Real Estate markets are extremely complicated. The price movements in this market are usually slow and difficult to come by. A major factor behind this is the type of investors who put their money in the real estate markets. Therefore, an understanding of the real estate markets has to be rooted in an understanding of the underlying participants as well as their motives. We will have a look at these factors in this article:
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 are the kinds of investors that 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 are the people that claim to have made a million dollars in 4 years without any investment of their own simply by flipping real estate. The truth is that such results are almost never obtained. Real estate investment is an old school investment game which 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 actually trying these phony 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 are buying their own homes. They have the intention of staying in the house for decades. This changes their outlook towards the investment. These people do not look at real estate as a purely financial decision. They look at it as a lifestyle choice. This is because they have to stay in that house day in and day out. Hence, factors such as lifestyle amenities available nearby as well as 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 currently are or are expected to be in the near future.
- Long Term Investors: Lastly, we have the 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 kind of asset that steadily grows in value over a number of 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 the degree of control they exert on the property in question.
- 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 may visit the property several times to ensure that no damage has been carried out by the tenants. Since they actively participate in the investing process, they are called active investors.
- Passive Investors: There are other long term investors which have the ownership of the property. However, they do not take interest in managing its day to day affairs. To do so, they either hire employees or they end up hiring professional real estate management firms. Since they play no role in maintaining the property, they are called passive investors. They just provide the cash flow for financing the property and make very few (if any) decisions regarding its management.
Lastly, the type of real estate investors can also be distinguished based on the type of legal entity they are. 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. This means that if they undertake a mortgage on one house and default on it, their other assets can be liquidated to make good 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 provide the investors with the ability to enter and exit the real estate market without any major hassles. While, in terms of number, individual real estate investors may outnumber the 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.
Real estate market, like the other markets, is therefore complicated. It has various investor groups, who have different motives and based on the competition and co-operation between them, the real estate prices are set.