Real Estate: What It Is and How It Works

Four Types of Real Estate

Real Estae
Buying a home is the first real estate purchase for most people. Photo: RK Studio/Getty Images

Definition: Real estate is the property, land, buildings, air rights above the land and underground rights below the land. The term real estate means real, or physical, property. “Real” comes from the Latin root res, or things. Others say it’s from the Latin word rex, meaning “royal,” since kings used to own all land in their kingdoms. The U.S. Constitution initially restricted voting rights to only owners of real estate.

Four Types of Real Estate

There are four types of real estate:

  1. Residential real estate includes both new construction and resale homes. The most common category is single-family homes. There are also condominiums, co-ops, townhouses, duplexes, triple-deckers, quadplexes, high-value homes and vacation homes.
  2. Commercial real estate includes shopping centers and strip malls, medical and educational buildings, hotels and offices. Apartment buildings are often considered commercial, even though they are used for residences. That's because they are owned to produce income.
  3. Industrial real estate includes manufacturing buildings and property, as well as warehouses. The buildings can be used for research, production, storage and distribution of goods. Some buildings that distribute goods are considered commercial real estate. The classification is important because the zoning, construction and sales are handled differently.
  1. Land includes vacant land, working farms and ranches. The subcategories within vacant land include undeveloped, early development or reuse, subdivision and site assembly. Here's more at Land Broker Transactions.

How the Real Estate Industry Works

Real estate also refers to producing, buying and selling real estate.

 The real estate industry is a critical driver of economic growth.

Construction of new buildings is a component of gross domestic product. It includes both residential, commercial and industrial buildings. It contributes 7 percent, or $1.2 trillion, to the U.S. economy. Find out How Real Estate Affects the U.S. Economy.

New home building is a critical category. It includes construction of single-family homes, townhouses and condominiums. The National Association of Home Builders provides monthly data on home sales and average prices. The data on new home sales is a leading economic indicator. It signals how the housing market will do in nine months. That’s how long it takes to construct new homes. The NAHB also reports new home starts, Those are the number of home construction projects on which ground is broken. For more, see NAHB Construction Statistics.

Real estate agents assist homeowners, businesses and investors buy and sell all four types of properties. The industry is typically divided up into specialists that focus on one of the types.

Sellers' agents help find buyers through either the Multiple Listing Service or their professional contacts. They price your property, using comparative listings of recently sold properties known as "comps." The can help you spruce up your property so it will look its best to customers.

They assist in negotiations with the buyer, helping you get the highest price possible. Here are more sellers' agent services.

Buyers' agents provide similar services for the home purchaser. They know the local market. That means they can find a property that meets your most important criteria. They also compare prices, called "doing comps." It allows them to guide you to areas that are affordable. Buyers' agents negotiate for you, pointing out reasons why the seller should accept a lower price. They help with the legalities of the process, including title search, inspection and financing. Here are more buyers' agent services.

Real estate agents who want to increase their professionalism become REALTORS®. The National Association of REALTORS®  publishes provides monthly reports on the number of homes resold and their average price.

It's a better indicator of the health of the overall housing industry than new home construction. That's because new home builders can be overenthusiastic about future sales and overbuild. They can also cut prices to force sales. Individual homeowners must follow the market's supply and demand. They don't have the clout to manipulate the market. Here's more on the most recent housing market statistics.

Real Estate Investing

Everyone who buys or sells a home engages in real estate investing. That means you must consider several factors. Will the house rise in value while you live in it? If you get a mortgage, how will future interest rates and taxes affect you?   

Many people do so well with investing in their homes they want to buy and sell homes as a business. There are many ways to do that. First, you can flip a house. That's where you buy a house to improve then sell it. Many people own several homes and rent them out. Others use Airbnb as a convenient way to rent out all or part of their homes. You can rent vacation homes using VRBO or Home Away.

You can also invest in housing without buying a home. You can buy stocks of homebuilders. Their stock prices rise and fall with the housing market. Another way is with Real Estate Investment Trusts, called REITS. These are investments in commercial real estate. Their stock prices lag behind trends in residential real estate by a few years.