Many strategies are available to individual and institutional investors when it comes to real estate investing. Whether you have a lot of money to invest or only a small amount of capital, understanding the types of real estate investors that exist can help you choose the best real estate investing strategy for you.
What Is a Real Estate Investor
A real estate investor invests money into properties in the real estate market. Real estate investing includes purchasing residential and commercial real estate. Any property that private real estate investors purchase and use to earn cash flow or profit is an investment.
Real estate investors can use the investing strategy that helps them meet their financial goals and honors their risk tolerance.
Real Estate Investor Considerations
Before choosing the type of property investor you'll be, consider these factors that make up the different types of investors in the real estate market.
Active vs. Passive Investments
Are you looking for active or passive investments? In other words, do you want to own real estate and manage it daily? For example, when you buy residential real estate properties or commercial properties, such as office buildings, shopping malls, or apartment buildings, you act as the landlord, maintaining and operating the property. Is this something you can handle?
On the other hand, passive real estate investors don't play an active role and often don't own any commercial or residential real estate investments. Instead, they fund an investment, such as a real estate investment trust, and let the fund manager handle the investing strategy and choices in the real estate market. As a result, passive investors earn cash flow and profits based on the percentage of their investment.
Legal Entity
The type of legal entity property investors are also plays a role. Most real estate investors are individual investors. They invest for themselves, making decisions and using their investing strategy. This strategy is most common for residential real estate investors in popular real estate markets.
On the other hand, institutional investors invest billions of dollars on behalf of a large group of investors. They aren't interested in low-value investments, though. Instead, investing in real estate assets is usually an extensive portfolio of properties versus a single property.
Investor Property Control
Investor property control differs depending on whether the investing strategy is active or passive. An active investor has complete control over the property and all its decisions. These types of investors go 'all in' and buy properties themselves. They need a high-risk tolerance because of the risk of a total loss. All liability falls on the investor's shoulders.
A passive investor passes off control of the real estate investments but also doesn't have the stress of taking care of them. This works well for types of investors with a lower risk tolerance. With passive investments, like real estate investment trusts, there is a much larger portfolio of properties, which means there is less risk of default.
Motivation for Investing in Real Estate
Different types of real estate investors have varying motives for investing in real estate. Most of which include:
- Buying and living in the property - The home you live in is an investment. You are the end user of the investment, but leverage your capital to buy a home that you hope will appreciate and provide a profit in the future.
- Buy and hold investors - Some property investors buy property to hold and rent out for the long term. They hope to profit in the long run, typically for retirement or other long-term goals.
- Fix and flip - These investors predict they can make money fast by buying properties and flipping them. They don't have a long-term investment strategy but instead capitalize on current trends.
Return Potential
All real estate investors must consider an investment's return potential. The higher the risk investors take, the higher the potential return. This is similar to what stock market investors face, but with real estate as the underlying asset versus a company that underlies a stock investment.
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4 Types of Real Estate Investors
Understanding the different types of real estate investors can help you choose your path in real estate investing.
Real Estate Investment Trust (REIT)Investor
The real estate investment trust investor is passive. You don't buy property yourself. Instead, you fund real estate companies, allowing them to pool your funds with other property investors to buy, manage, and sell investment properties.
REITs usually invest in commercial properties. They pay at least 90% of their profits to their investors. REIT investors don't have a say in which properties the REIT invests in or how they operate it. Once you fund the investment, you sit back and wait for your cash flow and/or the return on your investment once it matures.
Long-Term Investors
Long-term investors in real estate are buy-and-hold investors. You buy a property intending to own it for many years. Most investors in this category are residential real estate investors.
Rental Income
Long-term property investors usually earn monthly cash flow from rental properties. Therefore, collecting monthly rent gives the rental investor regular monthly cash flow, which they can reinvest in their investor's portfolio or use to supplement their income. Rentals are typically an active investment strategy unless you outsource the upkeep to a property manager or property management company.
Appreciation
Investors who hold onto properties long-term usually benefit from the appreciation a property experiences. Of course, there are no guarantees real estate investments will appreciate, but historically, real estate appreciates an estimated 4% per year, but that can fluctuate based on the economy.
Reduce Taxable Income
Buy and hold property investors run a real estate business, allowing them to take advantage of certain tax benefits, including writing off mortgage interest, travel, maintenance, and marketing expenses.
The tax benefits help a rental investor increase earnings by decreasing his tax liability on capital gains.
Speculator
A speculator doesn't have a buy-and-hold mentality. Instead, this investor speculates on a property's potential, using current trends and economic occurrences to capitalize on their investments.
Wholesaling
Wholesalers don't own property outright. Instead, they scour the market, find undervalued properties, and put them under contract. Then they flip the contract to someone in their network of real estate investors for a higher price.
The difference is the wholesaler's finder's fee and how he makes a profit without physically owning residential properties.
Fix and Flip
Fix and flip investors also buy undervalued properties but take possession of them. These types of investors work with a network of contractors and other real estate professionals to improve the home's livability and value, selling the house for a profit.
Fix and flip investors typically own properties for less than six months to earn the highest profits.
Owner-Occupant
Owner-occupied investors use what's called house hacking. They buy multifamily properties, live in one unit, and rent out the remaining units. Because they occupy one of the units, it's owner-occupied, which allows them to secure owner-occupied financing versus investment financing.
This benefits investors in two ways. First, owner-occupied financing is easier to qualify for and has better terms than traditional real estate financing for investors. Second, they can rent out the other units, using the rental income to pay the mortgage, allowing them to live for free while possibly earning a profit.
Real Estate Investing FAQ
How Much Can You Make on Investor Properties?
How much you make on an investment property depends on many factors. First, you must be able to charge more rent than the cost to maintain and operate the property, including the mortgage payment. Next, you must buy a property where renters want to live, so you have minimal vacancies. Investors can make anywhere from $0 - hundreds of dollars a month on a rental property.
How Do I Know What Kind of Investor I Am?
To determine what type of real estate investor you are, assess your risk tolerance, the amount of capital you have to invest, and how much involvement you want in the investment. If you want no involvement, passive investing is your best bet. However, if you want a more hands-on approach, look at owner-occupant investing, speculation, or buy-and-hold benefits.
Can You Be a Real Estate Investor With No Money?
You don't need much money to be a real estate investor, but you'll need some capital when starting in real estate investing. For example, real estate investment trust investors can invest with as little as $1 on some platforms, so you don't need a lot of money, but if you want to buy physical real estate, you'll need 20% - 30% for a down payment.
Types of Real Estate Investors: The Bottom Line
Investors buying homes and investors investing in passive real estate investments are different types of real estate investors. They all have one thing in common, though. They want to make a profit from real estate. So whether you have a few dollars or a few thousand dollars to invest, there are ways to invest in the real estate market as a real estate investor. Learn more by signing up and visiting our blog.
I am an expert in real estate investing with a deep understanding of the various strategies employed by both individual and institutional investors. My expertise is backed by first-hand experience and a comprehensive knowledge of the real estate market.
Now, let's delve into the concepts presented in the article about real estate investing:
Real Estate Investor Overview:
A real estate investor is someone who invests money in properties with the aim of earning cash flow or profit. This can involve the purchase of residential or commercial real estate.
Investor Considerations:
1. Active vs. Passive Investments:
- Active Investors: Own and manage properties actively, taking on responsibilities like maintenance and operation.
- Passive Investors: Don't play an active role, instead, they fund investments like real estate investment trusts (REITs) and let fund managers handle strategies.
2. Legal Entity:
- Individual Investors: Make decisions and use their own investing strategy.
- Institutional Investors: Invest on behalf of a large group, dealing with extensive portfolios rather than single properties.
3. Investor Property Control:
- Active Investors: Have complete control over the property and decisions, bearing all liabilities.
- Passive Investors: Pass off control, often investing in larger portfolios with lower risk.
4. Motivation for Investing:
- Buying and Living: Invest in the property where you live, leveraging capital for potential appreciation.
- Buy and Hold Investors: Purchase properties for long-term rental income or appreciation.
- Fix and Flip: Capitalize on current trends, buying and selling properties quickly.
5. Return Potential:
- Higher risk often corresponds to higher potential returns, similar to the stock market.
Types of Real Estate Investors:
1. Real Estate Investment Trust (REIT) Investor:
- Passive investors funding real estate companies, often investing in commercial properties.
2. Long-Term Investors:
- Buy-and-hold investors, earning through rental income and property appreciation.
3. Speculator:
- Invests based on current trends and economic occurrences, without a buy-and-hold mentality.
4. Wholesaler:
- Finds undervalued properties, puts them under contract, and flips the contract to other investors.
5. Fix and Flip Investor:
- Buys undervalued properties, improves them, and sells for a profit within a short timeframe.
6. Owner-Occupant:
- Utilizes house hacking by buying multifamily properties, living in one unit, and renting out others.
Real Estate Investing FAQ:
- Earnings: Vary based on factors like rent, property costs, and vacancies.
- Determining Investor Type: Assess risk tolerance, capital, and desired involvement.
- Investing With No Money: Possible with options like REITs, but physical real estate requires some capital.
Conclusion:
Regardless of the amount of capital you have, there are diverse ways to invest in real estate, each catering to different preferences and goals. Whether you're a passive investor in REITs or an active fix-and-flip enthusiast, understanding these concepts is crucial for making informed investment decisions.
