Do you deal in real estate? Or, perhaps, do you design or construct it? Aside from using 3D rendering services for marketing materials, it helps to break down the different types of real estate to make your choices easier.
Table of Contents:
Introduction: What is Real Estate?
Real estate is defined as land, as well as permanent structures, such as a home, other buildings, or improvements, attached to that land, whether human-made or natural.
It is a form of “real property”, which is a piece of land along with everything that is permanently attached to it. Owners of real property have all the rights of ownership, including the rights to lease, sell, and possess the land. Real property can be classified as commercial, residential, industrial, agricultural, or special purpose, according to its general use.
Real property differs from personal property, which is not attached permanently to the land, such as jewelry, vehicles, farming equipment and furniture. For investors, the term “real” means structures, raw land, buildings and personal possessions that can be utilized as security or collateral.
What that out of the way, this is where we can begin to understand the types of real estate.
Why Understanding Real Estate is So Important
In the US, real estate is a crucial driver of economic growth. Housing starts (that is, the number of new residential construction projects during any month) are considered a key economic indicator.
Analysts and investors tend to pay close attention to housing starts, since they can indicate economic direction. Furthermore, types of housing starts can provide ideas about the way the economy is developing.
If, for instance, housing starts point to more multifamily and fewer single-family starts, this could indicate impending supply shortages for single-family homes, increasing house prices.
Slower housing starts could also indicate a shortage of workers, lumber or concrete, which in turn could drive up costs. Additionally, declining home closings can suggest that the market is weak or weakening.
However, bear in mind that resale data can be a more accurate indicator of market health than data on new home construction. This is because new home builders can be overzealous about potential future sales, and might cut prices or overbuild to encourage sales.
The Four Types of Real Estate
Let’s take a look at the types of real estate business leaders should familiarize themselves with.
Residential Real Estate
Residential real estate incorporates a wide variety of homes, including but not limited to single and multi-family houses, duplexes, villas, condos, townhomes, and cooperatives. Residential properties or homes for sale are marked by certain characteristics.
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Residential property includes both existing homes and newly erected ones.
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It is a lot easier to secure financing for residential properties than commercial properties, owing to the low cost of entry.
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Compared to commercial properties, zoning laws are less stringent when it comes to residential properties.
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A down payment of 3% to 10% of the structure’s buying price is considered enough to purchase it. This makes it an attainable investing alternative.
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Residential real estate generally performs more consistently than commercial real estate during an economic crisis. This is because, regardless of the economy, shelter is always required.
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Having said that, there is a higher vacancy risk when it comes to residential properties – after all, your prospects have no dearth of options. Note that people tend to be selective about where they live, so buying in a prominent neighborhood could be to your advantage. Tenants who have moved into a prime location are less likely to leave.
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There are a couple of forms of investing in residential real estate:
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Some owners opt for short-term investment and make a profit by flipping the property through renovation.
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Long-term investment is another option, which constitutes purchasing the house for cash flow and using it as a rental property.
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Commercial Real Estate
Commercial real estate includes any property utilized exclusively for business purposes, such as offices, shopping centers, restaurants, theatres, stores, hospitals and gas stations.
While commercial property typically refers to buildings that house businesses, it can also refer to large residential complexes and land utilized to generate a profit.
Often, the performance of commercial real estate, such as new building rates, sales prices and occupancy rates, is taken as an indication of business activity in a particular economy or region.
Traditionally, commercial real estate has been viewed as a safe investment. Initial investment costs, as well as costs related to customization for tenants, are higher than those for residential properties.
Having said that, the returns can be higher, and investors can take advantage of the triple net lease, wherein expenses such as building maintenance and real estate taxes are sustained by the company leasing the premises. Such advantages are not available to those investing in residential properties.
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This type of real estate has leases that are long-term. It allows commercial property owners to demand more rent, providing a steadier and higher income.
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Commercial properties offer potential for capital appreciation, provided that the property is kept up to date and is well maintained.
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Commercial real estate requires a high down payment, almost 20% of the purchase price. Furthermore, the expenses to manage the property are substantially higher.
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REIT (real estate investment trusts) and crowdfunding allow property buyers to invest with a lower down payment.
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Commercial real estate needs more due diligence than residential real estate. You will probably have to spend a lot of time familiarizing yourself with local regulations and laws and inspecting properties before buying or investing.
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Every commercial property is leased and managed in a different way. Even the pricing for this type of real estate is highly dependent on the income it generates.
Land
Land includes agricultural lands (ranches, farms, timberland, etc.), undeveloped property, and vacant land.
Note the difference between raw land and vacant land, which are sometimes used interchangeably but are quite different.
Raw land is the same thing as undeveloped land – that is, it does not contain any key infrastructure such as power, sewage, water, buildings or paved roads. You can consider it the equivalent of a blank sheet of paper on which you can draw anything. However, there may be restrictions on raw land uses because of ecological sensitivity, topography, geology, or other zoning or environmental factors.
Generally, raw land is less expensive than developed land. However, investors may find it difficult to secure financing for it, since it poses an increased risk for lenders. Developers need to foot the bill for improvements such as mass site grading, roadway construction, environmental reviews and utilities installation.
Vacant land, unlike raw land, simply lacks any physical structures. It could once have had structures on it that were torn down or destroyed, or it could have utilities and underground infrastructure. Generally, the demand for vacant land is greater than that for raw land, since the time and cost for development are much lower.
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Vacant land is one of the least expensive types of real estate and buying it is a sought-after long-term strategy.
- When it comes to raw land, you could face several years of ongoing site work and negative cash flow before seeing a return on investment.
Industrial Real Estate
Industrial real estate includes properties meant for production, storage, manufacturing, distribution, and research and development.
Each city has specific designated areas for industrial properties. Zoning maps display these areas so that activity on industrial sites does not disrupt residencies or businesses.
While industrial real estate can be considered a sub-section of commercial real estate, there are certain key differences between the two. The most notable one is that most commercial properties involve interaction with the public, including customers and clients.
For instance, retail stores entice customers with attractive interior design, a welcoming atmosphere, and an appealing storefront. Office spaces will also sometimes, if not often, have clients or customers coming in. In contrast, you will rarely find clients on industrial properties.
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It is most often located in far-off places to ensure people don’t get affected by any pollutants and chemicals produced in the manufacturing process.
- Typically, industrial leases last a long time, which is beneficial for investors since there is more time to yield good returns.
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The estimation of capital investment is tricky, as it depends on its nature, the purpose it is being bought for, and the location of the property.
- Often, industrial real estate does not require a lot of TLC. Instead, they tend to be open and simple, fulfilling the purpose of storing, producing, and so on.
Conclusion
The different types of real estate all come with their set of advantages and disadvantages for builders, buyers, sellers and investors.
Real estate developers play an integral role in creating value for the different types of real estate. They construct new and fascinating structures, renovating existing ones and using multiple techniques and processes to improve real estate sales.
If you’re a business thinking of selling or developing real estate, 3D rendering can streamline your process and get buyers and investors to sit up and listen.
BluEntCAD offers 3D rendering services to homebuilders, real estate developers, architects, interior designers, design build contractors and remodelers. Browse our portfolio to see how we’ve helped companies like yours.
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