Real estate is supposed to be put to its “highest and best use.” It comes in several varieties : residential , commercial , and industrial. Among residential properties , there are houses , apartment buildings and other special-use properties such as time shares . Most areas are zoned for residential , commercial , industrial , or other forms of real estate . But sometimes you can upgrade real estate by building a more remunerative type as permitted , or by going to city hall to get the land rezoned for a higher type of use . Thus , an investor might be able to upgrade residential property for commercial use . If it were mixed residential and commercial , one might be able to convert it to all of one or the other , depending on which was the more profitable use in this area . A person might buy a building and adjoining land , and either erect another building on the spare land or sell the land for a profit . Industrial properties are the trickiest to deal with because they tend to consist of “ single-use ” buildings such as a factory , which are hard to convert to other uses if the business closes down .
Real estate can be owned in several ways . The most common way is as a stand-alone building , usually a house . A unit in an apartment can also be owned as a condominium . In such a situation , people own individual apartments within the building , while the manager of the building owns the lobby and other areas open to all that are known as common areas . Apartment owners pay a fee to the manager for the use of these common areas known as maintenance . If the building goes bankrupt , the lender will foreclose on the ownership of the common area , but individual apartment owners will not be affected . A less safe arrangement is a cooperative , or co-op for short . Here , a corporation owns an apartment building , and individual apartment owners buy shares in the building corresponding to the value of their apartment . The apartment itself is occupied under a proprietary lease . Here , if the building is mortgaged and defaults , the lender to the building can foreclose on the whole corporation , which is to say that individual apartment owners lose their shares in their apartments , and thus , the ownership of the units themselves .
Co-ops are much harder to finance than condos .In the case of a condo , the owner has title to the unit , which the bank can repossess in the event of a default . The unit can then be liquidated fairly easily , as in the case of a detached building such as a house . In the case of a co-op , the bank can repossess only the shares corresponding to the apartment , not the unit itself . This is a much weaker form of security because the co-op loans . The ones that do are mainly in large cities like New York City , where such arrangements are fairly common , and they typically require an assessment of the building’s financial condition , as well as the individual’s finances . Many co-ops require buyers to either pay cash or , if the purchase is financed , to use consumer , mortgage , credit , wherein the interest is not deductible for tax purposes , in order to screen out buyers . A most illustrative case was in the novel Bonfire of the vanities , in which the hero , Sherman McCoy , needed $420,000 of pretax income in order to pay annual interest of $252,000 on his $2.6 million apartment . He was “going broke on one million dollars a year .”
Another arrangement is known as a time share . This applies mainly to vacation and resort homes , where a number of people purchase and own the right use the home exclusively for a specified period of time , usually measured in weeks and months . The more desirable time slots ( the ‘ season ’ ) cost more , because what you’re really purchasing is not the home itself ., but the right to use it at a particular time .
Commercial real estate commands higher rents per square foot than residential , but it is quite a bit riskier . Except for the highest and lowest-cost properties residential real estate will seldom be priced out of the market , because there will be always be someone “ trading up “ or “ trading down ,“ even if the original target market disappears . However commercial properties such as stores , factories or motels are basically “ single-use “holdings that will have a tough time finding alternative users to its originally intended market . A private investor would do well to gain some experience with residential at first , before moving up to commercial . Office buildings are the riskiest . They are overbuilt in many parts of the country , which means high vacancy rates and soft rents . |
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