The concepts of real estate vs real property represent different aspects of property ownership. Real estate is defined as a physical property and any attachments or improvements made to it. Real property comes with a bundle of common law rights that extend beyond the physical existence of the property.
In this article, we’ll take a closer look at the definitions of real estate and real property and their key differences and legalities. Understanding more about them can help you know how to effectively include them in your investment strategy.
Defining Real Estate
Real estate refers to physical properties, including land and the structures or improvements permanently built on it. Real estate is tangible by nature, which means it can be seen, touched, and modified, making it a lucrative asset for investment and ownership. The term real estate covers a range of property types, such as residential, commercial, industrial, and retail properties, as well as real estate investment trusts (REITs).
Here are the most common types of real estate:
- Residential real estate: This category includes properties used for residential purposes, such as single-family homes, apartments, condominiums, townhouses, and cooperative housing.
- Commercial real estate: Commercial real estate refers to properties used for business or commercial activities, including office buildings, retail space, warehouses, shopping centers, and hotels.
- Industrial real estate: Industrial real estate includes properties used for manufacturing, distribution, or storage purposes, such as factories, warehouses, distribution centers, and industrial parks.
- Retail real estate: Retail real estate includes properties designed for the sale of goods and services to consumers, such as shopping malls, storefronts, and stand-alone retail buildings.
- Mixed-use real estate: Mixed-use properties combine multiple types of real estate within a single development, often featuring a blend of residential, commercial, and retail spaces.
- Real estate investment trusts (REITs): REITs are companies that own, operate, or finance income-producing real estate properties, allowing investors to gain exposure to the real estate market without direct property ownership. REITs often focus on specific property types, such as residential, commercial, or healthcare.
- Agricultural real estate: Agricultural real estate comprises land and properties used for farming and agricultural activities, including crop cultivation, livestock farming, and agribusiness operations.
- Healthcare real estate: Healthcare real estate encompasses properties used for healthcare-related purposes, such as hospitals, medical offices, senior living facilities, and clinics.
- Hospitality real estate: Hospitality real estate includes properties in the hospitality industry, such as hotels, resorts, motels, and vacation rentals.
- Vacant land: Vacant land refers to undeveloped parcels of land with no structures or improvements, often used for future development, agriculture, or as an investment.
- Special-purpose real estate: Special-purpose properties are designed for specific, nonstandard uses, such as churches, schools, government buildings, and recreational facilities.
- Green real estate: Green real estate focuses on environmentally sustainable properties designed to minimize their ecological footprint, featuring eco-friendly design and energy-efficient systems.
Investing in real estate tends to have a low correlation with the stock market, potentially reducing overall portfolio risk. Investors can also directly influence the value of their real estate investments through improvements and management.
However, real estate investments are not easily converted into cash, and the buying and selling process can be time-consuming and expensive. This can be a limitation for experienced investors who require quick access to funds.
Owning and managing real estate properties can be labor-intensive as well. Investors need to consider the time and effort required for property maintenance, tenant management, and regulatory compliance.
Real estate syndications
Experienced investors looking to tap into the real estate market without the hassle of property management can consider real estate syndications. This approach involves pooling funds with other investors to collectively purchase and manage real estate properties.
Real estate investment trusts (REITs)
For those with limited real estate knowledge, REITs can be a convenient way to access the real estate market. These are publicly traded companies that own, operate, or finance income-producing real estate, providing a relatively low-risk entry point.
Real estate crowdfunding
Beginning investors can explore real estate crowdfunding platforms that allow them to invest in property with smaller amounts of capital. It provides an opportunity to diversify across various real estate projects with lower upfront costs.
Depending on the type of real estate investment, it can have varying levels of risk. Residential real estate tends to be less volatile compared to commercial or industrial properties. Real estate can be a short-term or long-term investment, depending on the specific strategy.
Defining Real Property
The definition of real property covers a broader scope than real estate. It refers to not only the physical structures, but the land itself, along with anything attached to it, such as buildings, trees, minerals, and other natural resources.
Real property ownership goes beyond only physical possession. It involves a bundle of rights that typically include the right to use, possess, enjoy, transfer, and exclude others from the property. Real property rights are a comprehensive claim to a piece of land and everything associated with it.
Real property often appreciates over time, making it a reliable long-term investment. Experienced investors may find that holding real property can provide significant returns. In addition to potential appreciation, real property can generate rental income if leased or used for business purposes, creating a steady stream of revenue.
While real property has value, it is not a liquid asset, making it challenging to access the equity quickly. Liquidating real property can be a complex, time-consuming process. Real property ownership involves ongoing maintenance and expenses, such as property taxes and insurance. Real estate investors must budget for these costs and ensure properties are maintained.
For those with a substantial real property portfolio, diversification within real property investments is essential. Explore various property types, locations, and usage to spread risk and enhance returns.
Key Differences Between Real Estate and Real Property
The primary differences between real estate and real property are their definitions and scope. Here are some key distinctions:
- Physical vs. comprehensive: Real estate refers specifically to the physical structures and land improvements, while real property includes the land and everything attached to it.
- Tangible vs. comprehensive: Real estate is tangible—you can see and touch it. In contrast, real property includes intangible rights and interests associated with land that extend beyond the physical rights of real estate ownership.
- Real estate: A single-family house, an office building, or an apartment complex.
- Real property: A vacant lot, piece of agricultural land, mineral deposit, or even a scenic view that is part of a larger estate.
Understanding the legal implications of real estate and real property is crucial for investors. Legal aspects play a significant role in property ownership, investment strategies, and wealth preservation.
Property ownership rights
One of the critical distinctions between real estate and real property is the bundle of ownership rights. Real property ownership is more comprehensive, granting various rights to the property owner, including:
- Right to use: This grants the ability to use the land and associated structures as the owner sees fit, within the confines of local zoning laws and regulations.
- Right to possess: This is the right to physically occupy and control the property, which is the core of property ownership.
- Right to enjoy: Property owners have the right to enjoy the benefits and profits generated by the property. For instance, they can lease a building to generate rental income or cultivate land for agricultural purposes.
- Right to transfer: Real property rights are transferable, meaning the owner can sell, lease, or gift the property to someone else.
- Right to exclude others: This right allows property owners to exclude others from using or occupying their property without permission.
Real estate and real property both have legal and regulatory implications, but real property, with its comprehensive rights, involves more extensive considerations. Legal frameworks, such as zoning laws, environmental regulations, and property tax laws, can significantly impact how real property can be used and developed.
The process of transferring real property involves the use of deeds and titles. A deed is a legal document that conveys property ownership, while a title is a legal concept that represents ownership rights. A title search is conducted to ensure that there aren’t existing claims or liens on the property, so there’s a clear transfer of ownership.
Inheritance and real property
When it comes to inheritance, real property can pose unique challenges. Inheritance laws and regulations may differ from one jurisdiction to another, so understanding the legal implications of passing down real property in your location is imperative.
In some cases, property ownership rights can be inherited by the decedent’s heirs, while in others, the property may be subject to estate taxes. Careful estate planning and consulting with legal experts can help navigate these complexities.
Understanding the difference between real estate vs. real property is fundamental for property owners and investors. Each influences investment strategies and long-term wealth preservation. Whether you are an experienced or beginning investor, knowing these differences gives you invaluable insights into how to strategically approach property ownership and investment.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.