The term real estate is thrown around so much that it seems like everyone knows what it is, why it’s important, and why you should care. However, if you’re starting to look at different ways to invest your money and real estate has emerged as an attractive contender, you may have found that you’re not clear on any of it beyond buying and selling houses.
Don’t worry, we’ll keep it a secret between us. To help you, we’ve written this guide to the basics of real estate to help orient you to foundational knowledge pieces that could lend themselves to an exciting journey of investing in real estate.
Starting with the basics: what is real estate in general?
Anyone will immediately jump to “For Sale” signs in front of homes when they think of real estate, but the definition is more encompassing than that. Real estate can be defined as land and the permanent structures, components, and resources on that land. For example, permanent structures could refer to a building, while components and resources could refer to trees, water, and infrastructures such as fences and bridges.
With that definition, doors are opened wide, and the world of real estate becomes that much more exciting (and overwhelming) to navigate, especially if you’re considering investing your funds into real estate assets. To make it less chaotic-seeming, real estate is categorized into four different categories: residential, commercial, industrial, and mixed-use. Every real estate investor is going to be drawn to different areas of real estate, and there are certain advantages and disadvantages to each real estate category.
What is residential real estate?
Residential real estate can refer to single-family homes, duplexes, planned unit developments, and multi-family homes such as large apartment or condo buildings. The scope of residential real estate can go beyond this. The aforementioned assets are the most basic and essential to understand. Essentially, residential real estate refers to properties and structures intended for people to live in and not for professional uses.
Pros of investing in residential real estate
- It serves as a hedge against inflation.
- It has the potential to create a steady income.
- When done correctly, it can build long-term financial security.
- Investors and owners can receive significant tax benefits.
- Historically, real estate appreciates.
- By building a portfolio over time, you eventually get to be your boss.
- Your investment can be leveraged.
Cons of investing in residential real estate
- The financial barrier to entry for traditional residential real estate is higher. (Though fractional real estate investing is changing that, allowing would-be investors to be able to invest in new, exciting ways.)
- If you’re in a pinch and need the money wrapped up in your real estate investment, the low liquidity becomes a burden.
- You’re responsible for management and maintenance. If you don’t have a reserve fund put away and a large repair arises, you could be in serious financial and legal trouble, depending on the landlord laws in your state.
- Market fluctuation. Even though real estate historically appreciates, as recently as the real estate crisis in 2008, many people lost a lot of money on real estate.
What is commercial real estate?
Commercial real estate refers to properties used exclusively for professional purposes. Very often, commercial real estate is leased to tenants (who are businesses), to make money from renting offices or facilities. Examples include office spaces, hotels, restaurants, malls, and medical and dental offices.
Pros of investing in commercial real estate
- Historically commercial real estate hedges against the stock market.
- Potential high yield for income.
- Long-term tenants (who would have to be successful businesses) provide steady income flow.
- Potential for appreciation.
Cons of investing in commercial real estate
- Higher burden to entry as greater sums of capital are required to invest.
- Investors encounter greater regulation and red tape.
- Expensive renovation and maintenance costs.
- Generally less liquid than residential real estate.
What is industrial real estate?
Industrial real estate refers to properties that facilitate the manufacturing, developing, and/or distribution of products. Certainly not the “shiny object” in the world of real estate investing, industrial real estate is essential to any economy as it’s a vital resource for companies worldwide.
Industrial real estate can include a wide variety of facilities including:
- Office space used to design and research new products.
- Manufacturing facilities.
- Food processing and manufacturing facilities.
- Warehouses and fulfillment centers (think Amazon).
Pros of investing in industrial real estate
- High demand.
- Less tenant turnover as businesses will want to stay longer-term.
- Maintenance is usually the tenant’s responsibility.
- Generally less market saturation.
Cons of investing in industrial real estate
- Even though long-term tenants are an attractive option for landlords, if your tenant runs into tough times and can’t pay the rent, you still have the burden of paying your debt.
- The specific nature of industrial real estate narrows the potential tenant pool.
- Not a good candidate for fix and flip. This is a long-term investment.
What is mixed-use real estate?
Mixed-use real estate refers to properties that mix the use of commercial and residential real estate. Common applications include multi-story buildings with commercial storefronts on the first floor and residential apartments or condos on the upper floors.
An increasingly popular example of mixed-use real estate is live/workspaces where residents live and work in the same building, a trend fueled by changing work dynamics brought on by Covid-19.
Pros of investing in mixed-use real estate
- Access to a diverse pool of tenants.
- With high demand for mixed-use real estate, investing is less risky as investors will likely see a return.
- Mixed-use real estate is more sustainable for the environment, so any investment in one of these properties likely contributes to a greener tomorrow.
Cons of investing in mixed-use real estate
- The level of complexity for developing mixed-use real estate is significantly higher than other types of real estate.
- Potential risk of conflict between business and residential tenants.
- More costly upfront to invest in.
- More difficult to find lending because of the aforementioned complexity associated with these deals.
Final thoughts
This is a simplified overview of what real estate is, but what is exciting is how much opportunity exists for investors when you start building your knowledge base about everything each category has to offer. What’s even more exciting is that the field of real estate investing is changing in a way that allows people from all walks of life to start investing for much less than in traditional methods.
With Ark7, you could be a partial owner of a multi-family apartment in Berkeley or a single-family home in Austin. In some cases, this could be true for less than $6. You don’t need to be an expert to start investing, and you might find that taking action is the best way to learn in the first place.
