Real Estate

Updated on May 21, 2024
Edited byAaron Crowe
Reviewed byDheeraj Vaidya, CFA, FRM

Real Estate Meaning

At its most basic principle, Real Estate can be defined as properties that comprise land and its tangible attachments. The land includes the actual surface of the earth and any permanent natural objects such as water, dirt, or rock and any minerals or particulars under the surface. 

Real estate examples or real property would refer to land, attachments, and any rights or interests that a property owner may have in the property. For example, artificial attachments would include any houses, buildings, roads, and fences. In a business context, it refers to purchasing and managing physical properties for profits.

Key Takeaways

  • Real estate is the land, the earth beneath it, the air above it, its attachments to it, and its legal rights. In business terms, real estate is an instrument of investment.
  • Real estate has seven specific characteristics related to its economic impact or physical nature. They are scarcity, improvements, location, investment permanence, uniqueness, immobility, and Indestructibility.
  • A real estate property can be classified into residential, commercial, industrial, or land.
  • There are countless opportunities for careers in real estate, from investments to property management to sales. 

Characteristics of Real Estate

Real Estate

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Real estate has seven characteristics that are either economical or physical. The economic characteristics of land affect the investment and market value of the land, whereas the physical characteristics relate to the land itself.

#1 – Economic Characteristics

  • Scarcity: While most of the land on earth remains unused or uninhabited, the supply of land in a given location or a given quality is generally limited. For example, there is a finite number of built or possible high-rise office buildings in downtown Chicago.
  • Improvements: Building an improvement on one parcel of land can affect that land’s value and use. It can also affect the property of neighbors and the community.
  • The permanence of investment: The capital that is used for an improvement of a property can be a large fixed investment. In addition, the return on such investments tends to be long-term and relatively stable, making it a permanent investment.
  • Location- Real estate location is the most important economic characteristic of the land. This is because people prefer certain geographic areas over others, and these preferences will result in different values for properties in different locations. For example, 1,100 SF in San Francisco is worth more than 1,100 SF in Oklahoma City.

#2 – Social Characteristics

  • Immobility: Even though one can move dirt and land, they can never change the location of a parcel. 
  • Indestructibility: Land is also indestructible, permanent, and the location will never change.
  • Uniqueness: Although land can be similar and homes may even have the same design or layout, no two pieces of land are ever the same.

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Types of Real Estate

There are four main types of real estate that one could classify an asset under:

  1. Residential: Single-family (one dwelling) or multifamily (more than one dwelling on a plot of land). In this case, the property can be brand new developments or homes that are hundreds of years old. Types of residential real estate include homes, condominiums, townhomes, du/tri/quad-plex (2/3/4 unit buildings), vacation homes, co-ops, etc.
  2. Commercial: Businesses use real estate for commercial purposes. It includes properties where products are sold like shopping centers, services are rendered like nail salons and medical offices, and income is generated like apartments and hospitality.
  3. Industrial: Property used for industrial purposes and manufacturing (includes warehouses, factories, and plants). People use these buildings for research, production, and storage or distribution.
  4. Land: Encompasses raw vacant land, land used for agricultural purposes like farms or ranches, and land in development stages of the other real estate types. 

Examples of Real Estate

Real estate examples are all around us in the form of homes, offices, shopping centers, hospitals, farms, etc. The raw land a certain distance from our city is real estate, and so is the road that gets us there. Many people love working and investing in it because, by nature, the asset is tangible and a part of our daily lives.

How Does the Real Estate Industry Work?

The real estate industry is a huge factor in economic growth and wealth generation. Beyond the definition, real estate business is also the development, management, owning, and selling of assets.

The industry starts with raw land. Land entitlement and developers work to get municipal approvals and construct assets. The developers may sell the land once it is fully entitled or develop the property and operate it until stabilized (typically refers to a building being 95% occupied). Usually, asset managers help fill a property with tenants and get the asset cash flowing. Once properties are stabilized, they can be bought and sold. Over time, an influx of capital may rejuvenate or repurpose property to create more value. Brokers, appraisers, attorneys, financiers, and other external parties help facilitate the buying and selling of properties. 

Careers in Real Estate

Countless careers are associated with this industry. A person can work in real estate investments to evaluate and pitch opportunities to partners. Asset managers ensure that real estate is performing at the highest levels. Property managers and leasing agents help with onsite and day-to-day operations and attract tenants. The accountants help seek the best financing and capital markets strategy to maximize returns. Attorneys form complex investment partnerships and create documents that outline cash flow returns water flows. Real estate brokers and agents find possible assets or prospective buyers to facilitate sales. Finally, appraisers value properties and other assets during transactions or refinance opportunities.

Frequently Asked Questions (FAQs)

How does real estate work?

The real estate market uses properties as an investment medium to profit through their purchase, sales, renovation, lease, construction, etc. There are many ways a person can invest in a piece of land and the attachments included in it. Real estate works by improving the property’s value so that it can bring higher returns through various techniques.

Is real estate a good investment?

The real estate business is considered by many a highly profitable and easy investment option. An investor can enjoy multiple benefits like appreciation, leveraging the investment, tax benefits, and regular cash flow. This form of investment is particularly beneficial for those looking for a means of passive income.

Will the real estate market crash?

The real estate market can certainly crash if several negative factors persist for a long time. Risky investment movements, flexible interest rates, larger mortgage offerings are some of the reasons for such a market crash.

This article has been a guide to Real Estate & its Meaning. We discuss the characteristics of real estate, how it works, types, examples, and careers in it. You can learn more from the following articles –

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Comments

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