The 5 types of real estate investors

Today’s post comes to us via the PhREI network, and describes 5 different types of real estate investors. Which kind of investor are you?

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“Know thyself,” Socrates said. When it comes to investing, this is a foundational concept. I invite you to consider this before you start your own investing journey, as it’ll help to guide you to the right investments.

Below, Carpe Diem MD outlines the five types of real estate investors. If I had to categorize myself, I’d most likely fall into the “Financial independence now investor” bucket. Recognizing this helps me understand and justify the time I’ve spent investing in real estate over the past couple of years.

Which type of investor are you?

This post first appeared on Carpe Diem MD.

This is an important question to consider when getting into real estate. Are you an Analytical Investor, Cash is King Investor, Passive Investor, Lifestyle Investor, Financial Independence Now Investor?

As an Investor you may have one or all of these investing traits.  It is important to understand your investment style to improve your real estate success.  You will be far more successful in Real estate when your Investment style matches your investments.  For example, if you are a Passive Investor then self-managing apartments complexes may not work for you. 

It is also crucial to communicate with your partner to determine their investor type.  Your Investment styles do not need to align but knowing your partners’s investing type will help you communicate and understand one another’s investing position. Different investing styles may even complement each other. An Analytical Investor will balance a Lifestyle investor and vice versa.

The Analytical Investor

The Analytical Investor loves Excel and customized spreadsheets.  They can run numbers on deals quickly and make calculated decisions.  This type of investor is the most pure investor.  The numbers don’t lie and that is how the decision for an investment is made.  They evaluate COC, ROI, Tax Savings, ARV etc.

A purely Analytical Investor will have the numbers locked in but might miss the subtle value in a property.  Maybe the numbers will be low for the first year but improved in the second. The location may be worth the upfront investment etc.  They will not calculate lifestyle experiences in their investment.

The Cash is King Investor

This investor is focused on Cash flow and that is King.  Property appreciation is an afterthought.  If the Cash on Cash return is not above 10%, then they are out.  Cash flow is this investors screening tool.

The downside to this approach is the risk of missing hidden value and property appreciation.  For instance, a Cash is King investor might pass on a beautiful $400,000 property, with an unfinished basement, in a developing neighborhood because the COC is 7%. 

However, another investor might notice the neighborhood is improving.  This investor notices the opportunity, buys the property, adds one bath and bedroom in the basement and in two years increases the property value by 25%.   Resulting in an $100,000 increase in property value. 

Passive Investor

A Passive investor does not want to be bothered.  They approach Real Estate investing like the stock market.  They invest in real estate funds and expect a predictable rate of return. The level of time commitment and work is much less but the reward is also lower than active investing.  This type of investor would not be happy actively managing properties, analyzing deals, researching markets.  They do not enjoy spending their time on those exercises and that is ok.

Lifestyle Investor

A Lifestyle Investor is often a Short Term Rental Investor.  This investor focuses on investments that they can use and enjoy.  This is not a get rich quick investor.  They consider investment in life experiences and family time to be equal to pure wealth accumulation.

The lifestyle Investor will often be at odds with the Analytical Investor and FIN Investor.   However, Cash is King can align well with Short Term Rental/ Lifestyle Investing.

The return on investment to a Lifestyle Investor cannot be calculated on an Excel spreadsheet.   The Lifestyle Investor and Analytical Investor can coexist between partners and even the same investor. 

Finding a balance between these two investment styles is key.  The FIN investor is at complete odds with a Lifestyle investor because a Lifestyle Investor may not be willing to sacrifice years of life experiences to achieve Financial Independence Now.

Financial Independence Now Investor (FIN Investor)

You are ready to achieve Financial Independence Now.  You’re a combination of the Analytical Investor and Cash is King Investor.  Reaching FI is the goal and you are willing to sacrifice Lifestyle for a few years to reach your goal.  You are willing to wait until financial independence for the finer things, cars, vacations, etc.   A FIN Investor will experience difficulty understanding a Lifestyle Investor.

Conclusion

Lauren is a Lifestyle Investor and convinced me to purchase our first Short Term Rental, which was one of the best decisions we ever made.  We have shared years of great family memories at this property and grew our wealth significantly at the same time. 

I am more of an Analytical and Cash is King investor with Lifestyle mixed in.  After a few years of owning a Short Term Rental, I convinced Lauren to take a real estate course with me and buy our first Long-Distance Triplex this year.   

We are now investing in both Short term and Long term rental properties. Our investment styles balance each other and we have agreed to expand our rental portfolio in both categories going into 2021. 

We will expand our Short Term Rental portfolio because this form of investing brings us joy and matches with our Lifestyle Investment style.   Short Term Rentals allow us to provide a service for guests and enjoy properties with our family and friends.

To fulfill our Analytical Investor/ Cash is King Investor goals we will continue to expand our LTR portfolio, simply by the numbers.  LTR investing is very different than STR investing but Lauren and I enjoy this form of investing as well.

The key to Real Estate investing is to match your Investments to your Investment style and enjoy the process…

Thanks Ian!

As a financial independence now investor, I’ve mainly gravitated towards the BRRRR strategy. It’s worked, and I’ve generated a good amount of cash flow in my two years of real estate investing. I’ve become increasingly intrigued with short term rental, however, so I really love reading Ian Cook’s posts. I might be transitioning to a partial lifestyle investor! Which type of investor will win? We’ll find out together.

— TDD

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