The Basics of Real Estate: The Beginner’s 2025 Guide

Real estate can be a great investment when done right. But before you invest in real estate, it’s important to learn the fundamentals and basics of real estate so you can determine how you should invest, what the tax benefits (or consequences) might be, and how much money you can potentially earn. 

According to Statista, the real estate market in the United States is expected to reach a staggering value of US$136.62 trillion by 2025, highlighting the scale and opportunities within the industry. Now, let’s dive deeper into the basics of real estate and what every beginner should know before getting started.

Table of Contents

The Basics of Real Estate

What is Real Estate?

Who can Invest in Real Estate?

Real Estate Investment Pros

Real Estate Investment Cons

Real Estate Physical Characteristics

Why Start Investing in Real Estate

Real Estate Terminology to Know

Types of Real Estate

Ways on How to Invest in Real Estate

Active Investing vs. Passive Investing

Making Money From Real Estate

Real Estate Tips and Tricks

Risks vs Rewards

Key Takeaways | FAQs

The Basics of Real Estate

Investing in real estate can be a great way to diversify your portfolio and possibly earn cash flow. But before diving in, it’s important to ask: what are the basics of real estate? Understanding these fundamentals can help you see how the industry works, evaluate the risks involved, and decide if real estate investing is the right path for you.

What is Real Estate?

Real estate refers to land and anything permanently attached to it, such as homes, buildings, or natural resources. It includes both residential and commercial properties, as well as industrial spaces and even undeveloped land. At its core, real estate is considered a tangible asset with the potential to generate income, appreciate in value, or serve as a long-term investment. For beginners, understanding what real estate is lays the foundation for grasping how the market works and why it plays such a significant role in building wealth.

Who Can Invest in Real Estate

The good news is that the real estate market is open to anyone. Real estate investors don’t need to be a specific type of person, have a huge amount of money, or possess expert knowledge to get started. As long as you have the necessary capital for a down payment, can manage a mortgage, and are prepared for the responsibilities of being a landlord or house flipper, real estate investing can be a path for you. In fact, real estate investing for beginners is more accessible today than ever before, with options ranging from rental properties to real estate investment trusts (REITs).

However, before you jump in, it is absolutely essential to conduct your due diligence. This means taking a detective-like approach to research and investigate any potential investment opportunity. Due diligence is the key to minimizing risk and making informed decisions. 

Real Estate Investment Pros

• Real estate appreciates – Over time, property values generally increase, allowing you to build long-term wealth.
• You may earn tax benefits – Investors can often deduct mortgage interest, depreciation, and other expenses.
• Real estate often hedges against inflation – Property values and rents typically rise with inflation, protecting your money’s value.
• You may earn cash flow (passive income) – Rental properties can provide steady monthly income.
• You may build equity – Each mortgage payment increases your ownership stake in the property.
• You can leverage your investment – Using financing lets you control a larger asset with a smaller upfront investment.

Real Estate Investment Cons

• Real estate can be labor and time-intensive – Managing tenants, maintenance, and repairs requires ongoing effort.
• You may need a lot of capital – Down payments, closing costs, and renovations can add up quickly.
• It’s illiquid – Unlike stocks, you can’t sell property instantly; it takes time to find a buyer.
• You could make a bad investment decision and lose money – Choosing the wrong property or market can lead to financial losses.

Real Estate Physical Characteristics

The physical characteristics of real estate are important to understand. When you invest in real estate, you invest in property that cannot move, is indestructible, and unique.

• Immobility – Land cannot be moved. You invest in land that is permanently placed in its location. While you can alter its surface slightly, the land itself cannot be relocated.
• Indestructibility – Land and real estate are permanent. You aren't going to pick them up and move them, and they are rarely destructible.
• Uniqueness – Every parcel of land has its own distinct features and characteristics, even if two lots are located right next to one another.

Why Start Investing in Real Estate

There are many reasons investors add real estate to their investment portfolio. First, it offers diversification. Why take a risk investing in only stocks that could crash at any time? If you diversify with real estate, you offset the risk of a total loss even when the stock market crashes. Real estate and the stock market often operate in opposites, giving you a better chance of offsetting a significant loss.

Other reasons investors add real estate to their portfolio include potential monthly cash flow, equity build-up, capital appreciation, and potential tax benefits.

Overall, real estate may appreciate even if there is a downturn in the industry. Investors that treat real estate like a long-term investment, meaning they don't bail after a few months or even a few years, usually see the best return on their investment when investing.

Real Estate Terminology to Know

Accredited vs Non-Accredited Investors

Some real estate investments differentiate between accredited and non-accredited investors. Suppose you're investing directly in real estate. In that case, residential property is typically open to investors, and institutional-sized investments, like apartment buildings, hotels, and office buildings, are reserved for accredited investors.

To be accredited, you need an annual income of at least $200,000 per year for the last two years and/or a net worth of $1 million. But, if you want to buy residential real estate or even smaller commercial real estate investments, you may not need to be accredited as long as you can fund the investment with your own money. For many beginners researching how to get into real estate investing, understanding the difference between accredited and non-accredited investors is a key first step.

Listing Agent vs Buying Agent

A listing agent is the agent representing the seller and trying to sell the property. The buying agent represents the buyer, helping you find the best property for the best price.

Offer

This is the 'bid' you give to the seller or listing agent that includes the amount of money you're willing to pay for the home along with other details such as the closing date, items you want left in the home, and any contingencies you need in the contract such as an appraisal or inspection contingency.

Contract

This is a legal agreement between you (the real estate investor) and the seller to buy the home according to the terms in the contract. Since contracts are legally binding, it’s important to know the basics of what you’re signing. For beginners wondering how to get a basic understanding of real estate law, reviewing sample contracts, consulting with a real estate attorney, or taking an introductory real estate course can help build the confidence needed to navigate these agreements.

Contingency

A contingency is a way out of the purchase contract after signing it. Sellers don't love contingencies because if everything doesn't go perfectly, you might be able to cancel the sale. An example of a contingency is an appraisal contingency. This clause gives you time to get the appraisal done on the property, and if it comes back at a value lower than you offered to pay, you can withdraw your offer and get your earnest money back.

Earnest Funds

Earnest funds, otherwise known as a good faith deposit, are funds you put down to show that you're serious about buying the home. The escrow funds are held by a neutral third party until the contract clears or you back out of the contract (with or without a contingency). If you satisfy the contract's terms, the earnest funds go toward your down payment, and you have to bring less money to the table. If you don't satisfy the contract's terms, the seller can keep the escrow funds in exchange for the time the home was off the market.

Pre-Approval vs Pre-Qualify

Before you look at homes, you should determine what you qualify for with a mortgage lender. Your lender can provide either a pre-approval or a pre-qualification, but a pre-approval is better if you're serious about buying a home now.

When you're pre-approved, the lender evaluates your personal financial information and agrees that you can afford the loan. They write a pre-approval letter that tells sellers you qualify for financing based on the information provided. A pre-qualification means the lender took information from you verbally and estimated how much you can afford. Most real estate investing transactions go much faster and smoother with a pre-approval versus a pre-qualification.

Appraisal

A professional appraiser conducts the appraisal. They inspect the property, measure it, and take note of its features. The appraiser will take pictures of the interior and exterior of the property and compare the home to the current real estate market. The appraiser looks for similar homes that sold recently to determine the property's fair market value.

Inspection

A professional inspector performs a real estate inspection that determines the home's condition (not value). The inspector looks deeper into the home's structure, features, and inner workings to ensure it's a good real estate investment.

Title Insurance

Mortgage lenders require you to secure lender's title insurance. This protects the lender from anyone that might come forward later claiming ownership of the property. The title company conducts a title search to ensure there aren't any liens on the property, and the title insurance protects those interests. As a real estate investor, you can also buy owner's title insurance which protects your interests in the property from any future claims as well.

Types of Real Estate

Before you invest in real estate, you should understand the different types, including residential housing, commercial real estate, industrial properties, and land investments. For beginners asking what are the basic types of real estate investment, these categories provide the foundation for choosing the right strategy. Each type offers unique opportunities, risks, and potential returns, so knowing the differences is key to making informed decisions.

Residential

Residential real estate is real estate you invest in that is meant for families to live. Single-family homes, condos, and townhomes are good examples. You can buy the properties as a rental property, find tenants and rent them out, giving other families a place to live. It's important to find a particular market in your area with a high demand for rental properties before investing.

Commercial

Commercial real estate is real estate used for businesses. This could mean retail business, such as a freestanding store or a shopping mall. It could also mean residential buildings, such as an apartment building, office buildings, hospitals, or medical buildings. Commercial properties tend to be much harder to invest in alone, but real estate crowdfunding or real estate investment trusts are a few ways to get into commercial real estate investing.

Industrial

Industrial real estate is investments in buildings used for manufacturing or production. You'll typically find factories and warehouses in industrial buildings.

Land

Investing in land could mean investing in vacant undeveloped land or land that's ready to be built on. It also includes farm land.

Special Purpose

Special purpose properties are those used for things like cemeteries, parks, schools, or any other community purpose.

Ways on How to Invest in Real Estate

Today, real estate investing comes in many forms. Understanding your options and how they work can help you choose the right real estate investment type. For beginners, learning the basics of real estate investing means exploring different paths, such as buying rental properties, house flipping, participating in real estate crowdfunding, or investing in REITs (Real Estate Investment Trusts). Each option has its own risks and rewards, making it essential to match your choice with your financial goals and comfort level.

Rental Properties

Rental properties can be single-family homes, condos, or townhomes that you own and rent out to tenants. You are the landlord in this situation and in charge of all property management, including collecting rent, maintaining the property, screening tenants, and filling vacancies.

Flipping Property

If you'd rather not be a landlord, you can buy and sell property. This works best when you find undervalued properties in the housing market. You fix them up and sell them for a higher price once you increase the property's value. Most fix and flip investors do this within six months to turn a quick profit.

REITs

A real estate investment trust (REIT) is a company that owns and manages commercial real estate. Investors like yourself can buy shares of the company, therefore investing in real estate without directly owning the property. You don’t own the entire property in a REIT; instead, you earn a prorated amount of the monthly rental income, equity buildup, and capital appreciation when properties are sold. For those wondering what are the basic types of real estate investment trusts, REITs can include equity REITs (which own properties), mortgage REITs (which finance real estate), or hybrid REITs (a combination of both).

REIGs

Real estate investment groups are properties owned by a company that sells them to investors like you. When you buy from an REIG, you become part of the group, owning the real estate, but you don't have to manage it. The company that runs the group handles the property management, but takes a small portion of the proceeds monthly to cover their costs.

Real Estate Limited Partnerships

A real estate limited partnership is like an REIG, but smaller and with a predetermined term. Typically a property manager starts the partnership and joins hands with everyday investors that want to become real estate investors. The investors aren't responsible for the day-to-day maintenance of the property or the administrative work. The property manager runs it all and shares the proceeds with investors.

Real Estate Mutual Funds

Real estate mutual funds invest in real estate companies, such as REITs, giving you the returns of a real estate investor without a large amount of capital or responsibility required to own real estate outright.

Fractional Real Estate

Fractional real estate investments are investments in a portion of a property along with other investors. You don't need a lot of capital to invest in fractional real estate, and you aren't responsible for the upkeep of the property or even finding the tenants. With fractional real estate, you earn a prorated amount of the property's proceeds according to the agreement.

Crowdfunding

Real estate crowdfunding is the pooling of funds from multiple investors to invest either in a property's equity or debt. With crowdfunding, If you invest in equity, you own a portion of the real estate and receive rental income, equity buildup, and capital appreciation. If you invest in the debt side, you are the lender and receive interest income for the duration of the term.

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Active Investing vs. Passive Investing

Active investing in real estate means you take a hands-on role in managing your investment. This could include buying rental properties, managing tenants, overseeing maintenance, or flipping houses for profit. While active investing often offers higher potential returns, it also requires more time, effort, and knowledge. You’re directly involved in the day-to-day operations, which can be rewarding but also stressful if unexpected costs or tenant issues arise.

Passive investing, on the other hand, allows you to invest in real estate without the responsibility of managing the property yourself. Examples include investing in Real Estate Investment Trusts (REITs), crowdfunding platforms, or syndications. With passive investing, you provide the capital, and professionals handle the management, making it a good option for beginners or busy investors who want exposure to real estate without the workload. It typically involves lower effort but may also deliver smaller, steadier returns compared to active strategies.

Making Money From Real Estate

There are several ways to make money from real estate, no matter how you invest. You can invest directly or work with real estate investment companies to help you maximize your assets. For beginners wondering how to learn the basics of real estate, it starts with understanding the different income streams.

Appreciation

Real estate naturally appreciates over time. While there is always the risk that a property's value can fall, it typically increases annually. As a property owner, whether direct or in a property portfolio, you can earn some or all of the property's appreciation or the difference in the current value to the original value paid for the property.

Cash Flow

You might earn cash flow from an investment property if you bought it intending to rent it out to tenants. This works with residential and commercial real estate properties. The tenants live in or use the property and pay you or the investment group rent, which gets distributed to the owners or shareholders.

Real Estate Related Income

You can also make money from real estate by working in real estate, such as a real estate agent, broker, appraiser, or inspector. When you work in real estate, you can earn commissions for properties you help buy or sell, or you can earn fees for services such as home appraisals or inspections.

Ancillary Income

Ancillary income is income earned from items placed in real estate properties, such as vending machines or washers/dryers in an apartment building. You earn income from the use of the items within the real estate property.

Real Estate Tips and Tricks

Real estate investments can be overwhelming, especially if you think you need a lot of capital to gain exposure. The good news is that there are simple ways to maximize your opportunities, whether through rental properties, REITs, or crowdfunding platforms. Having a basic knowledge of real estate business practices, such as understanding market trends, financing options, and property management can make the process much less intimidating and help you avoid costly mistakes. 

1. Decide how you want to invest in real estate before starting. For example, do you want direct ownership and to be a landlord, or would you prefer a more passive approach and invest indirectly while earning profits from larger scale rental properties?
2. Know how much you have to invest. You can leverage your investment by borrowing money to buy a property worth more than you have to invest, but make sure you can pay back what you borrow and that the property you're buying is in an area that's popular with renters.
3. Consider working with a partner. If you have little real estate exposure thus far, consider working with a mentor or partner with a lot of real estate experience. You can learn from your mentor while making money together.
4. Consider the location. Location is a key element in preserving real estate value, immediate appeal, and long-term potential. For example, a waterfront condo in Florida will likely retain its value better than a comparable inland home, even if both are priced the same today. 
5. Tell everyone about your quest to invest in real estate. You never know when you'll come across a great real estate deal or even a small rental property that can start you on your journey in real estate investing.

Risks vs Rewards

Real estate investing can be very rewarding, but it also has risks. No investment is foolproof, so always make sure you know the risks before investing. Do your research and make sure the area has a high demand for renters, has increased market rent, and is an overall good investment, so you don't lose considerable money on your investment.

Key Takeaways

Real estate can be a lucrative investment and an excellent way to diversify your portfolio. Whether you’re trying to hedge against inflation, adjust your investment mix, or try your hand at real estate, there are many options available today. The key is to start by understanding the basics of real estate, determine what you’re most comfortable with, and assess how much capital you’re willing to invest. 

With the right knowledge and strategy, you can enjoy the long-term returns and stability that real estate has to offer. Learn more by signing up and visiting our blog.

Real Estate Basics FAQs

What Are the Tax Consequences of Real Estate Investing?

Real estate investing has unique tax consequences. If you earn monthly cash flow from rental property, your income is taxed at your ordinary-income tax rate. However, when you sell a rental property, you also pay taxes on the capital gains. In addition, you cannot exclude the capital gains like you can with a primary residence, which means you'll increase your tax liabilities when you sell the home.

What Is the 5% Rule in Real Estate Investing?

The 5% rule means a rental property shouldn't cost you more than 5% of its value per year. This includes property taxes, maintenance costs, and capital costs (debt and equity).

How Does Inflation Affect Real Estate Investments?

Real estate is often a hedge against inflation. As inflation increases, so does the value of most properties. If you own investment properties, you can increase the rent along with inflation, which helps you either keep pace with inflation or possibly even beat it.

What Type of Real Estate Investment Is the Most Profitable?

Every real estate market is different. In some areas, single-family homes can be a great investment, and in others, office buildings or short-term rental properties are the most profitable. Do your research in your area or work with a licensed real estate agent to determine which type of real estate is the most profitable in your area.