Today’s most prolific investors are savvy, business-minded individuals that have found the path of least resistance to financial freedom. There are several types of investors, not the least of which have demonstrated a propensity for their own success. Let’s take a look at the many types of investors there are today, and which option may be best for you.
Types Of Investors: Which Will You Be?
There are several different types of investors, each of which have taken to their own particular style and industry. That said, there are literally countless ways an individual or business may invest their money. From venture capitalists to private lenders, investors come in all shapes and sizes. While they are all different, each of them have one thing in common: they make investments to increase their financial status.
Let’s take a look at the most common types of investors you are likely to come across:
- Banks: Traditional and institutionalized banks are perhaps the most well-known investors in today’s borrowing-centric economy. Most notably, banks take on a considerable amount of risk to invest in prospective homeowners. With the risk, however, comes the benefit of interest. In lending money to homebuyers, banks stand to make a generous return on their investment, as interest rates are now somewhere in the neighborhood of 4.5% (depending on the duration and terms).
- Angel Investors: High net worth individuals who consider themselves angel investors typically invest in aspiring entrepreneurs. That said, angel investors tend to lend capital to those who have already generated some momentum of their own. They are in just about every industry imaginable, and tend to focus their efforts on entrepreneurs who are no longer in need of seed money, but still aren’t quite ready for venture capital.
- Venture Capitalists: Venture capitalist investors are usually reserved for businesses and entrepreneurs that have already demonstrated a propensity for success and wealth building. These investors usually invest significant amounts of money (upwards of tens-of-millions of dollars), and are usually only interested in working on larger projects.
- Personal Investors: Otherwise known as private money lenders, personal investors can be anyone with a pension for investing and the funds to do so. Private money lenders will usually loan funds to real estate investors in return for interest rates as high as 12% to 15%.
- Real Estate Investors: Real estate investors, as their names suggest, purchase real estate assets with the intent of making a profit, either through short-term or long-term investments. Common exit strategies include wholesaling, buying and holding and rehabbing.
- Stock Market Investors: Stock market investors will buy and sell stocks on the major market indices around the world. In buying stocks, investors are buying into a portion of each company’s stock they purchase. Stocks are typically reserved for long-term investors, but their volatility can work in favor of short-term investors, too. “Over nearly the last century, the stock market’s average return is about 10% annually,” according to NerdWallet.
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Active Vs Passive Investor
Many of the previously mentioned types of investors can be further broken down into two more subcategories: active investors and passive investors. As their names suggest, these sub-categories refer to the amount of work one may be willing to put into an investment to produce results; that, and how much time they are willing to invest.
Active investing is incredibly involved and hands-on. Most active investment plans will usually witness an investor trade their own time for the possibility of making a profit. The end result is directly correlated to the amount of work put into a respective investment. Due, in large part, to the nature of their preferred method of investing, active investors are typically more focused on short-term profits than long-term wealth building. Active investors in the real estate industry, for example, will focus their attention on rehabs and wholesales, as their profits are typically realized a lot faster than their buy-and-hold counterparts.
Passive investors, on the other hand, tend to take a more laissez-faire approach; they prefer to maximize returns by minimizing their efforts. Otherwise referred to as a buy-and-hold strategy, passive investors tend to prefer steady, gradual growth over large, inconsistent influxes of capital. Unlike the traditional active investor, proponents of more passive strategies are not interested in short-term price fluctuations, but instead work under the assumption that the market is more inclined to post positive returns over time. Passive investors involved in the stock market, for example, won’t fret over day-to-day price fluctuations of individual stocks. Instead, they buy and hold, hoping the market will produce gradual returns overtime.
Common Types Of Real Estate Investors
Within the real estate industry, there are several types of investors. The most common types of investors are listed below:
Otherwise known in the investor community as “flippers,” rehabbers purchase properties with the intent of restoring them to their original condition (or better) and selling them for a profit. Profit margins are usually realized on the purchase end, as most rehabbers try to acquire deals under market value. In doing so, most rehabbers prioritize distressed property owners, or those that are highly motivated to sell sooner rather than later. That way, the rehabber has more room to make a profit when it comes time to sell. Rehabs are relatively short-term investments, taking most investors anywhere from a month to six months to complete. As a result, rehabs are perhaps the most active investment strategy in the world of real estate investing. The profits are typically larger than any other exit strategy, and they are realized in a relatively short period of time.
- Acquisition Costs: Your acquisition cost is simply the net cost for the property you are purchasing. This includes paying off any liens on title, title search fees, property taxes, insurance and commissions.
- Repair Costs: Repair costs include every penny spent on restoring the home to its original state. Repair costs can range from purchasing new cabinets and hiring contractors to enlisting the help of a surveyor and pulling permits. Outside of the acquisition costs, repair costs are typically the most expensive. That said, you need to spend money to make money. It is the repair costs that add value to the home and allow you to sell it for more than you bought it for.
- Holding Costs: Holding costs are incurred every single day the property is in your possession. These are the expenses directly related with keeping the property running while you finish your work. These fees include loan repayment fees, insurance, utilities and even property taxes.
- Selling Costs: Every cost up to this point was to facilitate a deal. That said, selling a home isn’t without costs of its own. When it comes time to sell, you will endure another set of closing costs and fees, each of which need to be accounted for.
Buy & Hold Investor
Buy and hold investors are those who prefer building wealth through the acquisition and management of rental properties. Buy and hold investors will purchase properties with the sole purpose of renting them out to a subsequent landlord. The idea is not to receive a large influx of money immediately, but rather to generate steady, granular payments over a long period of time. While rental properties may not infuse your bank account with a significant amount of money up front, they have the ability to earn considerably more capital than a rehab as the years progress. What’s more, buy and hold investors can practice a passive strategy. With the help of a third-party property management company, landlords can essentially collect checks each and every month without adding anymore time to their schedule.
Buy & Hold Investing Costs
- Acquisition Costs: Not unlike buying a property to rehab, buying a rental property to hold onto will coincide with a significant upfront cost. Again, this is the net cost of buying the home, and should include everything from the down payment and processing fees to liens and inspections.
- Initial Repairs & Improvements: In the event you want to improve the property before any tenants move in, you will need to factor in repair costs to your budget. Depending on the amount of work that needs to be done, repair costs can add up to your second largest cost very easily.
- Property Managers: In the event you want to make your buy-and-hold real estate investment truly passive, you’ll need to hire a property manager. Hiring a property manager will cost you a percentage of your rent collected, but their services are well worthwhile.
- Fixed Expenses: Fixed expenses are those that accumulate on a regular, predictable basis. These expenses are not ‘fixed’ in the traditional sense, as the monthly bill can fluctuate, but are cash outflows you can depend on to be paid out repeatedly and at regular intervals. Examples of fixed expenses include water and sewer, electricity and gas, garbage, insurance, property taxes and the property itself.
- Variable Expenses: Variable expenses are those that are less predictable, but are nonetheless important to account for. Vacancies, for example, are a type of variable expense. Buy and hold renters also need to address issues like unexpected repairs or big-ticket improvements.
Wholesalers are investors who intend to act as the middleman, connecting sellers with end-buyers. The two most common ways to close a wholesale deal are selling the contract, otherwise known as the assignment of contract method, and a double closing. Wholesale real estate investors intent on conducting a double closing will purchase a property, only to resell it relatively quickly without rehabbing it. To be clear, while a double closing could take just a few hours, it could also be as long as a few weeks. In fact, double closings aren’t all that different from a traditional buy and sell; they just happen at a much faster pace. The assignment of contract method, on the other hand, will have wholesalers sell their contract to another buyer. That’s an important distinction to make; they aren’t selling the home, but rather the rights to buy the home. You see, when you sell a contract, you are not selling the property itself—you are actually selling the contract you have with the homeowner to buy the home to another buyer.
- Acquisition Costs: The acquisition costs of buying a wholesale deal are slightly different from other exit strategies. Whereas the marketing will typically result in similar costs (advertising to find the home), some wholesale deals may not even require much money at all. In the event you are assigning a contract, you may not even be required to pay any money out of your own pocket, as you are simply selling your rights to buy the home to an end buyer.
- Rehab Costs: Some investors may want to “prehab” the property before they sell it to an end buyer (make a few repairs). If that’s the case, expect a few minor expenses to clean up the property and make it presentable to the end buyer.
Summary: Which Type Of Investing Will You Choose?
There are several types of investors, and there are arguments both for and against each strategy. Therefore, it’s in the best interest of aspiring investors to first understand what it is they want out of investing. Is it a passive wealth-building vehicle? Is it a strategy to earn a quick influx of cash? Your ultimate goal should help determine which type of investor you want to become. Remember, the best and most successful investors have a diversified portfolio and leverage multiple strategies.
- There are several types of investors, not the least of which have demonstrated a propensity for their own success.
- It’s in the best interest of aspiring investors to first understand what it is they want out of investing before they pursue any particular strategy.