Real estate is one of the oldest and most popular asset classes. If done correctly it is one of the best ways to build wealth and generate solid cash flow. However, real estate markets are extremely complicated. The price movements in this market are usually slow and difficult to come by. A major factor behind this is the type of investors who put their money in the real estate market. Whether it is the motive of your investment, its duration, its size or the type of property you are investing in, as an investor you should be aware of what category you fall under. This will allow you to further understand your role in the market and how the role can be enhanced depending on your ambitions.
It is crucial to understand that each type of real estate investment has potential benefits and pitfalls when investing in the real estate market. To benefit from the lucrative industry an investor will have to put in work searching the market, navigating contracts, managing properties, remodelling and selling the property. It is key to have an understanding of different real estate markets, as this will help you make an informed decision and determine your future success in the real estate market. The type of investor you are will depend on your motive for the property.
Investment motive is an important feature which can distinguish a real estate investor. There are three major categories of investors in the market.
- Long term investor
An example of this type of investing is when you purchase land in a remote area in a remote area that is set for major development in the future. The decisions of long term investors are not short-term. To be successful in this venture, one has to understand that it is a slow-moving illiquid asset whose value rises steadily over the years. Most investors in this category use long-term investment strategies like buy-and-hold and in addition to rental income, they capitalize on natural property appreciation. The long-term investment strategy is usually the most common among real estate investors.
Locating profitable rental properties is key to becoming a successful speculator. The goal is to buy property for the lowest price possible and sell at a profit. Short term speculators may have a property that they rent out occasionally, but it is not their main source of income. They also go for flipping of properties – increasing the value of assets by upgrading them to sell at a higher price. This category of investors was hard to find just a few years ago. However, of late, they have become a lot more common.
This is the most common category of investors that are available in the real estate market. In this category, the investors purchase property as [part of their lifestyle choice. End-Users are investors that invest in real estate to reside in the property. Factors such as lifestyle amenities available nearby as well as the distance it takes to commute to work have a significant influence on this type of investor. Additionally, such investors may end up making a profit by selling their property they change their residence or move.
Terms of Management
Terms of management can be further subdivided into two categories.
Some investors prefer to manage the property themselves. They can choose to be actively involved in the property management process. They may also visit the property several times to ensure that no damage has been carried out by the occupiers. Active investors are the ones who conduct the repairs, find the tenants and rent out their properties.
- Passive investors
These are investors who do not take interest in managing the property’s day to day affairs. Passive investors are less involved in real estate. Real estate investing in this type of investors may be a secondary part or part-time job, or maybe they may not have the time to manage the property. A passive investor provides cash flow for financing the property and makes any decisions regarding its management. An investor can opt to hire a professional real estate management firm to take over the daily running of the property. Property management companies offer marketing, maintenance, financing and general management services for the real estate investors.
The type of real estate investors can also be distinguished based on the type of legal entity they are.
- Individual investors
Most of the investors in the real estate markets are individuals who take up unlimited liability in the property. This means that if they undertake a mortgage on one house and default on it, their other assets can be liquidated to settle their account.
- Institutional investors
An institutional investor is an organisation that invests on behalf of its members. These institutions usually finance themselves by issuing long term bonds in the bond markets. Since the bonds have a secondary market, they are very liquid and provide the investors with the ability to enter and exit the real estate market.
An investor needs to have a diversified portfolio and leverage multiple strategies to be successful. Therefore, it’s in the best interest that aspiring investors first understand what their goal and motive are, especially when investing in the real estate market. Real estate has different types of investments and can be very rewarding if done correctly.