Property types and homeownership

Real property is land and things permanently attached to it, including the surface and permanent features above and below it (Cornell LII Wex, real property). Brokers, appraisers and lenders sort it into categories by how the property is used, because use drives who buys it, how it earns money and how it is valued.

The five broad categories

A few points the exam likes:

• Apartment buildings are residential even though they produce income, because people live there. Many markets treat large apartment complexes as investment property, but the use is still residential.
• Agricultural is broad. For property tax classification, Florida lists agricultural purposes such as horticulture, floriculture, viticulture, forestry, dairy, livestock, poultry, bee, aquaculture and sod farming (Fla. Stat. 193.461(5)).
• Special purpose property is hard to sell or value by comparing sales, because few similar properties trade.

Many licensees specialize in one category. Residential brokerage is where most new sales associates start.

Homeownership basics

Most people's first real estate transaction is buying a home. The common reasons to own instead of rent:

• Equity. Equity is the amount the property is currently worth minus the amount of any existing mortgage (Consumer Financial Protection Bureau). It grows as the loan is paid down and if the home rises in value.
• Possible tax benefits. A homeowner who itemizes deductions may be able to deduct qualifying mortgage interest and real estate taxes; a person who itemizes cannot also take the standard deduction (IRS Publication 530). Homeowners insurance premiums and the part of a payment that reduces principal are not deductible.
• Control and stability. Owners decide how to use and improve the home and are not subject to a landlord's renewal decisions.

Owning has costs too:

• an up-front down payment and closing costs;
• property taxes, insurance and repairs that a tenant would not pay directly;
• less mobility, since selling takes time and money;
• the risk that values fall.

Tax rules are covered in more depth later in the course. For now, know that the advantages are equity, possible tax savings and control, and that they come with real costs.