One can invest in real estate directly by buying actual properties or parcels of land; or indirectly, by buying shares in real estate investment trusts (REITs).
Investing directly in real estate results in profits (or losses) through two avenues, which haven’t changed in centuries:
- revenue from rent or leases
- appreciation of the real estate’s value
Of the two, appreciation is the most common and it achieved through different means, but the increase in a property’s value is not actually realized until the owner sells it outright. Raw and undeveloped land, like the territory right outside a city’s borders, offers the biggest potential for construction, enhancement and profit. Appreciation can also come from discovering valuable materials on a plot of land, like oil, gold and diamond. Or, simply by a rise in the value of the area around the land you own. As a neighborhood grows and develops, property values tend to climb. Evidently, the gentrification of urban neighborhoods in some cities in last few years have often resulted in a dramatic increase in real estate prices. Scarcity can play a factor, too. If a lot is the last of its size or kind in a prestigious area or one in which such lots rarely become available, it obviously gains in marketability.
Income from real estate comes in many forms. The biggest generator is the rent paid on land already developed into residential or commercial properties. But companies will pay royalties for discoveries on raw land, or they may pay to build structures on it, like cell towers or pipelines.
Income can also come from the indirect investments, like REITS, which trade like stocks, with real estate as their underlying security. In a REIT, the owner of multiple properties sells shares to investors, and passes along rental income in the form of distributions.