Case study Question(s)
: [5 marks]
Real estate is the land along with any permanent improvements attached to the land, whether natural or man-made—including water, trees, minerals, buildings, homes, fences, and bridges. Real estate is a form of
real property
. It differs from personal property, which are things not permanently attached to the land, such as vehicles, boats, jewelry, furniture, and farm equipment.
People often use the terms
land
,
real estate
, and
real property
interchangeably, but there are some subtle distinctions.
Land
refers to the earth's surface down to the center of the earth and upward to the airspace above, including the trees, minerals, and water.
Real estate
is the land, plus any permanent man-made additions, such as houses and other buildings.
Real property
—one of the two main classifications of property—is the interests, benefits and rights inherent in the ownership of real estate.
Broadly speaking, real estate includes the physical surface of the land, what lies above and below it, what is permanently attached to it, plus all the rights of ownership—including the right to possess, sell, lease, and enjoy the land.
Real property shouldn't be confused with personal property, which encompasses all property that doesn't fit the definition of real property. The primary characteristic of personal property is that it's movable. Examples include vehicles, boats, furniture, clothing, and smartphones.
Land has three physical characteristics that differentiate it from other assets in the economy:
Immobility
. While some parts of land are removable and the topography can be altered, the geographic location of any parcel of land can never be changed.
Indestructibility
. Land is durable and indestructible (permanent).
Uniqueness
. No two parcels of land can be exactly the same. Even though they may share similarities, every parcel differs geographically.
Land also has some distinct economic characteristics that influence its value as an investment:
Scarcity
: While land isn't considered rare, the total supply is fixed.
Improvements
: Any additions or changes to the land or a building that affects the property's value is called an improvement. Improvements of a private nature (such as homes and fences) are referred to as improvements
on
the land. Improvements of a public nature (e.g., sidewalks and sewer systems) are called improvements
to
the land.
Permanence of investment
: Once land is improved, the total capital and labor used to build the improvement represent a sizable fixed investment. Even though a building can be razed, improvements like drainage, electricity, water, and sewer systems tend to be permanent because they can't be removed (or replaced) economically.
Location or area preference
. Location refers to people's choices and tastes regarding a given a.
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Case study Question(s) [5 marks]Real estate is the lan.docx
1. Case study Question(s)
: [5 marks]
Real estate is the land along with any permanent improvements
attached to the land, whether natural or man-made—including
water, trees, minerals, buildings, homes, fences, and bridges.
Real estate is a form of
real property
. It differs from personal property, which are things not
permanently attached to the land, such as vehicles, boats,
jewelry, furniture, and farm equipment.
People often use the terms
land
,
real estate
, and
real property
interchangeably, but there are some subtle distinctions.
Land
refers to the earth's surface down to the center of the earth
and upward to the airspace above, including the trees,
minerals, and water.
Real estate
is the land, plus any permanent man-made additions, such as
houses and other buildings.
Real property
—one of the two main classifications of property—is the
interests, benefits and rights inherent in the ownership of
2. real estate.
Broadly speaking, real estate includes the physical surface of
the land, what lies above and below it, what is permanently
attached to it, plus all the rights of ownership—including the
right to possess, sell, lease, and enjoy the land.
Real property shouldn't be confused with personal property,
which encompasses all property that doesn't fit the definition of
real property. The primary characteristic of personal property is
that it's movable. Examples include vehicles, boats, furniture,
clothing, and smartphones.
Land has three physical characteristics that differentiate it from
other assets in the economy:
Immobility
. While some parts of land are removable and the topography
can be altered, the geographic location of any parcel of land
can never be changed.
Indestructibility
. Land is durable and indestructible (permanent).
Uniqueness
. No two parcels of land can be exactly the same. Even
though they may share similarities, every parcel differs
geographically.
Land also has some distinct economic characteristics that
influence its value as an investment:
3. Scarcity
: While land isn't considered rare, the total supply is fixed.
Improvements
: Any additions or changes to the land or a building that
affects the property's value is called an improvement.
Improvements of a private nature (such as homes and fences)
are referred to as improvements
on
the land. Improvements of a public nature (e.g., sidewalks
and sewer systems) are called improvements
to
the land.
Permanence of investment
: Once land is improved, the total capital and labor used to
build the improvement represent a sizable fixed investment.
Even though a building can be razed, improvements like
drainage, electricity, water, and sewer systems tend to be
permanent because they can't be removed (or replaced)
economically.
Location or area preference
. Location refers to people's choices and tastes regarding a
given area, based on factors like convenience, reputation,
and history. Location is one of the most important economic
characteristics of land (thus the saying, "location, location,
location!").
There are five main types of real estate:
Residential real estate: Any property used for residential
purposes. Examples include single-family homes, condos,
cooperatives, duplexes, townhouses, and multifamily residences
with fewer than five individual units.
4. Commercial real estate: Any property used exclusively for
business purposes, such as apartment complexes, gas stations,
grocery stores, hospitals, hotels, offices, parking facilities,
restaurants, shopping centers, stores, and theaters.
Industrial real estate: Any property used for manufacturing,
production, distribution, storage, and research and development.
Examples include factories, power plants, and warehouses.
Land: Includes undeveloped property, vacant land, and
agricultural land (farms, orchards, ranches, and timberland).
Special purpose: Property used by the public, such as
cemeteries, government buildings, libraries, parks, places of
worship, and schools.
Despite the magnitude and complexity of the real estate market,
many people tend to think the industry consists merely of
brokers and salespeople. However, millions of people in fact
earn a living through real estate, not only in sales but also in
appraisals, property management, financing, construction,
development, counseling, education, and several other fields.
Many professionals and businesses—including accountants,
architects, banks, title insurance companies, surveyors, and
lawyers—also depend on the real estate industry.
Real estate is a critical driver
of economic growth in the U.S. In fact,
housing starts
—the number of new residential construction projects in any
given month—released by the U.S. Census Bureau is a key
economic indicator. The report includes building permits,
housing starts, and housing completions data, divided into three
different categories:1
5. Single-family homes
Homes with 2-4 units
Multifamily buildings with five or more units, such as
apartment complexes1
Investors and analysts keep a close eye on housing starts
because the numbers can provide a general sense of economic
direction. Moreover, the
types
of new housing starts can give clues about how the economy is
developing.
How to Invest in Real Estate
There are a number of ways to invest in real estate. Some of the
most common ways to invest directly include:
Homeownership
Rental properties
House flipping
If you buy physical property (e.g., rental properties, house
flipping), you can make money two different ways: Revenue
from rent or leases, and
appreciation
of the real estate's value. Unlike other investments, real estate
is dramatically affected by its location. Factors such as
6. employment rates, the local economy, crime rates,
transportation facilities, school quality, municipal services, and
property taxes can drive real estate prices up or down.
Pros
Offers steady income
Offers capital appreciation
Diversifies portfolio
Can be bought with leverage
Cons
Is usually illiquid
Influenced by highly local factors
Requires big initial capital outlay
May require active management and expertise
You can invest in real estate indirectly, as well. One of the most
popular ways to do so is through a real estate investment trust
(REIT)—a company that holds a portfolio of income-producing
real estate. There are several broad types of REITs, including
equity, mortgage, and hybrid REITs. REITs are further
classified based on how their shares are bought and sold:
Publicly traded REITs
7. Public non-traded REITs
Private REITs
The most popular way to invest in a REIT is to buy shares that
are publicly traded on an exchange. Since the shares trade like
any other security traded on an exchange (think stocks), it
makes REITs very liquid and transparent.
Like many stocks, you earn income from REITs through
dividend payments and appreciation of the shares. In addition to
individual REITs, you can also invest in real estate mutual
funds and real estate exchange traded funds (ETFs).
What We Like
Liquidity
Diversification
Steady dividends
Risk-adjusted returns
What We Don't Like
Low growth/low capital appreciation
Not tax-advantaged
Subject to market risk
8. High fees
Mortgage-Backed Securities
Another option for investing in real estate is via
mortgage-backed securities (MBS)
. These received a lot of bad press due to the role they played in
the mortgage meltdown that triggered a global financial crisis in
2007-08. However, MBS are still in existence and traded.
The most accessible way for the average investor to buy into
these products is via ETFs. Like all investments, these products
carry a degree of risk. However, they may also offer portfolio
diversification. Investors must investigate the holdings to
ensure the funds specialize in investment-grade mortgage-
backed securities, not the subprime variety that figured in the
crisis.
Questions
1. Give two Economic Characteristics of Real Estate (land)
[1.25 marks]
2. What are the There are five main types of real estate [1.25
marks]
3. How the Real Estate Industry Works [1.25 marks]
4. How to Invest in Real Estate [1.25 marks]
Deadline April 10, 11:00PM KSA Time