What it is:
Real estate refers to land, as well as any physical property or improvements affixed to the land, including houses, buildings, landscaping, fencing, wells, etc.
How it works (Example):
Vacant land and residential lots, plus the houses, outbuildings, decks, trees sewers and fixtures within the boundaries of the property are examples of real estate. Furniture, cars, paintings, jewelry and boats are examples of personal property rather than real estate.
There are a variety of ways to invest in real estate, ranging from real estate investment trusts (REITs) to buying rental property or multi-family housing.
For investors turned off by the idea of fixing plumbing and dealing with tenants, REITs offer the opportunity to participate directly in the ownership or financing of real estate projects. REITs are tradable interest (much like a share of stock) in a pool of real estate-related assets. REITs own, and often operate, income-producing real estate such as office buildings, apartments, shopping centers, warehouses and hotels. Many REITs specialize in one property type, such as offices, apartments or regional shopping malls.
Most investors buy REITs for their rich dividends, although those dividends are usually fully taxable. Keep in mind, though, that each real estate sector is affected by different economic cycles. Larger, diversified, or geographically dispersed REITs are less exposed to regional weakness and major economic cycles. On the other hand, smaller, more specialized REITs often provide the greatest growth potential.
Why it Matters:
In addition to having real value that investors can touch, feel and understand, real estate can be an excellent diversification tool for investors. If you pay the right amount for your property, there's potential to reap steady, long-term returns as a landlord.
Portfolios containing real estate tend to outperform those without real estate over the long haul. Investing in real estate can also offer reduced risk because the real estate market is not closely correlated with stock or bond markets.
[For information on real estate investment trusts, see our REITs definition.]
[InvestingAnswers Feature: Real Estate Investors' Top Strategies for Getting the Best Price on Rental Properties.]