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Real estate is land plus any property or resources on it. For millions of people, real estate — in the form of their homes — is the largest investment they will ever make, and the single most valuable asset they’ll ever own.
The real estate market can have profound impacts on the economy of a nation as a whole, a fact most demonstrated during the housing market crash of 2007, which in turn triggered the Great Recession (2008-09).
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 resources on the land such as water or minerals.
Real estate is generally the most valuable asset 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.
Purchasing real property, such as a traditional single-family home, is generally facilitated by a real estate agent, broker or attorney who specializes in real estate transactions. If you don’t have the cash to purchase real estate outright, financing options depend on the type of real estate you’re buying and your financial resources.
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 by the federal government or a private lender. Mortgages require a down payment from the buyer that commonly varies from 3.5-20 percent of the purchase price of the home, with some exceptions for special loans, like VA loans.
Purchasing real estate for investment can be done through traditional lending sources like banks or through sources like hard money lenders, private money lenders or out-of-pocket, although other innovative solutions — such as real estate crowdfunding platforms — 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 rentals, long term rentals, or vacation rentals. Flips are another common form of real estate investing, which adds value to a purchased property or asset and sells it for a profit at a higher value. Buy-and-holds and flips are most common with single-family and multi-family assets, but can also apply to commercial use properties such as storage unit facilities and marinas.
If investing in real estate on your own presents too much risk, you can purchase a fractional share of a property or asset through a syndication, partnership or investment fund, which diversifies risk to the limited partners and provides equity and distributions to all partners. This is called passive real estate investing, as you don’t directly manage the property; instead, your money is put to work for you by experienced real estate investors – typically the General Partners.
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 a large portfolio of properties, and sharing the risk with a large group of people.
First-time homebuyers have a variety of grants, loans and down-payment assistance programs available to them because of their novice status.
Whether buying a home to live in or as an investment property, working with an experienced, local real estate agent can help you navigate the market in your area of interest.
Before shopping for real estate as a homebuyer, you’ll want to assess your finances. Know your credit score (and debt-to-income ratio) and take steps to improve it if possible. Keep track of your recurring expenses so you know what monthly mortgage payment you can afford. Save up what you can for a down-payment, which directly affects your mortgage payment. If you’re flexible in your location, compare the cost of living in different areas to help decide where to live.
For new real estate investors, joining a real estate investing network in your area can help you identify which forms of property may be most beneficial for your situation and involvement. Whether you are looking to become a passive investor in real estate or want to acquire rental or commercial properties to generate revenue as an active investor, your network is going to have the most impact on your net worth. Asking questions, shadowing other investors and attending webinars to learn will give you the best idea of where to start your real estate investing journey.
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