Real estate investors have distinct characteristics that determine the type of investments they will pursue. In this article, we will highlight the most common characters so you can determine which style is closest to your own.
So you want to be a real estate investor?
There are many characters in the world of real estate. Owning real estate isn’t something new. As the old adage goes, there is nothing new under the sun. This is true in life and in real estate.
During your real estate investing journey, you will encounter many characters. The names change but the roles they play are as old as the earth.
Once you enter the scene of investment clubs, networking groups, and hopefully actual investing, you’ll meet these players.
Here are the five main characters and investing styles we have come across:
This person is full of hot air. They literally sit on the sidelines and tell you what you should do. They have an opinion about absolutely everything but actually take action on nothing. This article is not for sideline sitters.
Cash Flow King
This type of real estate investor seeks cash flow above all else. This person is not limited by typical attributes of the property values and neighborhood conditions. They will speculate and accept tiger risk factors such as high crime rates, unfavorable economics in the area and anything else that could influence the long-term stability of the property. The cash flow king is solely focused on maximizing their monthly return on investment.
Properties that appeal to this type of investor rarely appreciate unless influenced by gentrification and urban renewal. The property is purchased for its ability to produce monthly income, not its potential to increase in value over time. This means that a duplex worth $40,000 today will be worth the same $40,000 in 20 years. You can argue that inflation eats away at its value over time, so in real dollars it has lost value. Because of the time value of money, $40,000 today is worth more than $40,000 tomorrow.
Nevertheless, the argument for this investment style is monthly income. It is helpful to think of the cash flow king as you would a fast food franchise or laundromat owner. These business people are purchasing a cash producing business, not an appreciating asset. Businesses like these are priced based on their income potential. The intrinsic value of the underlying assets (washing machines and houses) are discounted heavily.
Beware, this investment style is not for the faint of heart. It requires intensive management and extremely diligent tenant screening. The risk with this style of investing scales in tandem with it’s benefits. This type of investor can be so focused on the return on investment that they can overly discount the other factors that can affect an investment’s performance such as neighborhood, crime, resident demographics and lifestyle of residents.
Solid Return Seeker
The Solid Return Seeker is a real estate investor that has a high emphasis on cash flow, but is not willing to sacrifice on the quality of the neighborhood to achieve it. Much like the Cash Flow King, the Solid Returns Seeker is not counting on appreciation as a part of their investment strategy. For them, the monthly cash flow is the name of the game. This type of investor is willing to pay a little bit more for the investment in an effort to reduce the intensity of management required. Often this type of investor does well in forced appreciation situations often found in commercial multifamily projects. This pragmatic investor doesn’t like to take too many risks, opting instead for calculated decisions.
Properties that appeal to this investment style are typically found in low-middle income, working class neighborhoods. The crime level is low and the residents try to make an honest living. The school district may or may not be desirable and the homes are modest. The neighborhoods tend to be about a 50/50 mix of owner occupants and renters. The ROI will be less than the cash flow king receives, but so are the management issues. Because residents of the area have stable working class jobs (think: hairdresser, mechanic) they have a sense of responsibility and take pride in their homes to a greater extent than residents in locations that appeal to Cash Flow Kings.
The primary caution with Solid Returns Seekers is that this investor can be too conservative. Meaning that while his returns are stable and consistent, they could be easily increased by a few minor tweaks. A Solid Return Seeker would benefit from evaluating their portfolio in a seller’s market to upgrade to even nicer properties.
Appreciation Aficionado is on the opposite end of the spectrum from the Cash Flow King. This type of investor does not care about cash flow – but purely buying well-located property with hopes that it will increase in value. The old real estate adage “location, location, location” comes into play here. While under the right conditions this investing strategy can be profitable, it is also the most risky. Real estate investors with this style are willing to take on a short-term cash drain because they think the ultimate pay-off will repay those short-term expenses and still offer a handsome profit.
Properties that appeal to this type of investor are homes in the best neighborhoods but are in need of a renovation. Think about the Class A locations that are the best school districts with stellar amenities. These investors tend to follow large development trends and position themselves in the path of progress. Buying the ugliest house in the best neighborhood is their core strategy. Because the month-by-month economics do not normally work, these tend to be short time frame deals. An investor can only float the monthly loss for so long before it ends up being a losing proposition.
Some examples of this type of investing are house flippers. Beware, this type of investing can be resemble gambling if the investor is not knowledgeable about his/her subject matter. The best way to implement this strategy is to study development trends in a city. Riding waves that have already started works well. Trying to start a new gentrification trend in a depressed neighborhood does not work unless you are able to control a significant amount of property. In general, these investors ride waves but do not create them.
Appreciation – Cash Flow Blend
This one is interesting. The appreciation-cash flow blend investor is the ultimate opportunist. They want to play the field and win on both ends. It’s genius actually, but can be a bit difficult to implement in practice. The person is looking for a blend of appreciation and cash flow, and is willing to speculate while profiting in the short-term. In exchange for this trade-off, this type of investor is usually willing to sacrifice ROI for hopes of a bigger pay-off in the end.
Properties that fit this investing style are profitable in every scenario and actually may be the most prudent investing style. The property is typically purchased for 30-40% of its ARV or After Repair Value. This allows the investor to own a renovated property that is 60-70% of its ARV. All the money in this type of investing strategy is made when the property is purchased. The low purchase price makes the deal profitable in a variety of scenarios. The property can be sold for a 30% gain or rented at market rate. The rent rates in areas that appeal to the blend investor would cover the mortgage and expenses for the property. Often these properties return 1.5% of the purchase price monthly in gross rent or more. The Appreciation Aficionado normally does not clear 1% gross monthly rent, which is why their properties are a monthly cash drain.
The Appreciation-Cash Flow Blend strategy isn’t as risky as the Appreciation Aficionado, but is more so than the Solid Returns Seeker and the Cash Flow King. This can be a profitable strategy when it pays off and the cash flow helps the investor stay afloat until payday.