Real estate may be defined as land plus anything permanently fixed to it. This may include buildings, sheds and other items affixed to the structure. Real estate is generally grouped into three broad categories based on how it is used. These are residential, commercial and industrial. Some examples of what may be considered real estate are undeveloped land, houses, condominiums, townhomes, office buildings and retail store buildings.
While the average person may think of their home as the only piece of real estate they will buy, investing in real estate means much more than finding that perfect place to call a home. The practice of investing in real estate has grown in popularity over the last fifty years and may now be labeled as one of the more popular means of investment. Real estate investment encompasses the purchase, ownership, management and rental or sale of real estate in order to make a profit.
The U.S. Census Bureau has reported that since 1940 real estate values have shown a steady increase, which is an encouraging fact for anyone considering the real estate market as an avenue to revenue enhancement. It also good to bear in mind that when compared to the Wall Street equity market, the real estate market has consistently been the better performer. This is so, even though buying and owning real estate carries more complications than investing in stocks and bonds, but stays true because the real estate market has a ‘wealth’ of opportunities for making huge gains.
Real estate investors generally own several pieces of real estate, one of which may serve as a primary residence, and the others used to generate income through rental and profits through appreciation in value and resale price. Those who decide to invest in real estate invariably expect to reap capital gains as property values increase over time. Some of the more commonly seen types of investment properties are apartment buildings and rental houses, which provide ongoing income in the form of rental from tenants.
Real estate development is one type of real estate investment and it involves improvement of real estate property so as to give it added value to the owner who can charge higher rates for rental or lease of the property or seek a higher price if the intention is resale of the property. One practice, called ‘flipping’ sees the investor trying to use as little resources as possible to upgrade the property while seeking as quick and as large a profit as possible.
When compared to other investments, real estate is capital intensive and highly cash flow dependent and may be viewed as an asset form with limited liquidity. Real estate becomes a risky business when the investor is not fully cognizant of these facts and hence is prone to mismanage the investment. This leads to the primary cause of investment failure in real estate where the investor experiences negative cash flow for a protracted period of time that has not been planned for and is not sustainable. This often forces them to choose between reselling the property at a loss or going into insolvency.