Real Property: Types and Legal Aspects

Property implies the lawful right of use, control, and disposal, which an entity or individual may legally exercise over things, objects, or land. However, when you describe property in legal terms, there are only two types:  real property and personal property. 

Real property includes the land, improvements on the land, the surface, whatever is beneath the surface, and the area above the surface. In contrast, personal property  describes everything that is not real property. While the difference between real and personal property may appear insignificant, the legal delineation of each property type impacts how value can be classified, taxed, protected, and transferred. In addition, with real property representing a sizable chunk of the world's wealth and its valuation key to financial and property markets, understanding the importance of real property can go a long way in helping you navigate investment prospects in the property industry. This article will help you understand the differences between real property and personal property, the legal aspects of real property, investing in real property, and the risks associated with real property investments.

What is the Real Property

Real property refers to property that cannot be physically moved or immobile. Specifically, it is land and the improvements, such as all permanent man-made structures (for instance, parking facilities, utility upgrades, water heaters, sewers, buildings, driveways, landscaping, swimming pool, decks, retaining walls, furnaces, security systems, and garages) attached to the land, including its bundle of legal rights.

Although "real estate" is sometimes used interchangeably with real property, real estate refers to the transactional acquisition or sale of real property, including the land and everything permanently attached. It differs from real property in that it only refers to the physical property and the structures on the property but not the rights bestowed on the owner.

In contrast to real property, personal property can be anything (that is not real property) that has an inherent value that characterizes it as movable. Personal property can be tangible, such as jewelry, furniture, artwork, vehicles, and appliances, or intangible, such as a bank account, legal rights, intellectual property, patents, stocks, and bonds.

Types of Real Property

There are different types of real property, each serving different purposes. If you are buying a property, understanding what kind of property it is can help you make the right choice per investment and development. Below are the primary types of real property, along with examples and typical uses.

Residential property

Residential property typically refers to condos, apartments, single-family homes, and other types of dwellings where people reside. These properties are usually located in neighborhoods or residential zones and are designed to provide living spaces for individuals and families. Common features include amenities such as gardens, garages, and recreational facilities.

Commercial property

Commercial property refers to property built for business purposes or to earn money. Examples include office buildings, hotels, shopping centers, malls, and office spaces. These properties are often situated in commercial districts or city centers, where accessibility and visibility are high. They are designed to accommodate businesses, ranging from retail stores to corporate offices, and are often evaluated based on their potential to generate revenue.

Industrial property

Industrial property is real property used for research, development, manufacturing, storage, and distribution of goods. It is typically larger than residential property and includes factories, warehouses, and distribution centers. These properties are usually located in industrial zones and are equipped with the necessary infrastructure to support heavy machinery, large-scale production, and logistics operations.

Agricultural property

Industrial property is real property used for research, development, manufacturing, storage, and distribution of goods. It is typically larger than residential property and includes factories, warehouses, and distribution centers. These properties are usually located in industrial zones and are equipped with the necessary infrastructure to support heavy machinery, large-scale production, and logistics operations.

Mixed-use property

A mixed-use property is one intentionally used for multiple purposes, such as residential, commercial, retail, and office spaces. A mixed-use property may combine retail stores, businesses, and apartment complexes in the same area. These properties are designed to create vibrant, self-contained communities where people can live, work, and shop without needing to travel long distances. Mixed-use developments are often found in urban areas and are increasingly popular due to their convenience and efficient use of space.

Legal Aspects of Real Property

Purchasing, owning, and investing in real property involves a host of legal considerations that must be carefully considered. These considerations, including ownership rights, property transfer, zoning laws, and property taxes, all play important roles in the use and management of real property.

Ownership Rights

Ownership rights in real property are grouped in the "bundle of rights." These are:

• The Right of Possession:This refers to the right to own or possess the property. Anyone who is the title holder of a property is recognized as the legal owner of the property.
• The Right of Control: This right refers to the legal right to use the property as you deem fit. It includes the right to make changes or renovate the property, rent out the property, or live in it by yourself. However, local laws in your jurisdiction may slightly impact your right of control, such as municipal regulations restricting the types of businesses that may be operated out of your real property.
• The Right of Enjoyment:This right allows you to lawfully enjoy your property as desired. For instance, you can hold a party at your home if you comply with noise-related ordinances.
• The Right of Disposition:This right allows you to sell your real property or transfer its ownership to another person. However, there may be complications if you have a lien on the property. In that case, if you exercise your right of disposition, you must pay the loan balance with the sale proceeds.
• The Right of Exclusion: This right allows you to exclude the presence of specific persons from your property. For instance, if you operate a clubhouse, you can exclude certain types of persons from setting foot on your property. Note that this right can be limited in some scenarios. For instance, a law enforcement agent with a legal warrant can set foot on your property without your permission.

Transfer of Property

Real property can be transferred by sale, gifts, and inheritance. If a real property is to be transferred in sale, the action will be formalized via a deed, such as a warranty deed or quitclaim deed. A warranty deed establishes ownership of the real property and explicitly states that the seller of the property holds good title to the property. Consequently, the new owner can be assured that there are no liens, easements, or other encumbrances on the property. However, a quitclaim deed, while establishing the ownership interest the seller has in the property, does not promise the new owner that the seller holds good title to the property.

Alternatively, you can transfer real property in exchange for "consideration." If this transfer is done without obtaining anything of value in return, the real property can be said to have been transferred as a gift.

Real property transfer can be done via a gift. To transfer a real property via a gift, you can use a transfer on death deed or a gift deed property. Also called a beneficiary deed, a transfer on death deed provides the property owner with complete control of the property while they are alive. However, the deed transfers the real property to another individual when the original owner dies. In such a transfer, the new owner avoids paying a gift tax since the transfer is not immediate and is revocable. If a real property transfer is done via gift deed, the title to the property is voluntarily transferred by the owner during their lifetime to another individual or charity. Persons who want to make a delayed gift prefer this option. For a real property gift to be considered a gift, its deed must explicitly state that no compensation is required or expected. The donor of the real property will pay the federal and state gift tax applicable.

Also, when a property owner dies, their property can be transferred to a new owner through a will or, in the absence of a will, via state intestacy provisions.

Zoning laws and regulations

Zoning laws refer to local or municipal regulations governing where and how different types of real property can be located or used in the jurisdiction. Municipalities partition neighborhoods and districts into sections or zones per a master plan to ensure proper management of noise levels, economic development, traffic flow, and resource protection. Consequently, a municipality's zoning lawdetermines what kinds of properties may coexist in different areas of the city.

Property taxes and assessments

Property tax is an annual or periodic charge levied by local authorities and paid by real property owners in a jurisdiction. Property tax receipts constitute a significant revenue source for municipalities in the United States as they can fund police, fire departments, schools, libraries, road construction and repair, water and sewer departments, and other local services benefitting the municipality.

Property taxes are calculated based on a property's assessed value, a property tax rate, and whether exemptions apply to the property or owner of the property. Hence, property tax and its assessment form a considerable part of the financial obligations on real property. Failure to meet your property tax obligations can result in severe consequences, such as the government placing a tax lien on your property. If the situation deteriorates and you continue to avoid paying the property taxes owed, the real property may be sold off to recover the owed taxes in a foreclosure.

Investing in Real Property

Investing in real property involves purchasing land and buildings to earn a return on the investment. You can earn a return via rental income, property appreciation, or both. However, you must understand how to invest in real estate and the peculiar challenges of the industry before putting funds in the real property market.

Benefits of investing in real property

There are several benefits to investing in real property. Some of these include:

• Getting an Additional Income Stream:You can earn passive incomefrom investing in real property by buying and renting properties and investing in real estate investment trusts (REITs). When you rent out a real property, you can earn income from its use by the renter. On the other hand, REITs allow investors to put their funds into large and commercial residential real estate projects without investors having to manage the properties themselves. The REITs managers provide passive income to investors in return.
• Real Property Value Appreciation:Typically, real property appreciates over time. Hence, if you invest in them, you can sell them later for a higher value, making a profit.
• Protection against Inflation: Unlike some other investments, real property generally keeps pace with inflation. Hence, investing in real property provides a hedge against inflation, preventing you from losing the value of your investment despite rising inflation.
• Tax Benefits: Real property investors may be able to enjoy tax breaks if their real property investments are treated like a business. The Internal Revenue Service (IRS)allows investors to remove expenses related to their real property business from the tax due if they are able to prove material participation in the industry. Consequently, you may be able to deduct mortgage interest, depreciation, and the cost of running the business. Furthermore, the 1301 exchange rule permits real property investors to defer capital gains taxes using the proceeds of sales from one real property to buy another property of the same kind.

Different investment strategies

You can invest in real property in the following ways:

• Buying and Holding: This is a long-term strategy in which you purchase a property and hold it for an extended period to benefit from its appreciation over time. You may plan to sell the property after a long period or rent it out while holding it. Experienced real estate investors often look for properties in growing municipalities with the potential for long-term resale value.
• House Flipping:This type of real property investment is typically short-term. It involves purchasing undervalued properties, fixing them up, and selling them within a short period of time, often six months or less. Some property flippers, however, do not invest in improving purchased properties; they hedge their bets on the intrinsic value of the undervalued properties to be enough to turn a profit within a short period. The house flipping strategy is often used by investors with significant experience in real property valuation, marketing, and renovation.
• Real Estate Investment Trusts (REITs):If you want a portfolio exposure to real property without the classic real property transaction, you may consider REITs. REITs are established when a trust uses funds obtained from investors to buy and operate real properties for income. REITs can be bought and sold like stock on major exchanges. Hence, if you want a regular income, you can invest in real property using REITs, which pay dividends like regular stocks.
• Real Estate Investment Groups (REIGs):Investing in real property via REIGs is advisable if you want to own rental real property without having to get involved in hands-on management of operations. In a REIG, funds from investors are pooled in a mutual fund-like manner and invested in rental properties. Typically, in a REIG, a company purchases and builds a set of condos or apartments. While one investor may own multiple units of self-contained apartments, the company operating the REIG collectively manages all units of real property purchased, including vacancy advertisements, interviewing tenants, and handling maintenance. In exchange, the company deducts a percentage of the monthly rent. You can get some income in a REIG even if your unit is empty.

Risks Associated with Real Property Investments

As with other investment forms, there are risks attached to real property investments. These include:

• Market Fluctuations: Many factors may cause fluctuations in the market, making real property markets unpredictable and leading to downturns in dividends and income. For instance, changing neighborhood dynamics can lead to losses for investors in the real property in that area.
• Liquidity: Sometimes, depending on the economy and other factors, selling a property can take longer than expected. For instance, if you opt for the buy-and-hold or house-flipping strategy, it may be challenging to find a buyer when you are ready to sell due to liquidity issues.
• Operational and Maintenance Costs: Owning a real property can come with many unexpected costs, especially if you are new to the industry. Your estimates for repair, insurance, and maintenance operations may also be far lower than the actual costs for the stated operations. Also, unexpected costs may significantly impact the profitability of a real property investment. 
• Rental Income Issues: If you invest in buying a property to earn income from renting it out, issues such as tenant turnover, vacancy, and non-payment of rent may disrupt your income flow and reduce profitability

Real Property vs. Personal Property

Real property can be differentiated from personal property by three key characteristics: mobility, permanence, and longevity. Real property refers to land and permanent structures attached to it, such as buildings, culverts, viaducts, fencing, dikes, ditches, dams, and retaining walls. It cannot be moved, is permanent, has an indefinite lifespan, and appreciates in value over time.

On the other hand, personal property is a movable property, such as assets not permanently attached to a land or building. It can be moved from one place to another and has a shorter lifespan than real property, depreciating over time. Personal property includes sofas, beds, tables, cars, boars, necklaces, wristwatches, rings, arts, televisions, computers, phones, and clothing.

Real property is subject to zoning laws, building codes, and property taxes, while personal property is not subjected to such laws. Real property may be used for mortgages and are subject to foreclosure. However, personal property may be used as collateral for personal laws and may be repossessed for failure to meet the conditions of the loan.

In conclusion real property is not the same as personal property. In basic terms, real property refers to land and all its immovable attachments, such as buildings, driveways, sewers, and fences. Personal property is movable and, unlike real property, tends to depreciate in value with time. Examples are clothing, jewelry, and furniture. Real property can be classified as residential, commercial, industrial, agricultural, and mixed-use property. These all serve different purposes.

If you want to own real estate, you must be aware of specific legal aspects that may shape the purchase, use, and ownership of the property, such as ownership rights, zoning regulations, property tax, and real property transfer. If you are considering investing in real property, there are also strategies and risks involved. Without sufficient experience in the real property industry, you may waste money. Hence, you should consider hiring the services of real property professionals for legal and financial advice and support before investing funds in real property.