Real estate agents buy, lease and sell properties; developers buy land, build properties on the land, and sell it to buyers.

Further, real estate appraisers estimate the value of properties, and real estate lawyers help buyers and sellers process the legal aspects of the transaction.

Here are the most common jobs in the real estate industry:

  • Real estate agents: They are often referred to as Realtors
  • Real estate appraisers: Professionals who estimate the value of properties.
  • Home inspector: A professional who assesses the physical condition of a property.
  • Mortgage agent: Helps you get the mortgage from a lender.
  • Loan underwriter: Analyzes the credit risk as it relates to a loan and the borrower.
  • Real estate lawyers: Help you make the transaction legal.
  • Real estate analysts: Analyze the real estate market.

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