Today’s most successful investors are clever, business-minded individuals who have discovered the shortest path to financial independence. Of course, there are different types of investors, but they do a lot more than just acquire an investment property when it comes to real estate investments. According to widely held views, there are four fundamental sorts of real estate investors. Each kind of investment, like any other, has its own set of rewards and drawbacks. But, first and foremost, What exactly is a real estate investor?
Simply put, a real estate investor is someone who adds a real estate asset to their portfolio on purpose. While many people think of a real estate investor as buying and holding rental property, that is only one type of investor. Real estate investors might put their money into a real estate investment trust (REIT), pursue a fix-and-flip investing strategy, or become wholesalers. Individual investors, institutional investors, and investors who fall somewhere in the middle are all possibilities for real estate investors. Individual investors would be counted as institutional investors in this situation, while banks and other financial entities would be counted as individual investors. Individuals can, however, form a real estate investment company that falls somewhere in between those two extremes of the real estate investing spectrum.
What are the different types of real estate investors?
The most passive method of real estate investing is through a real estate investment trust (REIT). One will similarly invest in this strategy to how you’d invest in the stock market. They buy stock in a real estate investment business and receive dividends when the company makes a profit. The shares of a publicly traded REIT will be listed and exchanged on major stock markets. A non-traded REIT, on the other hand, can be listed with the SEC even if it is not publicly traded or is a private firm.
The main advantage of investing in REITs is that, like stocks, it is accessible to anybody. You don’t need to be an accredited investor or have much real estate experience to participate. It’s as simple as buying and selling stocks in this scenario. REITs, in particular, are required to pay out 90% of their earnings in dividends.
The disadvantage of investing in REITs is that there is little control over what one has invested in or managing them. With this in mind, it’s critical to complete the homework before investing in a REIT. Also, REIT dividends are taxed as regular income rather than at a lower rate.
Buy-and-hold investing, once again, is the classic example of real estate investing, in which one purchases an investment property and rents it out for a constant monthly income. This is, on the whole, a relatively active sort of real estate investing. It is a must to perform the legwork of finding a tenant, evaluating all potential applications, and being available to deal with maintenance issues. It’s also a long-term plan, as most investors acquire an investment property and maintain it in their portfolio for several years.
The ability to produce reasonably constant returns is one of the biggest advantages of a buy-and-hold investment strategy. Landlords may usually count on the same amount of rental money every month in this situation. There is an option of turning this into a more passive investment if one employs a property management firm.
The main disadvantage of this investment technique is that it requires a lot of effort for lower returns than other methods. In addition, as previously stated, if someone is an individual investor who hasn’t engaged in a property management business, they will be needed to take on landlord responsibilities willingly to collect any rental revenue, which can take a significant amount of time and work.
Then there’s an investment in fix-and-flip properties. In this case, the investor will make every effort to locate a real estate deal undervalued by the market. After that, they’ll fix it up and resell it for a much greater price. The investor keeps the difference between the initial investment and the ultimate sale price as profit after the buyer is located.
The essential advantage of this sort of real estate investing is that it can generate high profits if one finds the right investment opportunity. It’s also a short-term investment plan so that they may see a return in as little as a few months.
This is, nevertheless, an extremely active investment technique. In this instance, finding the proper real estate transaction is up to people and their real estate agent. Then it is a must to decide how to improve the property. If one can do the task themselves, they can typically get superior results. However, if someone is not handy, they need to factor labour charges into their budget. And finally, one has the danger of over-improving the home and losing money on the sale when it comes time to sell.
On the other hand, real estate wholesalers will function as a middleman between a property owner and a final buyer. The goal of this investment approach is to identify a real estate acquisition that is undervalued. Then, without first repairing it, sell it for a greater price to an interested buyer. Thus, in this scenario, one gets to profit from the difference between the amount they paid for the property and the amount they sold it for.
In reality, this is a reasonably low-risk investment technique with the potential to yield a substantial reward. Wholesalers typically buy and sell properties on the same day to save money on holding charges. To make this work, one usually needs an established network of real estate connections to identify eager buyers and distressed sellers.