Real Estate markets are highly complicated. The price movements in this market are usually slow and difficult to come by. A significant factor behind this is the type of investors who put their money in the real estate markets.

Therefore, understanding the real estate markets has to be rooted in the underlying participants’ experiences and motives. 

Investment Motive

The most important feature based on which we can distinguish real estate investors is their investment motive. All investors buy real estate. However, not all of them do for the same reasons. Let’s have a look at the three major categories of investors in the market.

Speculators

These kinds of investors should not be called “investors” in the first place. They give a bad name to real estate investing. This is because if you read their blogs and believe their claims, they will make a sophisticated operation like real estate investing sound like a no-brainer.

These people claim to have made a million dollars in 4 years without any investment simply by flipping real estate. The truth is that such results are rarely obtained. Real estate investment is an old-school game that only pays off in the long run.

Most of these speculators are either people trying to make a quick buck by selling their phony “surefire real estate profit strategy” or people who have fallen prey to these con men and are trying these phoney strategies in the market! This category of investors was hard to find just a few years ago. However, of late, they have become a lot more common.

End Users

This is the most common category of investors that you will find in the real estate market. Usually, people who buy real estate buy their own homes. They have the intention of staying in the house for decades. This changes their outlook toward the investment.

These people do not look at real estate as purely financial decisions. They look at it as a lifestyle choice. This is because they have to stay in that house day in and day out. Hence, nearby lifestyle amenities and the distance it takes to commute to work become extremely important.

The demand for these kinds of investors can be predicted based on where their job locations are or are expected to be short.

Long-Term Investors

Lastly, we have long-term real estate investors. Like the “flippers,” these people, too, invest in the real estate market to make money. However, their decisions are not short-term. They understand that real estate is a slow-moving, illiquid asset that steadily grows in value over several years. Many corporations are also present in the real estate investment business.

Degree of Control

The long-term investor category can be further subdivided into two more categories. These categories are distinguished based on their degree of control over the property.

Active Investors

Some long-term investors prefer to manage the property themselves. They are the ones who conduct the repairs, find the tenants and rent out their properties. Also, they may be actively involved in the property management process and visit the property several times to ensure that the tenants have done no damage. Since they actively participate in the investing process, they are called active investors.

Passive Investors

Other long-term investors have ownership of the property. However, they do not take an interest in managing their day-to-day affairs. To do so, they hire employees or professional real estate management firms. Since they play no role in maintaining the property, they are called passive investors. They provide the cash flow for financing the property and make very few (if any) decisions regarding its management.

Legal Entity

Lastly, the type of real estate investors can also be distinguished based on the type of legal entity they are. A legal entity is important because it determines the amount of liability that a person has.

Individual Investors

Most of the investors in the real estate market are individual investors. Individual investors have an unlimited liability. If they undertake a mortgage on one house and default on it, their other assets can be liquidated to compensate for the loss.

Institutional Investors

There are many institutional investors in the real estate market as well. These institutions usually finance themselves by issuing long-term bonds in the bond markets. Since these bonds have a secondary market, they are very liquid and allow investors to enter and exit the real estate market without any major hassles.

While, in terms of number, individual real estate investors may outnumber institutional investors, in terms of scale or volume, they are no match for the big corporations who invest billions of dollars in real estate investments.