If you have ever thought about becoming a real estate investor, then you must have wondered what it would take to become one.
You were right to think that there ought to be different ways of becoming a real estate investor, not only buying and holding rental property. And yes there are! Buying and holding a rental property is just one way, there are several other options to consider that can earn you the title of a “real estate investor”.
For some of these options, you’ll need to participate actively as an investor to get your returns while for some others, you don’t need to do so much. In this scenario, all you’ll need is your good instinct and the necessary information to choose right.
So how do you identify a real estate investor? Or better still, how can we tell you are one?
WHO IS A REAL ESTATE INVESTOR?
A real estate investor is anyone or entity that decisively invests in real estate. In a broader sense, this definition also covers regular investors who add a real estate investment to their existing investment portfolio.
What this means is that a real estate investor can either be an individual, an organization/firm who invests in real estate with the expectation of getting a financial return. Individuals investing in real estate are called individual investors while organizations investing in real estate are called institutional investors.
However, this categorization – of individual investors and institutional investors is not enough to identify and explain the different types of real estate investors we have. To understand real estate investors, we need to take into account how an investor would like to invest and the reason for such investment.
These are the features needed to distinguish the different types of real estate investors.
The manner speaks to whether or not they want to be actively involved while the reasons point to their investment motives. Now let’s learn about these in detail.
KINDS OF REAL ESTATE INVESTING
There are two kinds of real estate investing: Active real estate investing and passive real estate investing. A real estate investor may decide to use any of these investment strategies to get returns on his investment.
- ACTIVE REAL ESTATE INVESTING
The term active investing already invokes a picture in our mind where a real estate investor is expected to do something.
A real estate investor using this strategy is expected to be physically and actively involved to get his returns on his real estate investment. He is involved in every process and at every phase. For this investor, the active participation may create the opportunity to make more profits, but the work involved is often overwhelming.
- PASSIVE REAL ESTATE INVESTING
In passive real estate investing, a real estate investor has some people who take the load off him. In most cases, real estate investors using this strategy do less.
They are not physically and actively involved to get their financial returns. Though having others do most of the work involved may cut into their profit but this gives them ample time to expand.
INVESTMENT MOTIVES FOR REAL ESTATE INVESTING
To understand real estate investors, the other information needed is the investment motive. As earlier stated, the investment motive speaks to the reason they are investing.
Are they investing for long term gains or short-term gains?
- INVESTING FOR LONG-TERM GAINS
When a real estate investor decides to invest for long–term gains, he chooses real estate investments that promise a high return in the long run.
They often purchase real estate investments intending to enjoy the long-term advantages.
- INVESTING FOR SHORT TERM GAINS
Investing for short-term gains, a real estate investor will purchase a real estate investment to sell it out quickly to turn up a quick profit. This is a great option for those real estate investors who have no desire to hold onto a real estate investment for a long time.
So a real estate investor can either be an active or a passive investor who is either investing for long-term gains or short-term gains.
TYPES OF REAL ESTATE INVESTORS
There are five different types of real estate investors.
- REIT INVESTOR
This real estate investor in real estate by buying a number of shares from a real estate investment trust (REIT) to receive dividends on them at a stipulated time. It works just the same way as getting shares from the stock market, the only difference here is that you would be apportioned an equity share of a real estate asset equivalent to the funds you provide.
It is very important to note though that REIT’s shares may or may not be listed. This is means that the firm may choose to trade its shares publicly or make it an exclusive sale. Either way, you only need to meet the criteria as a buyer to have the shares. A REIT investor practices passive real estate investing.
- BUY-AND-HOLD INVESTOR
This is the first type of investor that comes to mind when thinking about real estate investors. A buy and hold investor is a real estate investor that purchases an investment property intending to lease it for consistent monthly income.
Here is how we can describe this real estate investor. He is an active investor and he is in it for the long term.
A buy and hold investor is usually involved in all the work necessary to turn his investment property into the income-generating asset it ought to be. And for his active participation, he enjoys a relatively stable financial return in form of rent.
But as the portfolio of a buy and hold investor increases, he would be compelled to adopt passive investing to save time and ensure efficient management of his real estate assets. It is at this time; he will be needing real estate asset management or the services of a property manager.
- FIX AND FLIP INVESTOR
A fix and flip investor is an active investor like the buy and hold investor. But this investor invests in real estate differently.
To get his financial returns, a fix and flip investor first finds an undervalued property and fixes it up so it can be sold at a higher price in the market. So the difference between his initial investment (purchase price plus renovation cost) and the final sale price becomes his profit.
This means that a fix and flip investor invests in real estate for short-term gains. He could see his financial returns in just a few months.
- CROWD FUNDERS
These types of investors may not have the term ’investor ‘on their label but they are real estate investors. Crowd funders are real estate investors that come together to fund the development of a grand investment property.
These real estate investors pool together their investments to provide capital for a real estate project to receive a financial return once it’s done.
Crowd funders usually belong to a club that facilitates these opportunities.
- REAL ESTATE WHOLESALERS
Real estate wholesalers are real estate investors that may not need to purchase an investment property or real estate shares to invest in real estate. They might not need to fix a property either to get financial returns.
Here is what they do. They act as a go-between for a property owner and a final buyer.
Real estate marketing companies are real estate wholesalers. They connect investment property owners even real estate investment trusts (REITs) with potential buyers. They offer different services that get other types of investors their returns on investment and earn a commission doing so.
A real estate wholesaler can do all of these because of the established network of real estate contact and professional team at his disposal. A real estate wholesaler may be an individual or a real estate marketing and sales company.
Now that you know who a real estate investor is and the different types you can become, it’s advisable to first determine what kind of real estate investing you would be interested in. This way you will be guided.
Still not sure how to start shaping yourself into the real estate investor you wish to be?
Are you a seasoned investor already and looking to expand your portfolio? Let’s help you discover why you need real estate asset management for this big move.
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