In general, real estate refers to buildable lands and buildings, including residential homes, raw land and income-producing properties (such as warehouses, office and apartment buildings). Real estate is a type of tangible assets, which are investment assets that can be seen and touched. In contrast, financial assets are only recorded as pieces of paper.

Overview of the Real Estate Market

Characteristics of real estate as an investable asset class:

• Properties are immovable and basically indivisible so they are illiquid.
• Every property is unique, primarily because no two properties can share the same location. In addition, terms and conditions of transactions may differ significantly. Therefore, properties are only approximately comparable to other properties.
• There is no national, or international, auction market for properties. Therefore it is difficult to assess the market value of a given property.
• Transaction costs and management fees for real estate investments are high.
• Real estate markets suffer inefficiencies because of the nature of real estate itself and because information is not freely available.

Forms of Real Estate Ownership

There are plenty of ways to invest in real estate without owning, financing, and operating physical properties.

They may be classified along two dimensions, debt or equity based, and in private or public markets. There are many variations within the basic forms.

Direct ownership refers to full ownership rights for an indefinite period of time, giving the owner the right, for example, to lease the property to tenants and resell the property at will. Owners can borrow money. Leveraged ownership refers to the same ownership rights but subject to debt (such as a promissory note) and/or a pledge (mortgage) to hand over real estate ownership rights if the loan terms are not met. The benefits of of direct ownership are control, and tax benefits.

Mortgages represent a type of debt investment as a mortgage provides the investor a stream of bondlike payments. This is a form of real estate investment as the creditor may end up with owning the property being mortgaged. To diversify risks a typical investor often invests in securities issued against a pool of mortgages.

Aggregation vehicles aggregate investors and serve the purpose of giving investors collective access to real estate investments.

Real Estate Partnerships (RELPs). A RELP is a professionally managed real estate syndicate that invests in various types of real estate. The purpose of the RELP varies from raw land speculation to investments in income producing properties. Managers assume the role of general partner with unlimited liability, while other investors are treated like limited partners with limited liability.

Real Estate Investment Trusts (REITs). A REIT is a type of closed-end investment company that sells shares to investors and invests the proceeds in various types of real estate and real estate mortgages.

• It allows small investors to receive both the capital appreciation and the income returns without the headache of property management.
• Its shares are traded on a stock market.
• It provides a tax shelter.
• It also has strong restriction on the use, and distribution of funds.

Investment Categories

Residential properties: an individual or a family purchases a home. In most cases a financial institution makes a direct debt investment in the home by offering a mortgage. The largest sector of the real estate market by value and size is the residential real estate.

Commercial real estate: a direct equity and/or debt investment is made into a property which is then managed to generate economic benefit to the parties. It includes office building, shopping centers, and warehouses.

REIT investing: mortgage REITs invest in mortgages and equity REITs invest in commercial and residential properties.

Mortgage-backed securities (MBS): securitization of mortgages. MBS maybe issued privately or publicly.