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For millions of people, real estate — in the form of their homes and land — is the largest investment they will ever make, and the single most valuable asset they’ll ever own. The real estate market can also profoundly impact the nation’s economy as a whole. This fact was aptly demonstrated during the housing market crash of 2007, which in turn helped trigger the Great Recession (2008-09). For more about real estate explained and defined, read on.
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 natural resources on the land, such as minerals or water.
Real estate is a piece of land, including any artificial or natural property permanently attached to it, above or beneath, such as a house, a building, a tree or minerals, according to Cornell University Law School’s Legal Information Institute.
Real estate is generally one of the most valuable assets 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.
Real estate takes several forms, and depending on the type, various levels of regulation or restriction may apply to its purchase and use.
Residential real estate 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.
While owning and occupying an individual home won’t generate an income, your property can develop significant equity over time. 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 and leverage to further other financial objectives.
Multi-family real estate also appreciates in value over time, and can provide your own residence as well as generating significant rental income.
Commercial real estate is used to conduct business or professional activities and generate income through commercial means. This typically means the owner allows other businesses to lease property on the land, which provides revenue. The owner may also own a business on the property themselves.
Industrial real estate is similar to commercial in that it’s also intended to turn a profit. Farms, mines and land with factories built on it are all considered forms of industrial real estate.
Undeveloped land can be held vacant for future development or used to generate income through grazing, timber, agriculture or other uses. Even separate from other functional uses, land also tends to increase in value over time, making it a consistently strategic investment.
Purchasing real property, such as a traditional single-family home, is generally facilitated by a licensed real estate agent, broker and/or attorney specializing in real estate transactions.
If you don’t have the means to purchase real estate outright, in cash, the purchase can be financed. 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 or insured by either the federal government or a private lender.
The mortgage options available to you will depend on the type of real estate you’re buying, your credit score and your financial resources. Most mortgages require a down payment that commonly ranges from 3.5 to 20 percent of the home’s purchase price. Saving enough for a down payment can be a significant barrier to homeownership — for example, a 20 percent down payment on a $300,000 home is $60,000, a daunting sum for many.
Purchasing real estate for investment can be done out-of-pocket, through traditional lending sources like banks or via sources like hard money lenders and private lenders. There are also more out-of-the-ordinary solutions — such as real estate crowdfunding platforms — that 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, long-term or vacation rentals. House flipping is another common form of real estate investing, in which the buyer adds value to a purchased property and then sells it for a profit. Buy-and-holds and flips are most common with single-family and multi-family assets but can also apply to commercial-use properties.
If investing in real estate on your own presents too much risk, it’s also possible to purchase a fractional share of a property or asset through a syndication, partnership or investment fund. This diversifies risk to the limited partners and provides equity and distributions to all partners. This is often called passive real estate investing, as you don’t directly manage the property; your money is put to work for you by experienced investors.
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 an extensive portfolio of properties and sharing the risk among a large group of people.
Second home vs. investment property: Different mortgage requirements and rules
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What is residential real estate?
Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and services, or by you clicking on certain links posted on our site. Therefore, this compensation may impact how, where and in what order products appear within listing categories, except where prohibited by law for our mortgage, home equity and other home lending products. Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range, can also impact how and where products appear on this site. While we strive to provide a wide range of offers, Bankrate does not include information about every financial or credit product or service.
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