Types of Investors in Real Estate Markets

Real estate markets in any part of the world can be quite intricate, if not mysterious and convoluted. This is because apart from the slow movements in the prices, it is also difficult to get into them to make money for yourself. Perhaps a primary reason for this confusion can be attributed to the types of investors in real estate markets. These are those individuals and organisations who put their money into this unique market with a view to making good profits. If anyone wants to really understand any of the numerous real estate markets in any country, all you need to do is to study and understand those who participate in these real estate markets, in other words, the investors.

In this article, we would take a look at some of these types of investors in real estate markets:

Legal Entity

Firstly, we would distinguish the types of investors in real estate markets on the basis of the type of legal entities that are available. Legal entities are necessary because they can tell anyone willing to participate in any real estate market the amount of liability that they have and stand to pay.

  • Institutional Investors: In most real estate markets in the world, there are institutional investors. Such big corporations normally raise finance for their real estate investments by issuing long term bonds in the bond markets. Because there is a secondary market for these bonds, they tend to provide enough liquidity for the real estate investors to enter and leave the real estate market without much inconvenience. That said, a major distinct factor with this type of investor is the huge volume of funds they have with which they can make huge bets.

Individual Investors: Individual investors form a huge chunk of the investors in real estate markets. They also tend to have unlimited liability. What this means is that assuming they take out a mortgage on one property and they end up defaulting on it, then their other assets are going to be disposed of in order to take care of the loss. There is no doubt that they can outnumber institutional investors by number. However, they can never match them in terms of volume or scale of investments because they cannot match the billions of dollars that such big corporations invest in real estate markets.

Degree of Control

Any long term investor in any real estate market can also be distinguished on the basis of the degree of control that they can apply over the particular property.

  • Active Investors: Some long term investors like to have a hands-on approach to the management of their real estate properties. You can find them making repairs, searching for tenants, and renting out their properties by themselves. Equally, they may play an active role in the process of managing the property and could be found visiting the property to ensure that the tenants have not carried out any damages. And because they play an active role in the real estate investment process, they are referred to as active investors.

Passive Investors: These are the second group of long term investors in any real estate market. However, unlike the active investors they do not have any intention to manage the daily affairs of such investments. Rather, they either end up hiring professional real estate management firms or they look for employees to do the work for them. They are called passive investors because they do not play any role in managing the property. All they ever get to do is make very few (if any) decisions regarding its management and provide the cash flow needed for financing the property.

Investment Motive

Investment motive is another important feature by which anyone can distinguish the investors in any real estate market. Even though all investors buy real estate, not all of them are doing so for the same reasons. On the basis of investment motive, we can identify three main types of investors in this market, namely: 

  • Long Term Investors: This type of investors are quite common in any real estate market. Unlike those who invest to get quick returns within short periods of time, the long term investors in real estate markets are not in a hurry which is why they do not make short term decisions. They have a firm understanding that real estate markets are slow moving markets, with illiquid kinds of assets that grow steadily in value over a number of years. This explains why many corporations are present in the real estate investment business. They have the financial muscle and the patience to wait for their returns to accrue from such bets. 
  • Speculators: because this group of investors tend to give investors in real estate markets a bad name, there is the tendency not to classify them as types of investors in the market. Perhaps one of the reasons for such notoriety is the fact that when reasers go through their blogs and believe their bogus claims, there is a tendency for anyone to believe that a serious and sophisticated operation like real estate investing is child’s play. These are the people who claim that they have made a million dollars in 3 years without any investments of their own in real estate markets simply by engaging in real estate flipping. The fact is that it is very rare, if not impossible, to achieve such results. An investment in real estate is an old school investment process which pays off after a long term. Most of these speculators are either people who are trying to sell their fake “guaranteed real estate profit strategy” or people who are actually victims of these phoney strategies and are struggling to make profits using these phoney strategies in the real estate markets. It was actually difficult to find these kinds of investors a couple of years ago. However, they have become common recently.
  • End Users: In any of the real estate markets in the world, this is the most common category of investors that you would encounter. Usually, anyone who buys real estate is buying their own home. They plan on living in such houses for several years. This one reason has a way of changing their outlook towards real estate investment. They regard it as a lifestyle choice because they have to live in that house every day. This is why factors like lifestyle amenities, available in their neighbourhood as well as the distance it takes to get to their place of work are very important to them. One can predict the demand for this kind of real estate investor based on where their job location is at present or where it is expected to be in the near future. 

Complications can exist in any real estate market. There are also different types of investors whose motives for coming into the market are different. However, based on the cooperation and competition that exists between them the prices of real estate markets are set.

Myths of Real Estate Investments

Out of all the various types of investment opportunities available today, buyers seem to have a tendency of being emotionally attached to real estate investing. This is perhaps why such people always rationalise their emotional decisions by believing in some of the myths of real estate investments. 

It is necessary for anyone who wants to make good real estate investments to be aware of those myths that surround it. This is especially true if one does not want to get tangled in the emotional aspects of such investments that can prevent you from making decisions that are financially sound. The essence of knowing what such myths are is to be able to recognize them and dismiss them anywhere they are encountered. The aim of this article is to identify some of such myths of real estate investments and expose them.

Myth: Buying is Better Than Renting

All over the world, it is common knowledge that buyers of real estate properties have an emotional connection with the real estate that they purchase. From ancient times, it has always been considered the “adult” thing to do for a person when they buy real estate. As you can imagine, there is no financial backing for such decisions. It is merely rooted in the thinking that when a property is tied to your name then somehow you tend to have some more economical security than someone who does not have one.

However, there is clearly no truth in this myth, especially when you consider the financial aspects. There are some situations when the better thing to do is clearly to buy whereas there are other cases when the best option would be to rent. The best thing to do would depend on looking at each case and the circumstances surrounding it. In a subsequent article, this rent vs. buy decision is going to be discussed further.

Myth: Real Estate Investments Can Be Flipped Easily

This is not one of the most popular myths of real estate investments. However, stories of self made millionaires who made their fortunes as a result of only buying and selling real estate on the basis of monies they borrowed were very rampant before the subprime crisis broke out in the US. 

These bloggers were responsible for propagating the virtues of flipping, which is buying and selling real estate a lot of times over and in a very short amount of time. What the idea entailed was to book the profits that arose from the differences in price and then convert it into physical cash. However, what these so-called real estate gurus omitted (deliberately or ignorantly) was the huge quantity of transaction costs that are involved with any type of transaction involving real estate anywhere in the world. In other words, one is bound to incur more transaction costs when you flip more properties. These transaction costs can amount to as low as 2% or as high as 5% of the cost of any real estate property involved.

Aside from the transaction costs, finding a buyer who is willing to purchase the property and then going into negotiations on a deal can be a time-consuming and tedious process. Therefore, it is well known that flipping properties can result in a huge waste of time as well as resources, which is why most financial advisors say they should be avoided as much as possible.

Myth: Past Performance Predicts Future Performance

Hopeful real estate investors have a common tendency of day-dreaming and in the process they love to extrapolate the trends that were available in the real estate market in the past and visualise a future scenario that is extremely bullish. However, they fail to realise and appreciate the fact that in the last decade or so the world has gone through a fundamental shift. An unprecedented boom in the emerging economies has been created by such business fundamentals like free trade, outsourcing, and cross border investments by multinationals. Apparently, the future does not predict any huge revolutions. And in any case, it is highly unlikely that the performance of a few years gets repeated in the future years, because it is very unlikely that any unexpected economic revolution is going to fundamentally change the present economic paradigm. Any real estate investor that is hoping on a repeat performance is going to be severely shocked!

Myth: Land Prices Always Go Up in Value

This logic is very common in developing economies where an unprecedented boom in the real estate sector has been happening in the past ten years or so. In fact, over the past twenty or so years, the price of land in these economies has increased by up to ten times what it used to be. This is why those living in these countries tend to believe that land prices always increase, that is there is always an increase in the value of real estate. 

Nothing can be further from the truth. There are actually situations in which real estate prices do come down. Take for instance, developed economies like the US and Japan where crashes in real estate prices by as much as 40% have happened. In fact, for the better part of the last decade, the prices of real estate properties have gone down in Japan and have continued to remain there.

This is why it is merely a mythical statement to believe that ‘land prices always appreciate in value.’ Several factors determine what the price of land in any country would be, and one of those factors is the well-being of the economy.

Myth: Land is Scarce

Perhaps this is the most popular myth that real estate salesmen and other participants of real estate investments propagate. They keep on saying that land is scarce. In the world today there is only a limited amount of land. And in addition to the fact that the world’s population is growing daily, one is bound to conclude that the prices of the world’s land is going to continue to increase into perpetuity because there is always going to be land shortages.   The most common myth propagated by real estate salesmen and other proponents of real estate investing is that land is scarce. There is only a limited amount of land in the world.

This is clearly not the case. All you need to do is take a closer look at the numbers. 

First of all, there is a limited amount of land in the world today. This is actually true. However, development in technology has made it possible to make more efficient uses of this limited land. Several scientific studies have been done in this field and they all conclude that there would still be an abundant amount of land for all human beings to survive and thrive even if their populations grew by as high as four folds!

Secondly, other scientific studies have been done which concluded that the world’s population is about to be balanced. What this means is that the era of population growth has reached its zenith and now the number of people will remain the same. 

This is why, it is nothing but the propagation of a myth to say that ‘land is scarce and therefore precious.’