Real estate markets are known to be complex, where price movements can be slow and challenging to predict. This is primarily due to the different types of investors who put their money in the market, and understanding their motives is crucial to understanding the real estate market itself. In this article, we will discuss the various factors that make up these underlying participants.
Investment Motive
Real estate investors can be distinguished based on their investment motive. There are three primary categories of investors in the market:
- Speculators: These investors often give a bad name to real estate investing. They usually make unrealistic claims of making a quick fortune through flipping real estate without any investment of their own. In reality, real estate investment requires patience and a long-term approach. Most of these speculators are either trying to scam people with phony “surefire profit strategies” or have been scammed themselves.
- End Users: The most common category of real estate investors, end users, are individuals who purchase real estate to use as their primary residence. They intend to live in the property for an extended period and do not solely view real estate as a financial investment. Factors such as lifestyle amenities and commuting distance become important for these investors.
- Long-term Investors: This category of investors is also looking to make money through real estate investment, but with a long-term outlook. They understand that real estate is a slow-moving, illiquid asset that appreciates in value over a considerable period. Many corporations are also present in this category of investors.
Degree of Control
Long-term real estate investors can be subdivided into two categories based on the degree of control they exert over the property.
- Active Investors: These investors manage the property themselves, conducting repairs, finding tenants, and handling day-to-day affairs.
- Passive Investors: These investors own the property but do not manage its daily operations. They may hire employees or professional real estate management firms to manage the property for them.
Legal Entity
The type of legal entity can also determine the type of real estate investor.
- Individual Investors: Most real estate investors are individuals with an unlimited liability. If they default on a mortgage, their other assets can be liquidated to make up for the loss.
- Institutional Investors: These investors are institutions that finance themselves by issuing long-term bonds in the bond market. They have the ability to enter and exit the market without any major hurdles.
In conclusion, the real estate market is complex, and it is crucial to understand the various investor groups with different motives. Real estate prices are set based on the competition and co-operation between them.
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