TYPES OF ESTATES IN REAL PROPERTY

By definition, an estate in real property is an interest in the property sufficient to give the owner of the estate the right to possession of the property. It is imperative to understand the difference between the right of possession and the right of use. The owner of an estate in land, firstly, has the right of possession of the land in addition to the right to use it. Secondly, an easement owner on the other side has the use of the land but not the right to possess it and therefore, the easement is a non-possessory interest in land.

Basically, the Latin translation for the word estate is defined as "status" which indicates the relationship of the estate owner with reference to rights in the property. This establishes the degree, quantity, nature, and extent of interest a person has in real property. Estates in land, in addition to this, are divided into two groups: estates of freehold and estates of less than freehold (also called leasehold estates and non-freehold estates). The two estates can exist simultaneously in land where the owner (lessor) of a property has a freehold estate. Hence, if let say the owner leases the property, the tenant (lessee) has a leasehold estate.

A. ESTATES OF INHERITANCE

Freehold is defined as an interest in land of at least a lifetime and therefore generally is identified with the concept of title or ownership. Freehold estates may be fee simple estates or life estates. Although fee simple estates are practically inheritable, however, most of the life estates are not.

I. Fee Simple Estates

The fee simple estates provide the greatest form of ownership available in real property. The typical ownership in fee simple absolute gives certain legal rights which are usually described as a bundle of rights. The owner in fee simple absolute, in this case, may convey a life estate to another; may pledge the property as security for a mortgage debt; may convey a leasehold estate to another; may grant an easement in the land to another; and may give a license to conduct some activity on the property to another.

For example, if the owner conveyed a lease or an easement to another, the owner’s remaining rights would be a fee simple subject to the lease or easement. The fee simple ownership should not be confused with the quality of title. Ownership in fee means that the grantee owns it forever, not that it is free of title defects. And of course, an owner cannot expect to live forever and therefore the ownership consists of two periods of time, which are from the receipt of title until the owner dies and the period of time after the owner dies. In any case, the owner has the rights of ownership and use during his lifetime and then the ownership shall convey to his heirs (either by will or by the law).

II. Fee Simple Subject To a Condition Subsequent

The fee simple subject to a condition subsequent can continue for an infinite period, as in the case with the fee simple absolute. The fee simple subject to a condition subsequent also can be defeated and therefore is a defeasible (revocable) title. The fee simple subject to a condition subsequent is created by the grantor (the one conveying title) who restricts the future use of the property in some way.

For example, a grantor may convey property with the condition that it can never be used as a landfill. As long as the property is never used for this purpose, the title will continue indefinitely in the name of the initial grantee or any subsequent grantee. Any use of the property for a landfill will violate the covenant (the agreement) in the deed and the original grantor or her heirs may reenter the property and take possession or go to court and sue to regain possession. By doing so, the titleholder’s estate is terminated.

Another example of fee simple subject to a condition subsequent is that a grantor may want to convey a title in the case of the landfill where the owner may be protecting the property he owns that is close to the landfill. This is similar to the case of the college where the grantor may be highly committed to education, but may not want to give up ownership of the property for any other reasons. Perhaps, you may notice that in the case of a fee simple determinable, the estate in the grantee automatically terminates in the event where the designated use of the property is not continued or a prohibited use is undertaken. This is contrasted with the fee simple subject to a condition subsequent, in which the termination is not automatic.

B. ESTATES NOT OF INHERITANCE

Estates not of inheritance are good only for the life of the tenant (freehold) and do not pass on to his heirs, but rather are disposed of by some other method. In addition to being created by an intentional conveyance, life estates also can be created by operation of law. When life estates are created by act of the parties, they are called conventional life estates whereas when they are created by operation of law, they are referred to as marital life estates.

I. Conventional Life Estates (Estate for Tenant’s Own Life)

A life estate is a non-inheritable freehold estate which is created only for the life of the named life tenant (one who holds a life estate). And, questioning what will happen to the estate at the death of the life tenant, well, if nothing else is specified in the conveyance of the life estate, it will revert to the grantor or to his heirs at the death of the life tenant. In this case, the grantor or his heirs would have a reversionary interest and alternatively, the conveyance of the life estate could specify that the estate pass on to someone other than the grantor or his heirs.

II. Marital Life Estates

A marital life estate is created in North Carolina (United States) by the intestate succession statutes governing the distribution of property of one who dies intestate that is the one who dies without leaving a valid will. This statute allows the surviving spouse to choose a life estate in one-third of the real property owned in severalty (sole ownership) by the deceased spouse at any time during the marriage under certain conditions. If let say that the surviving spouse is entitled to any property of the deceased spouse through a will or intestate succession statutes and the surviving spouse has not joined in the transfer of such property by signing the deed, the surviving spouse must forfeit any interest in the deceased spouse’s property resulting from a will or an inheritance to claim her marital estate. Because of this, only few surviving spouses elect the marital life estate option since it is seldom advantageous for them to do so.

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THREE MAIN PURPOSES OF INVESTING IN REAL ESTATE

It is not uncommon to notice that the vast majority of people would rather invest their retirement savings in some combination of stocks and bonds, typically through some kind of mutual funds. Despite the fact that this renders them a great opportunity to diversify their sources of earnings or the so-called investment portfolios, they are often shocked to discover the value of their investment has tumbled whenever there is an unprecedented change in the market conditions. Investing in real estate is no different, yet, the value of property acquired normally increases every single year, particularly against the ever growing populations where the land becomes scarce.

 

1. TO PRESERVE CAPITAL

Obviously, the ultimate reason for investing in real estate is the preservation and the possible enhancement of the money invested. A real estate owner may build up additional money through reduction of mortgage debt. Generally, real estate owners have enjoyed rising property values over the years. Consequently, the equity or the value of money invested is preserved and increased by appreciation. This is precisely the reason behind why real estate investments are described as the investment which hedges against inflation. Although the problems associated with tenants are legendary, prevalent and endless, however, they often improve the properties that they occupy to enhance their living environment. As a result, the betterment of the property they make tend to increase the property’s value and is often left behind by the time when they move.

2. TO EARN PROFITABILITY

Fundamentally speaking, all investors in real estate have one ultimate purpose to put their money in for the sake of gaining profitability. By definition, an investment of any kind is a commitment of funds with the intention of preserving a "capital/equity/money" and earning a profit. From the viewpoint of real estate investors, these profits assume two forms. First, the income stream derived from the tenants’ rents should generate one kind of profit. Second, the gross amount of rent should be adequate to pay for all of the fixed and variable operating expenses of the property with sufficient remaining to show a return on the investment. After all, before committing to make any investment of real estate property, an investor should analyze thoroughly the returns of investment from opportunities rather than simply acquiring the assets.

 

3. TO ENJOY TAX RELIEF

Unlike any other form of investments, the income stemmed from the rental real estate can be sheltered enormously to diminish the income tax liability and thus enhancing the bottom-line return. Often, after all income from a rental property is accumulated for the year, the expenses incurred to grow this income will possibly be deducted. As these expenses include all operating costs such as management fees, utility expenses, repairs, maintenance, advertising, bookkeeping and so forth, the interest paid on existing real estate loans is usually deductible as a consequence of the amount of depreciation. Hence, the gross income derived from rentals is effectively reduced to a net amount that is then subjected to the imposition of income taxes at the taxpayer’s pocket.

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THE OBJECTIVE AND THE SCOPE OF REAL ESTATE INVESTMENT

In general, the primary purpose of any investment is none other than to produce income or profit, or balancing the profit the investor desires against the risk. Real estate offers the opportunity to make a profit in three different ways: appreciation, positive cash flow, and tax benefit. As we know, real estate investors come in many varieties ranging from the individual who buys one rundown property and fixes it up for resale or rental to the other individuals, or corporations who acquire large commercial complexes such as shopping centers and factories. While appreciation, positive cash flow, and tax benefit are some of the ways to generate profitability on the real estate investments, such leverages allow more money to be made on less investment.

For example, suppose an investor buys a $100,000 property with an initial investment of $10,000 for down payment and closing costs. The property appreciates $3,000 the first year has a positive before-tax cash flow of $50 a month, and produces a tax savings of $400 for the year. This $4,000 is only 4% of $100,000 which is not a very good return on an investment. However, if it is 40% of $10,000 then it is an excellent return on an investment.

Moreover, real estate like any other investment also involves risks. The real estate’s market value can decline, deteriorate, or even the area surrounding the property can change; adversely affecting the property value. Perhaps, rent or income may not meet expectations. Neither plants nor military installations nearby can be opened. Environmental problems may adversely affect the property so if any of these things occurs, the effect may be compounded by the real estate’s lack of liquidity (the investor most likely cannot sell the property instantly for its full value).

Next, when it comes to discussing the scope of the real estate business, it is extensive and is a complex type of industry. Normally, when people think of the real estate business, they think only of residential brokerage. Well, this is just one of several specializations within the real estate business where in fact, there are multiple specializations rooted within the field of brokerage including farm and land brokerage, residential property brokerage, also commercial and investment property brokerage.

In addition to brokerage, other specializations in real estate include property management, appraising, financing, construction, property development, real estate education, and government service. Although real estate transactions can be traced to early written records from biblical times, however, those transactions were between the seller and buyer directly without the participation of a real estate broker. Bottom line, the business of real estate brokerage is a product of the twentieth century whereby in the early 1900s for example, many states began enacting licensing law legislation and today all states in the nation require real estate brokers or salespeople to be licensed.

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THE NATURE OF REAL ESTATE MARKET

When it comes to the characteristics of real property investments, each parcel of real estate is unique and thus requires an individual investment analysis relevant to its specific geographic attributes. However, all real property has certain prevalent characteristics that affect its market value, which include:

1. Fixity. The property is fixed in location and as a result, its values are affected by any political and economic activities which occur in the immediate vicinity (surrounding area).

2. Longevity. The property is considered to be a long-term investment because of the durability of improvements and the permanence of the land. Consequently, this enables investors to estimate with some degree of reliability and the present value of a future stream of income from the property.

3. Permanence. It is the attribute that forms the basis of long-term mortgage-debt amortization. The investment occurred in this stage involves a relatively large amount of money which requires complex financial arrangements. These complexities, in turn, entail the expertise of lawyers, accountants, brokers, property managers, consultants, and other specialists.

4. Risk. The investment of real estate property is a relatively high-risk venture that reflects the uncertainty of somewhat unpredictable market. Unlike the stocks and bonds, there is no readily identifiable or organized national market for real estate.

5. Market segmentation. The fractured aspect of its unorganized and unregulated market is further exacerbated by the lack of standardization of the product aside from the fact that many of the market’s participants react intuitively and giving little attention to formal feasibility of marketing studies. Although the real estate investment market is divided into sub-markets such as retail, warehouse, residential and others, however, the investor who seeks for qualified help and takes advantage of protective measures can often mitigate some of the risks inflicted.

On the other hand, many government activities also possess either direct or indirect influences on the property values. At the federal or regional level, for example, income tax laws are often perplexing and frustrating. As a result, the power of government’s regulation and control of money effectively dictates the extent of real estate activity through manipulation of the supply as well as the cost of mortgage money.

Meanwhile, local political attitudes regarding zoning and growth restrictions have further contributed to the rise of real estate prices which create a monopolistic position for the property owners. Fueling the real estate property values with such political attitudes is the anti growth philosophy of citizens in some areas where property taxes and other public costs are rising at an alarming rate to serve an ever-increasing population. Therefore, the utterance to the saying "Not in my backyard!" has often become the slogan in some of those troubled cities which are heavily impacted by political attitudes.

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INTRODUCTION TO REAL ESTATE INVESTMENT

In general, property is something that can be owned. By definition, real estate is defined as land and all natural and human-made improvements attached permanently including air and mineral rights. To own real estate be it land or buildings is not only to process the physical property, but also to acquire certain legal rights to its continuing use and redistribution. To put it mildly, when we acquire real estate, we also acquire an accompanying bundle of rights in the property we own – the rights of use, possession, control, enjoyment, and disposition which includes the rights to pass the property on by means of a will.

To begin with, the ownership and control of real estate is a fundamental part of our lives. This is because in reality, we depend on our property to provide us with shelter and to satisfy other basic needs. In our own country, for instance, some of our essential needs can be fulfilled in various ways. Due to the fact that technological achievements have advanced our standards of living, hence, there is no need to be individually dependent on the ownership of land for the fulfillment of our basic needs. In other words, we can either rent or own a property (e.g. house or apartment) that is serviced by utility companies and financed by lending institutions. We can work in office buildings, manufacturing plants, and shops. We can also purchase our goods in stores, play in parks, and consume the products of far-off farms.

Nowadays, many people have the buying power or financial capability to go one step beyond using real property to supply only their basic necessities. These individuals, in addition, also acquire real estate as an investment which represents the conversion of their hard work efforts into a tangible and valuable asset. When it comes to the realm of real estate investment, it can be described as the sheer commitment of funds by an individual with a viewpoint to preserving, increasing, and earning capital or profit. In any case, we all make investments of various kinds throughout our lives whereby we invest time, energy, and money in educating ourselves and our children, in obtaining good health care, in purchasing vehicles, in accumulating savings, and in pursuing other necessary ventures to ensure that we have a better quality of life.

Furthermore, real estate investment does represent the forgoing of some present comforts (the enjoyment that we give up at the moment) in anticipation of future benefits. Forgoing instant satisfaction, although often painful for example, is necessary in the accumulation of an individual’s savings which is essential to the acquisition of investment property. As it sometimes requires something as important as money, a real estate investment on the other side also involves the application of personal time and effort.

Although the said hands-on approach to an investment is practically challenging, however, investment in real estate extends beyond our day-to-day activities and concerns us with the commitment of free money – the money accumulated in excess of funds required to secure life’s necessities. After all, the above hands-on approach to a real estate investment is called "sweat equity", while the free money is often called "discretionary fund" which can be viewed as money available for investment.

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