Everything You Wanted To Know About: Real Estate and Land Sales

Land plus anything permanently fixed to it, including buildings, sheds and other items attached to the structure. Real estate can be grouped into three broad categories based on its use: residential, commercial and industrial. Examples of real estate include undeveloped land, houses, townhomes, office buildings, retail store buildings and factories.

 Unlike other investments, real estate is dramatically affected by the condition of the immediate area where the property is located – hence the well-known real-estate maxim, “location, location, location.” With the exception of a national or global recession, real estate values are affected primarily by local factors such as the availability of jobs, crime rates, school quality and property taxes.

Types of Real Estate:

 The various categories of real estate investments are direct property ownership, mortgages, and debt or equity securities. What these real estate investments have in common is that there are one or more tangible real estate properties underlying each investment. When you’re looking at the underlying real estate, one of the most important criteria is the type of property. When considering a purchase, you need to ask yourself whether the underlying properties are, for example, residential homes, shopping malls, warehouses, office towers or a combination of any of these. Each type of real estate has a different set of drivers influencing its performance.

• Income-Producing and Non-Income-Producing Investments

There are four broad types of income-producing real estate: offices, retail, industrial and leased residential. There are many other less common types as well, such as hotels, mini-storage, parking lots and seniors care housing. The key criteria is that they are income producing.
Non-income-producing investments, such as houses, vacation properties or vacant commercial buildings, are as sound as income-producing investments. If you invest equity in a non-income producing property you will not receive any rent, so all of your return must be through capital appreciation. If you invest in debt secured by non-income-producing real estate, the borrower’s personal income must be sufficient to cover the mortgage payments, because there is no tenant income to secure the payments.

• Office Property

Offices are the “flagship” investment for many real estate owners. They tend to be, on average, the largest and highest profile property type because of their typical location in downtown cores and sprawling suburban office parks.

• Retail Property
  

There is a wide variety of retail properties, ranging from large enclosed shopping malls to single tenant buildings in pedestrian zones. Many retail properties have ananchor, which is a large, well-known retailer that acts as a draw to the center. The demand for retail space has many drivers. Among them are: location, visibility, population density, population growth and relative income levels. From an economic perspective, retails tend to perform best in growing economies and when retail sales growth is high.

• Industrial Property
  

Industrials are often considered the “staple” of the average real estate investor. Generally, they require smaller average investments, are less management intensive and have lower operating costs than their office and retail counterparts. There are varying types of industrials depending on the use of the building. For example, buildings could be used for warehousing, manufacturing, research and development, or distribution. Some industrials can even have partial or full office build-outs.

• Multi-family Residential Property

Multi-family residential property generally delivers the most stable returns, because no matter what the economic cycle, people always need a place to live. The result is that in normal markets, residential occupancy tends to stay reasonably high. Another factor contributing to the stability of residential property is that the loss of a single tenant has a minimal impact, whereas if you lose a tenant in any other type of property the negative effects can be much more significant.

Characteristics of Real Estate Investments:

The income return from real estate is directly linked to the rent payments received from tenants, minus the costs of operating the property and outgoing mortgage/financing payments.
Capital appreciation of a property is determined by having the property appraised. If the appraiser thinks your property would sell for more than you bought it for, then you’ve achieved a positive capital return. Because the appraiser uses past transactions in judging values, capital returns are directly linked to the performance of the investment sales market. The investment sales market is affected largely by the supply and demand of investment product.
The majority of the volatility in real estate returns comes from the capital appreciation component of returns. Income returns tend to be fairly stable, and capital returns fluctuate more. The volatility of total returns falls somewhere in between.
Other Characteristics

Some of the other characteristics that make real estate unique as compared to other investment alternatives are as follows:

1. No fixed maturity
   Unlike a bond which has a fixed maturity date, an equity real estate investment does not normally mature.
2. Tangible
   Real estate is real. You can visit your investment, speak with your tenants, and show it off to your family and friends. You can see it and touch it. A result of this attribute is that you have a certain degree of physical control over the investment – if something is wrong with it, you can try fixing it.
3. Requires Management
   Because real estate is tangible, it needs to be managed in a hands-on manner. Tenant complaints must be addressed. Landscaping must be handled. And, when the building starts to age, it needs to be renovated.
4. Inefficient Markets
   An inefficient market is not necessarily a bad thing. It just means that information asymmetry exists among participants in the market, allowing greater profits to be made by those with special information, expertise or resources. In the real estate markets, information is king, and can allow an investor to see profit opportunities that might otherwise not have presented themselves.
5. High Transaction Costs
   Private market real estate has high purchase costs and sale costs. On purchases, there are real-estate-agent-related commissions, lawyers’ fees, engineers’ fees and many other costs that can raise the effective purchase price well beyond the price the seller will actually receive. On sales, a substantial brokerage fee is usually required for the property to be properly exposed to the market. Because of the high costs of “trading” real estate, longer holding periods are common and speculative trading is rarer than for stocks.
6. Lower Liquidity
   With the exception of real estate securities, no public exchange exists for the trading of real estate. This makes real estate more difficult to sell because deals must be privately brokered. There can be a substantial lag between the time you decide to sell a property and when it actually is sold – usually a couple months at least.

Advantages And Disadvantages:

Real estate fits well as part of a portfolio because it has several qualities that can enhance the return of a larger portfolio, or reduce portfolio risk at the same level of return.
Benefits
Some of the benefits of having real estate in your portfolio are as follows:

1. Diversification Value
2. Yield Enhancement
3. Inflation Hedge
4. Ability to Influence Performance

Other Considerations
Real estate also has some characteristics that require special consideration when making an investment decision:

• Costly to Buy, Sell and Operate
• Difficult to Acquire
• Cyclical (Leasing Market)
• Cyclical (Investment Market)
• Performance Measurement

Conclusion:

• Real estate investments fall into one of the four following categories: private equity, public equity, private debt and public debt.
• Real estate can produce income (like a bond) and appreciate (like an equity).
• Real estate is tangible, so it requires ongoing management. On the other hand, you also have an increased ability to influence the performance of a single investment as compared to other asset classes.
• Real estate has high transaction costs, can be difficult to acquire and it is challenging to measure its relative performance.
• Buying real estate requires substantial due diligence.
• The way to determine the value of your property is to have it appraised by an accredited appraiser.