Given the wild housing market at the moment, I have been fielding a lot of questions about how I got into real estate and what it’s all about. In this article I’m going to give a simple intro to the sector, the various types of real estate, and some thoughts about where it’s headed in the post-pandemic world.
As its name suggests, real estate refers to physical things present in a given location like buildings, land, and other resources. “Real property” entails real estate but further includes things like ownership and legal rights, for example who has access to the property and whether or not they are allowed to build structures on it. Real estate is one of the cornerstones of our economy and society – at the most basic level, everyone requires a place of residence that is both affordable and suitable for their needs. It goes beyond that, however. In addition to residential, there also exist additional categories including commercial and industrial real estate.
Dynamicity of Residential Real Estate
Residential real estate includes everything related to housing such as apartments, houses, condos, and even mobile homes. In 2020, the total value of residential properties in the US reached a sum of 36.2 trillion dollars, a whopping 2.5 trillion dollar increase from the preceding year.
Many factors play a role in the prices of residential real estate. These can include the size, novelty, conditions, and most importantly, the location of the residential property. On average, a square foot of housing in the US costs $123, but this cannot be relied on as an accurate estimate as it dramatically varies according to location. For example, a square foot in Manhattan will cost just over a thousand dollars, whereas you can find the same area listed for as low as 100 dollars in certain parts of other states. This is not the only contributing factor of location, though. Additional circumstances like proximity to retail stores and nearby recreational areas can have a noticeable impact on driving the prices higher, compared to being located in a polluted industrial area. Everyone wants to be able to fulfill their daily needs easily. Imagine having to drive around for hours to find that pair of prescription sunglasses that you really liked, or not being able to buy your favorite brand of jeans because the store seemingly lies on the other end of the country.
In addition to the location of a residential property, other aspects can be just as important in determining the price. Most notably, supply and demand trends can cause massive spikes – or crashes – to the prices of residential real estate. As the competition between buyers grows increasingly fierce over the finite supply of residences, the rates are bound to go up. On the other hand, if a certain area is facing slow sales, sellers might be driven to lowering their prices as an attempt to entice more buyers. Other minor factors can also play a role, like the build quality and the type of neighbors. Interestingly, the number of noise complaints is by far the highest when compared to that of other types of complaints.
Other Types of Real Estate
The remaining categories of real estate include those that are commercial, industrial, and related to land resources. While these categories do not attract as much popular attention as residential real estate, they still inarguably shape as much of the world today – especially given the economic impacts of COVID-19 on bricks-and-mortar businesses.
Commercial real estate refers to structures dedicated to conducting business activities and is mostly used by companies and institutions rather than by individuals. The category includes offices, shopping centers, hotels, resorts, and more. Investors usually need to exercise more caution when investing in this type of estate than with that of residential estate. In general, investors in this area are more likely to generate income from purchasing and letting the properties to renters, as opposed to trading them. Other factors also come into play, like the probability of a resort or shopping center failing and resulting in substantial loss to its investors. There are also complex legal requirements that need to be taken into account regarding issues like taxes and maintenance responsibilities.
Since the Industrial Revolution in the 18th century, a lot has changed in the realm of industrial real estate. This category refers to structures like factories and other industrial buildings that are used to manufacture and package products. The strength of a country’s economy can usually be judged by the volume of its exported goods, meaning the more industrialized it is, the better. This encourages governments to invest more in this area. However, the environmental impact resulting from industrial buildings is growing increasingly concerning, especially with the recent exacerbation of global warming. It is therefore crucial for investors in this field to implement responsible measures to limit pollution and preserve the environment. An increasingly promising list of governments has begun imposing limitations and is requiring industrial buildings to meet certain standards of environmental awareness. I mention this because, in the longer term, it is likely to be of significant relevance to investment decisions in the industrial real estate sector.
Conclusion
Real estate is a topic of global significance, and will continue to be for the foreseeable future. Predicting market movements is always tough. Instead, it is important to look at what you’re buying, where it is, and why it is useful. That way, in the event of an unexpected market downturn, you still have something of value. If you are not afraid of prices crashing, you are in a much better position to make smart investment decisions going forward. This is my philosophy, and has served me well in my short investing career.