Different real estate investor types are a lot like the different player roles on a sports team. Take soccer for example.
Now, if you watched the USA women’s soccer team defeat Sweden in the Women’s World Cup 2019, then you watched different roles at work. Some of the women were forwards, focused on scoring goals. Others, like the defenders, protected their own goal from the opposing team.
Players arrange themselves into different types based on preference, need, talent, and each team member’s goals. This is like the real estate ecosystem, where investors are drawn to certain investor roles based on market opportunities and personal preferences.
Where real estate investing differs from soccer is the level of daily involvement of a particular investment. To understand investing, we need to divide investment opportunities into two categories: active and passive.
Hands-on or Hands-off: Active vs. Passive Real Estate Investor?
I like to think of active and passive investing as hands-on and hands-off investing.
Active investing requires a high level of effort. You need to spend time managing your investment daily, which means you have to be involved in the investment continually. This is not a set-and-forget activity. The active investor has to constantly manage the investment, often because there is a lot of daily work or the investment isn’t held for along.
Passive investing, on the other hand, generally requires a low level of effort. This doesn’t mean the investment is easier than an active investment, just that the daily effort required is generally less. Passive investments are usually hands-off after the upfront investment of time and energy.
Buying a home can have elements of either active or passive investing. As an active investor, I want to buy a home under cost, fix it up, and sell as soon as possible for a profit. This will be hands-on from the time the home is bought until it is sold. As a passive investor, I want to avoid homes that need fixing up and instead focus on buying a home that is expected to appreciate over time. I would spend my time identifying areas of Texas that might experience growth in the coming years.
3 Core Investor Groups
In real estate investing, there are three main types of investors. While many investors choose to specialize in one or the other, these three investors can overlap, dabbling in one while focusing on the other.
- Flippers / Rehabbers
- Buy and Hold
As a real estate pro, I’ve worked deals in all three of these. Each type has a specific set of goals and a specific mindset, which I will talk about below. If you are just starting and want to learn more about how to choose which type to specialize in, contact me for coaching and mentoring. I also advise beginners to get involved with their local real estate investment association. Now onto the types.
- Length: Very short (A few hours to a few weeks)
- Level of involvement: Active
- Growth potential: Low
- Costs: Acquisition and rehab
Many novice investors aren’t aware of wholesaling. In short, a wholesaler is a middleman between sellers and buyers. Wholesalers won’t hold a property long, often purchasing the property or just the contract from the original owner and then selling quickly to the end-buyer.
With wholesaling, there is often little risk to money and credit. It is an active investor type that is transaction-based, requiring hands-on work during a sale.
- Length: Generally short-term (1 to 6 months)
- Level of involvement: Active
- Growth potential: Moderate
- Costs: Acquisition, rehab, holding, selling
Flipper has become a popular real estate investor type due to the popularity of TV shows like HGTV’s Flip or Flop. These days it seems every other investor has dreams of becoming a home flipper. For those who thrive flipping homes, it can be exciting and profitable.
This is an active investment type that can be very risky, both in terms of money and potential credit impact. Flipping is a transaction-based investment strategy that requires great care in selecting the right property. The ideal property is one that can be bought at a low price, repaired quickly, and turned around for a profit. Flipping can be unforgiving and is the riskiest of the three real estate investor types.
Buy and Hold
- Length: Generally long-term (6 months or more)
- Level of involvement: Passive
- Growth potential: High
- Costs: Acquisition, initial rehab, property manager, fixed and variable expenses
Buy and hold real estate investors purchase properties to build wealth over the long-term. These can be commercial or non-commercial properties, which are often rented to generate profits.
This investor type operates a passive investment strategy with moderate risk to both money and credit, depending on the acquisition strategy. Investors often complete an initial investment, complete repairs, and outsource management to a property management company.
Learn from Your Local Pros
Whichever investor type you focus on, you’ll need help along the way. Here at REIC we help investors of all types sharpen their skills. Our education and coaching will teach you:
- How-to strategies
- How and where to look for funding
- How to select the most experienced and effective contractors
- How to find, buy or sell properties at the right price
- How to build a real estate investing business, including best practices
Contact us to get started!