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:
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 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.