What is Real Estate?
Real estate is a term used to describe a type of investment property. Real estate includes real property consisting of the actual buildings and land on it, and its accompanying natural resources like water, minerals or vegetation; and any financial interest vested in it, such as buildings or real estate in general. Real estate investors usually buy low-valued properties and make a profit by holding on to them. Properties can be bought, developed and rented out.
There are three main categories of real estate investment trusts. The first is a residential real estate. This is the most popular type and usually refers to houses, condominiums, town homes, mobile homes and apartment buildings. The second category is commercial real estate. This is usually a smaller market than residential, but still large enough to cover all sorts of real estate investment opportunities.
The third category is vacant land, which can include agricultural land, parcel lands and vacant land owned by the government. Vacant land can also be termed as Economic Development Property, since it adds to the value of the underlying property for economic purposes. The economic characteristics of vacant land will vary greatly depending on the owners’ plans and preferences.
Within the main categories of real estate investment trusts there are four sub-categories that are more commonly known as permanently attached, mortgage backed, mortgage non-recourse and single family residences. Permanent attached to real property is one in which the actual property is owned by a single entity, a partnership or a corporation. Mortgage backed real estate includes mortgages that are subordinate to the underlying property and are issued underwriting agreements. Mortgage non-recourse real estate includes properties whose loans are subordinate to other existing loans, but do not rely on any asset as collateral.
In order to understand fully the nature and attributes of permanent attached land and permanent non-attached land the concepts of economic development, liquidity, risk, man-made, limited equity and adverse financing need to be examined in detail. Economic development refers to the ability of a location to support local commerce and employment. A local economy based on real estate financing that provides jobs and other forms of revenue to surrounding areas is called predominantly positive economics. On the other hand, an economy based on man-made problems, such as pollution, depleting natural resources or the lack of qualified professionals for certain jobs is termed negative economics.
Fluctuations in liquidity refer to the difference between cash inflows and cash outflows. This can take the form of surplus cash payments between operations or deficit cash outflows from sales not offset by outflows. Man-made problems such as pollution are inherently short term because they affect only one area within an overall system. However, adverse financing occurs when financing is used to finance a project that produces a short term result but will cost more in the long run due to increased costs associated with environmental compliance or increased taxes on real property. For example, purchasing real estate to convert to residential rather than use it as a rental property may create a negative cash flow when the effect on the existing property is considered over the life of the loan.