Real Estate An Overview

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Anupama Nair

Real estate is the name we hear a lot. What is real estate? Real estate is the land with any permanent improvements attached to the land, both natural or man-made, including water, trees, minerals, buildings, homes, fences, and bridges. Real estate is a form of property. It differs from personal property, which are things not permanently attached to the land, such as vehicles, boats, jewelry, furniture, and farm equipment.

People often use the terms land, real estate, and real property interchangeably, but there are some subtle distinctions. Land refers to the earth's surface down to the center of the earth and upward to the airspace above, including the trees, minerals, and water. Real estate is the land, plus any permanent man-made additions, such as houses and other buildings. Real property is one of the two main classifications of property i.e., the interests, benefits and rights inherent in the ownership of real estate.

“Real estate includes the physical surface of the land, what lies above and below it, what is permanently attached to it, plus all the rights of ownership, including the right to possess, sell, lease, and enjoy the land”. You should never be confused with personal property, which involves all property that doesn't fit the definition of real property. The primary characteristic of personal property is that it is movable. Some examples are vehicles, boats, furniture, clothing, and smartphones.

A land has three physical characteristics that separates it from other assets in the economy – immobility which means some parts of land are removable and the topography can be altered, the geographic location of any parcel of land can never be changed; indestructibility means land is durable and permanent; uniqueness i.e., no two parcels of land can be exactly the same. Even though they may share similarities, they differ geographically.

Land also has some distinct economic characteristics that influence its value as an investment:

  • Scarcity: While land isn't considered rare, the total supply is fixed.
  • Improvements: Any additions or changes to the land or a building that affects the property's value is called an improvement. Improvements of a private nature  are referred to as improvements on the land. Improvements of a public nature like sidewalks and sewer systems) are called improvements to the land.
  • Permanence of investment: Once land is improved, the total capital and labor used to build the improvement represent a sizable fixed investment. Even though a building can be razed, improvements like drainage, electricity, water, and sewer systems tend to be permanent because they can't be removed (or replaced) economically.
  • Location or area preference. Location refers to people's choices and tastes regarding a given area, based on factors like convenience, reputation, and history. Location is one of the most important economic characteristics of land.

There are five main types of real estate:

  • Residential real estate is any property used for residential purposes. Examples include single-family homes, condos, cooperatives, duplexes, townhouses, and multifamily residences with fewer than five individual units.
  • Commercial real estate is any property used exclusively for business purposes, such as apartment complexes, gas stations, grocery stores, hospitals, hotels, offices, parking facilities, restaurants, shopping centers, stores, and theaters.
  • Industrial real estate any  property used for manufacturing, production, distribution, storage, and research and development. Examples include factories, power plants, and warehouses.
  • Land: Includes undeveloped property, vacant land, and agricultural land (farms, orchards, ranches, and timberland).
  • Special purpose is the property used by the public, such as cemeteries, government buildings, libraries, parks, places of worship, and schools.

Even after the magnitude and complexity of the real estate market, many people  seem to think that the industry consists merely of brokers and people who work in the sales department. However, billions of people in fact earn a living through real estate, not only in sales but also in appraisals, property management, financing, construction, development, counseling, education, and many other fields. Many professionals and businesses including accountants, architects, banks, title insurance companies, surveyors, and lawyers also depend on the real estate industry.

Real estate is in fact a  crucial driver of economic growth in the US. The number of new residential construction projects in any month released by the Census Bureau of US is a key economic indicator. The report includes building permits, housing starts, and housing completions data, divided into three different categories: single-family homes; homes with 2-4 units and multi-family buildings with five or more units, such as apartment complexes.

The investors and analysts keep a close eye on housing starts because the numbers can provide a general sense of economic direction. Moreover, the types of new housing starts can give clues about how the economy is developing.

 

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