There are several economic principles and characteristics of real property or real estate. Understanding these principles is essential for you to understand your real estate investment.
These four real property principles are the economic principles of land and real estate investments. The four basic principles of real property investments include scarcity of real estate, the improvements of the real property, permanence, and area preference for the real property.
Table of Contents
- The Four Economic Characteristics Of Real Property
- Economic Realities of Real Property
- Frequently Asked Questions
- Related Questions
The Four Economic Characteristics Of Real Property
There are four basic economic characteristics of real property or real estate investments. Understanding these principles will help you understand real estate prices and investments.
Scarcity In Real Property
Scarcity in real estate means not a lot of something or something scarce. Scarcity in real property means a limited amount of land or buildings.
You can see the aspects of scarcity in major cities worldwide, where it is tough to buy or obtain any land for any real estate purposes. The scarcity of land can drive up the price of the land. On the opposite end, if there are many lands, land prices can be lower.
Besides just land, scarcity also affects real estate. Places with limited land or real estate for sale, but many buyers will always have high prices.
A great example of scarcity is in cities like Hanoi, Vietnam, where I live. In many parts of Hanoi, buildings are very tall and skinny as land is so expensive; real estate prices are also extremely high in the city center or near a landmark as a lake or essential buildings,
Improvements In Real Property
Improvements are an economic principle for real property in real estate. Improvements are also known as modifications.
Improvements or any modification can positively or negatively impact the value of the real property. Adding an outdoor pool or improving your landscaping should improve the value of your home; things as remodeling a kitchen or buying a new roof also enhance the value,
On the other hand, if a garbage dump is built next door to your property, this will decrease the value. Also, if you change your property and hurt its value, the value will go down.
The Permanence of Investment in Real Property
The Permanence of Investment in Real Property means that real estate investments are considered long-term investments. The reason why real property is considered to be a long-term investment is that real property is immovable, indestructible, and fixed.
A fire can damage your home, but the real property or land will remain. The land is a piece of earth that will not disappear and remain there.
The land is fixed and cannot be moved. If the market is better in another location, you can not just pick up the piece of land and move it. The land will forever stay in the same location.
Real property is also usually considered a long-term investment. They are considered long-term investments because real estate transactions are complex and require large sums.
Area Preference in Real Property
The area preference, also known as situs, is one of land and real property’s most important economic and investment characteristics.
The an old saying that says:
Location! Location! Location!
The location of the real property is significant for real property or real estate investment.
If you are holding a piece of real property in the wrong location, the value of that property will not increase but can decrease. On the other hand, you can have a small piece of property in the right location, and you may find that the piece of property continues to increase in value.
The location of the real property is a very complex issue. The situs of real property can be based on many factors, including history, convenience, growth, and reputation.
Home and land in an area with great schools and a low crime rate will always command a higher price. On the other hand, a home and land in an unsafe neighborhood with poor schooling are usually lowered priced.
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Economic Realities of Real Property
As with anything in life, there are some economic realities of purchasing and investing in real property: Not every real property you buy will be a good investment.
Many things can happen to drive down the price of real property. Here are just some of the economic realities:
Buying Too High
Real estate investment can go up as well as down. In the 2008 housing crisis, many people were what was known as being “underwater” with their houses and real property investments.
The term underwater means when a house or property is worth less than the money owed for the loan. Usually, this is because the buyers purchased the home or property when the market was at its highest, and then the market took a huge dip.
Local Zoning and Law Changes
Local zoning and law changes can affect real estate in many different ways. The local government may suddenly allow public or other lands to be developed, so scarcity is no longer an issue.
Prices could be driven down as suddenly there is more on the market and more for the buyers to choose from.
Also, zoning or laws could change things such as access or allowing commercial property right next to your property. This could either drive your property prices up or down. In other cases, you may find that a once peaceful and quiet piece of land now has a noisy freeway next to it.
All of these things can affect your real property in many different ways.
Acts of Nature
Things as an act of nature can also affect your real property value. Earthquakes, tornadoes, fires, and hurricanes can all destroy your property.
In some cases, people will decide to rebuild, but in other cases, most of the community may decide not to rebuild, so a once-thriving area is almost desolate. This has happened in many different places in the United States where an act of nature or natural disaster has come and destroyed an area and, in the process, also real property values.
Purchasing real property is a good investment if you purchase it at the right location, make improvements, and buy it at the right prices to increase your investments. As real estate purchasing is a long-term and complex investment, it is something you need to understand before making the purchase.
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Frequently Asked Questions
What are the economic characteristics of real property?
The economic characteristics of real property refer to the features that affect its value, use, and potential for generating income.
What is scarcity as an economic characteristic of real property?
Scarcity refers to the limited supply of real property in a given area, which can impact its value and demand.
What is utility in relation to real property?
Utility refers to the usefulness or functionality of a property for a specific purpose or use, influencing its value and desirability.
How does transferability impact the economic characteristics of real property?
Transferability refers to the ease with which ownership rights can be transferred. Properties with high transferability tend to be more marketable and liquid.
What is the concept of permanence in relation to real property?
Permanence refers to the long-lasting nature of real property and its ability to retain value over time, making it a durable asset.
How does supply and demand affect the economic characteristics of real property?
The interaction between supply (availability of property) and demand (desire or need for property) influences property values and rental rates.
What is the concept of investment value in real property?
Investment value refers to the financial return or potential income that can be generated from real property, making it an attractive investment option.
How do property taxes impact the economic characteristics of real property?
Property taxes levied by local governments can affect the affordability, profitability, and overall economic characteristics of real property
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