What Is Real Estate?
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Real estate is land and whatever is permanently attached to it, such as buildings, houses, fences and trees. Real estate is also referred to as real property.
What counts as “permanently attached” to real estate often depends on local, state and federal regulations and what was cited specifically in a property’s sale agreement. Real estate and real property are not the same as personal property.
Personal property refers to property that can be moved. Appliances like washers and dryers can be bought or sold with a home, but they aren't considered part of the property. Likewise, the rights to minerals beneath land can be sold separately from the land itself. Whether you’re attached to the owner’s stainless steel appliances or want to dig for gold in your new backyard, it’s important to include those details in writing when buying or selling real estate.
What are the types of real estate?
There are three main types of traditional, physical real estate.
Residential real estate refers to a property where people can reside or stay, including single-family homes, apartments, condos and vacation homes. Investors in residential real estate make money by collecting rent from tenants or by selling a property that has increased in value.
Commercial real estate is a building or property where business is conducted — think strip malls, warehouses and office buildings. Commercial real estate can include industrial real estate (where goods are made and housed, like factories) and retail real estate (where goods or services are sold, like malls). Commercial real estate owners also make money by collecting rent from tenants and from potential property value increases that generate a profit when sold.
Raw land can be purchased and sold as is or it can be developed. Investing in raw land can be tricky and carries more risk than investing in existing buildings. There is often no way for raw land to generate revenue unless you build on it, lease its use, or use it for agricultural purposes.
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Investing in real estate
If you own a house, you’ve already invested in real estate, and if you enjoy taking care of a property, you can consider purchasing more traditional real estate and renting it. But if you don’t want to be a landlord, you can still add real estate to your portfolio.
One way is with publicly traded REITs, or real estate investment trusts. REITs are companies that own and sometimes operate income-producing real estate. REITs are required to return at least 90% of their taxable income to shareholders every year, which makes them a popular choice for those looking to receive regular income payments — called dividends — from their investments.
Publicly traded REITs offer high levels of liquidity (meaning you can buy and sell them easily) because their shares trade on stock exchanges.
Another nontraditional real estate investment option is investing through a real estate crowdfunding platform. Many of these offer nontraded or private REITS, which tend to have less liquidity than publicly traded REITs. In exchange, these platforms claim to offer a high rate of return.
» Interested in nontraditional real estate? Learn about investing in REITs and crowdfunding platforms.
Why is real estate important?
Adding real estate to your investment portfolio helps you diversify your assets, which can allow you to better withstand economic volatility. By spreading out your money across different types of investments, like stocks, bonds and real estate, you create a stabilizing force within your portfolio. When stocks fall, real estate might rise (or vice versa).
“By spreading out your money across different types of investments, like stocks, bonds and real estate, you create a stabilizing force within your portfolio.”
The real estate market can mirror the peaks and valleys of other assets. But the movements of the real estate market are usually not as dramatic as those of the stock market, and the two assets can sometimes move in opposite directions, creating balance for investors.
» Ready to start investing? Best real estate crowdfunding platforms
Should I invest in stocks or real estate?
Investing in both stocks and real estate can be smart, and it's quite common, as many Americans invest in stocks and own homes. For a comparison of the two, read this post on stocks vs. real estate. And you can easily invest in REITs through many online brokerages.
