9 Different Types of Real Estate Investors Explained

In this comprehensive guide, we’ll break down the nine different types of real estate investors — from small-scale professionals, such as home flippers, to institutional investors like private equity firms.

Let’s dive in and review each type of real estate investor in more detail, along with the pros and cons of each investment model.

Who Are Landlords?

Landlords can be individuals or companies that buy properties with the intent to rent them out.

This approach is popular with both commercial and residential properties and can be a profitable way to generate stable profit over a long term.

The profitability, of course, depends on various factors such as location and demand.

To grow their business as quickly as possible, many landlords adopt the BRRRR strategy. It involves:

• Buy: purchase a property that needs repairs below market value from a motivated seller
• Rehab: renovate the property to increase its value
• Rent: find tenants and start collecting rental income
• Refinance: secure a home equity loan based on the property’s increased value. This allows the landlord to recover most or all of the capital used for the initial purchase and repairs
• Repeat: use the recovered capital to repeat the process with another property

A landlord can choose between two models: short-term and long-term rentals.

Short-term rentals (also called vacation rentals) mean renting a property to tenants for short periods of time, usually for less than a month. It’s especially profitable in popular tourist locations.

Because of the need to change tenants more often, this strategy requires more time and money investment in marketing and management than long-term rentals. The complexity increases even more when managing rental property remotely.

At the same time, by using resources listed below, a vacation rental landlord can earn more income than a long-term rental owner while keeping their time investment at a reasonable level:

• vacation rental booking software
• short-term rental management tools
• Airbnb management apps
• Airbnb automation apps
• short-term rental accounting software
• Airbnb accounting apps
• accounting software for landlords
• vacation rental websites

Pros and Cons of Being a Landlord

Pros of Being a Landlord

• Stable income: A major perk of being a landlord is the potential to generate stable income over a long term.

• Passive income potential: With a small portfolio, landlords have to invest significant time and effort into property management (which can be reduced by using property management platforms, rent collection apps, tenant background check services, and other property management software for landlords). But after growing a portfolio enough to hire a property management company or a wealth management firm, the income basically becomes passive. Learn what property managers do for you and how to find a good property management company.

• Tax advantages: Landlords often benefit from several tax write-offs for real estate investors. These include deductions for mortgage interest, property taxes, insurance, upkeep expenses, and depreciation.

• Inflation hedge: Rental income usually keeps pace with inflation. Landlords raise rents to compensate for it.

• Easy to start: Becoming a landlord is easy compared to other real estate investment strategies such as real estate development. Still, it will help to take one of the best real estate investing courses, and specifically courses for landlords, before investing your money in a property. Books for real estate investors also help deepen your knowledge.

Cons of Being a Landlord

• Time investment: Managing rental properties can be time-consuming. Tasks such as property maintenance, tenant acquisition, and dealing with tenant issues can take up a significant amount of time.

• Unexpected costs: Owning a rental property can come with unexpected costs. These can include emergency repairs, legal fees if dealing with problematic tenants, and periods of vacancy where no rental income is coming in.

• Dependance on tenants’ solvency: A landlord’s income is as stable as their tenant’s is. Rental laws aren’t always in favor of landlords when it comes to forcing a renter to pay or pursuing eviction. Using one of the best lease guarantor companies helps reduce this risk.

• Market downturn risk: Like any investment, real estate comes with a risk of a market downturn. Property values can go down. A local or national economic downturn can make locals lose jobs and not be able to rent, etc.

Who Are House Flippers?

If you’re a fan of home makeover TV shows, you’re probably aware of house flipping.

Flippers are experts in finding distressed properties about to be foreclosed by a lender. They also find houses with tax liens or homes sold by other types of motivated sellers.

Flippers purchase them at a price that is lower than market value. Then they refurbish the property and sell it at a profit.

Success in this career requires a deep understanding of local real estate market data and having good property acquisition strategies.

Thus, it can also be regarded as a good side hustle for realtors who already have deep knowledge of the areas they operate in and are skillful in assessing home values, property condition, and negotiation.

When finding properties to fix and flip, investors look for houses for sale in poor condition that require significant renovations. This helps rehabbers increase property value before reselling.

Another factor is the seller’s motivation to sell fast because of financial or personal troubles. Selling fast for them means buying cheap for you. You don’t want them to be willing to prepare their house to sell for a top dollar.

There are various ways to find motivated sellers and keep your real estate investor CRM full. There are also various tactics to negotiate with them properly.

Here are a few resources to help you learn how:

• probate marketing letters
• sample letter to distressed homeowners
• sample letter to motivated sellers
• questions to ask motivated sellers
• motivated seller phone script, and more

Also, for identifying investment opportunities, flippers often use professional tools for real estate investors such as real estate investor lead generation systems and foreclosure websites.

An alternative is buying a property through local real estate wholesalers. Here is how to find wholesale properties.

An important part of this strategy is financing. It can’t be done via traditional real estate lenders and mortgage brokers because traditional loans aren’t designed for high-risk projects.

Therefore, home flippers often use hard money lenders who offer loans specifically for this type of investment.

Here are tips on how to qualify for a hard money loan, how to finance a house flip, and an explanation of hard money rates.

Now, let’s look at the pros and cons of house flipping.

Pros and Cons of Being a House Flipper

Pros of Being a House Flipper

• Quick returns: Unlike being a landlord, house flipping allows for relatively quick returns on investment. You can buy a property, renovate, and sell it within two or three months. Plus, professional flippers can manage multiple projects at the same time.

• Value creation: House flippers have the opportunity to add value through the renovations they make. This process can be creative and emotionally rewarding. For many, the artistic passion for reviving run down houses is the main reason for starting a house flipping business.

• Flexibility: Flippers have much control over their projects, from the renovations made to the selling price and date. This allows for more flexibility in decision-making and potentially higher profits.

Cons of Being a House Flipper

• Complex cost management: Flippers need to be skillful in managing their costs wisely. A miscalculation may make a whole project unprofitable. Some of the costs in a flipping project are high. They include: house purchase and resale prices, renovation, wholesaler’s assignment free, hard money loans (they are way more expensive than a traditional mortgage), realtor commissions, and more.

• Unforeseen issues: Renovating a property can often uncover hidden issues not accounted for in the initial budget. These unexpected costs can significantly eat into profits. A thorough investment property due diligence must be conducted before purchasing a fixer-upper. To minimize this risk, flippers use investment property analysis tools and other fix and flip software.

• Dependence on market fluctuations: The success of house flipping is closely tied to the real estate market’s performance. A sudden downturn in the market can lead to financial losses instead of anticipated profits.

While presenting considerable risks, all these issues are entirely manageable. Take one of the best house flipping courses to get the necessary knowledge.

Who Are Property Wholesalers?

Property wholesalers differ from house flippers in that they don’t renovate the properties they deal with. Technically, they don’t even buy nor sell them.

A wholesaler’s role is more of a middleman, linking sellers with real estate investors.

Via driving for dollars apps, real estate wholesaler software, or by using strategies to generate motivated seller leads or find motivated sellers for free, they locate a motivated seller and sign a property purchase contract with them, as if the wholesaler was an interested buyer.

Then they find a real estate investor interested in purchasing the property at a slightly higher price than the one the wholesaler has negotiated with the seller.

The difference between these prices is the wholesaler’s profit — the assignment fee (usually a portion of the sale price, about 2-5%).

At closing, the investor purchases the house at the rate indicated in the contract and pays the assignment fee to the wholesaler.

Although this approach might seem less risky than house flipping, it’s important to weigh its advantages and disadvantages.

Like any real estate investment strategy, wholesaling also requires deep understanding and some education.

Listen to real estate wholesaling podcasts, read books on wholesaling real estate, and take one of the best real estate wholesaling courses to get ready to start your career.

Pros and Cons of Being a Property Wholesaler

Pros of Being a Property Wholesaler

• No need for financing: Since property wholesalers don’t actually purchase a property, there’s no need for large amounts of capital or financing. It only takes a refundable earnest money deposit ($1,000-$2,000) to complete a deal. This makes property wholesaling more accessible to individuals who may not have significant funds available. Notably, newbies in real estate investing often start with wholesaling. Learn more about how to wholesale homes with no money.

• Shorter time commitment: Compared to house flipping and rentals, a property wholesaling project requires less time commitment as there are no renovations or improvements involved. This makes it a more flexible option for those with other full-time commitments.

• Building connections: In the role of a property wholesaler, you get the chance to meet and network with a range of investors. This helps in building relationships that might pave the way for more deals in the future.

Cons of Being a Property Wholesaler

• Finding buyers: The success of wholesaling largely depends on building a cash buyers list. This is challenging when only starting a wholesaling business.

• Finding motivated sellers: To find properties to wholesale, wholesalers need to be professionals in wholesale real estate lead generation. This profession isn’t for people who aren’t good at marketing. However, things are much easier with the Real Estate Bees lead marketplace that allows you to simply purchase leads on various motivated seller types at a low enough rate to keep your real estate wholesaling CRM full of prospects and marketing expenses reasonable.

• Lack of asset worth growth: Property wholesalers miss out on the benefits of property value appreciation since their strategy doesn’t involve holding onto the properties, unlike other real estate investment strategies.

• Lower profits: While property wholesaling may require less capital and time commitment, the profit margins are typically lower compared to other real estate investment strategies such as flipping.

Who Are Land Bankers?

Rather than being interested in buildings, land bankers are a type of real estate investors who focus on plots of land.

Land bankers will usually aim to purchase land in areas that are projected to grow and develop over time. They find cheap land at land auction websites, foreclosure auction sites, and other sources of good deals.

Land bankers make their profits by selling the land they initially invested in, usually after several years have passed.

Once land prices increase, which can be due to factors such as population growth and infrastructure development, land bankers sell the land for a higher price and make a profit.

While this strategy sounds easy, there are certain details you should understand before diving in and spending your money. The best land investing courses will help you in that.

Pros and Cons of Being a Land Banker

Pros of Being a Land Banker

• Long-term investment: Land banking is a long-term investment strategy that can provide a hedge against inflation.

• Low maintenance: Unlike buildings, vacant land requires little to no maintenance, reducing ongoing costs.

• Multiple use possibilities: Land bankers can also explore different use options for the land they own, such as leasing it for farming or recreational purposes.

Cons of Being a Land Banker

• Slow to liquidate: Land is not a liquid asset, and selling it can often take longer than selling developed properties.

• Ongoing expenses: Even with limited maintenance requirements, those investing in land banking still face ongoing costs like property taxes and insurance.

• Uncertainty in area development: There’s always a chance that the anticipated development or growth in the area might not happen as expected, impacting the potential profitability of the investment.

Who Are Commercial Real Estate Investors?

Investors in commercial real estate operate in a similar way to those in the residential sector, but their attention is on properties for business use.

Investing in commercial properties can be more lucrative than residential ones due to the possibility of higher rent and longer leases.

Unlike residential real estate, which tends to be uniform in function and design, commercial properties are much more diverse in terms of scale, location, and purpose.

The common types of commercial properties include:

• Office buildings: Buildings or complexes specifically designed for businesses to operate in
• Retail spaces: Properties used for retail businesses, such as shopping centers and restaurants
• Industrial facilities: Manufacturing facilities, warehouses, distribution centers, and more
• Multifamily properties: Apartment buildings, senior living facilities, RV parks, and others
• Hotel and hospitality properties: Properties used for accommodation purposes, such as hotels, motels, and resorts

Pros and Cons of Being a Commercial Real Estate Investor

Pros of Being a Commercial Real Estate Investor

• Steady income stream: Commercial properties usually come with longer lease agreements compared to residential properties, offering investors more consistent and reliable income.

• Tax advantages: Commercial real estate investing is a long-term strategy that lets investors enjoy the benefits of long-term capital gain rates and provides other related tax benefits.

• Higher income: Commercial real estate generally offers a higher income potential than investing in residential properties.

Cons of Being a Commercial Real Estate Investor

• High entry costs: Commercial properties typically have a higher purchase price than residential real estate, requiring a significant initial investment.

• Market volatility: Commercial real estate is generally affected by economic downturns quicker than residential properties, which may lead to vacant units and reduced rental income.

• Longer holding periods: Commercial properties often have longer lease agreements, which can make them less liquid than residential properties.

• Complexity: Marketing a commercial property and selling or buying one is a more intricate, bureaucratic, expensive, and time-consuming process than buying or selling a house. Appraising commercial property is a more risky process if you aren’t experienced enough. Fortunately, commercial real estate investment analysis software makes it easier. The same goes for commercial property management tools and real estate investment accounting software.

• Higher experience and knowledge requirements: As the commercial real estate industry is more complex, getting into it requires higher expertise and education than getting into residential real estate. One way to achieve this is taking commercial real estate investing courses and multifamily investing courses taught by experienced and recognized commercial real estate coaches. It’s also helpful to read books on commercial real estate investing.

Who Are Real Estate Developers?

Real estate developers, either individuals or firms, acquire land, make improvements on it, and resell it.

Developers orchestrate the necessary resources, capital, and strategies to convert undeveloped land into new buildings or refurbish existing structures.

Their projects range from residential units and apartment complexes to industrial buildings.

For example, they buy a large plot of residential land, divide it into plots, and resell them separately. Or, they can buy commercial land and build a large shopping center on it.

Developers earn by either selling or leasing the properties they’ve developed.

Pros and Cons of Being a Real Estate Developer

Pros of Being a Real Estate Developer

• Creativity and innovation: Developers often have the opportunity to shape landscapes and create innovative spaces that meet market demands.

• Local economy boost: Real estate development can act as a catalyst for local economic growth, generating employment opportunities and enhancing infrastructure.

• High profit potential: For those who succeed in real estate development, there is a potential for substantial earnings, making it an attractive career choice for many.

Cons of Being a Real Estate Developer

• Education requirements: To become a developer, you need vast experience in real estate and knowledge of construction. Unlike real estate jobs without license requirement such as a house flipper, being a developer obliges you to spend years of higher education to get your license and knowledge of all industry aspects.

• High initial investment: Real estate development demands a considerable amount of capital at the outset, including expenses for acquiring land, planning, and construction processes. Large projects require securing financing from multiple sources. Nowadays real estate crowdfunding platforms and real estate fundraising software significantly help in attracting passive investors in development projects.

• Market sensitivity: The outcome of a real estate development project is closely tied to the real estate market’s conditions. A market slump can lead to decreased demand, falling prices, and abandonment of a project.

• Regulatory challenges: Developers must navigate complex zoning laws and building codes, which can add to costs and timelines.

Who Are Mortgage Note Investors?

Aside from developers, another important participant in the real estate sector is mortgage note investors.

These individuals or companies purchase mortgage notes from lenders such as banks and private sellers.

Mortgage notes are a form of promissory note that details the specifics of a loan agreement for financing a property purchase.

There are primarily two categories of mortgage notes:

1. Performing: In this scenario, the borrower consistently makes payments.
2. Non-performing: Here, the borrower has failed to keep up with payments, leading the lender to consider selling the note. The new owner can either foreclose on the property and sell it, or renegotiate the loan terms with the borrower to help them repay the remaining balance.

When investors buy a mortgage note, they step into the shoes of the original lender, receiving the borrower’s payments and accruing interest from the loan.

This investment strategy provides a way to diversify within the real estate sector without owning physical properties directly.

Pros and Cons of Being a Mortgage Note Investor

Pros of Being a Mortgage Note Investor

• Cash flow: Performing notes can provide a steady stream of income from the borrower’s monthly payments.

• Secured by property: In mortgage note investments, the financed property acts as collateral, offering a measure of protection for the investor.

• Passive income potential: Just like a landlord can outsource their rental property portfolio to a property management company, a note investor can outsource their note portfolio to a note servicing company that will do all management for the investor.

Cons of Being a Mortgage Note Investor

• Illiquidity: Selling a mortgage note can take time, making it less liquid than some other types of investments.

• Legal complexity: Purchasing and managing mortgage notes involves legal considerations and potential complications, making it important for investors to have knowledge or seek professional advice.

Who Are Passive Real Estate Investors?

Passive real estate investors allocate funds to property investments without directly overseeing the properties.

They typically invest through private equity firms — real estate investment trusts (REITs) and real estate investment funds.

Real estate investment trusts specialize in owning, managing, and financing properties that generate income.

They offer individuals the opportunity to invest in commercial and residential real estate by purchasing shares that can be sold.

In contrast, real estate investment funds invest in other private equity firms, including REITs. This provides a higher level of diversification, but you can’t trade shares.

Instead, you invest for a certain period of time and then recuperate your investment with income added to it.

Pros and Cons of Being a Passive Real Estate Investor

Pros of Being a Passive Real Estate Investor

• No time investment: All property management is done for you by professionals.

• Ease of entry: Investing in REITs is feasible with a modest amount of starting capital, which makes this a more accessible real estate investment for more people.

• Consistent earnings: REITs invest in properties, such as apartment complexes or office spaces, that yield steady rental income.

Cons of Being a Passive Real Estate Investor

• Low income potential: The amount of passive income is far inferior to the one an active investor could earn. You need a large initial investment to get significant income.

• Less control: Passive investors have little to no say in selecting properties purchased and sold by a private equity firm.

• Fees: REITs and real estate investment funds often come with management fees that eat into returns.

What Are Private Equity Firms?

Private equity firms deal with capital and shares outside public stock exchanges. In real estate, they pool resources from investors to buy or build, manage, and eventually sell real estate.

These firms typically generate revenue through two types of fees — management fees and performance fees.

Management fees are often a set percentage of the total assets being managed and are charged irrespective of the investment’s performance.

Performance fees, also known as carried interest, are a share of the profits from the firm’s investments, payable only when these investments are profitable.

Pros and Cons of Working as a Private Equity Firm

Pros of Working as a Private Equity Firm

• Potential for large profits: As a private equity firm, it’s easier to find financing for large projects that yield high returns.

• Decision-making power: Private equity firms actively manage their investments, which gives them control over property acquisitions and management strategies.

• Spread of risk: These firms typically invest in a diverse array of properties, which helps in spreading and mitigating risks across various real estate types.

Cons of Working as a Private Equity Firm

• High responsibility: As private equity firms get financing from multiple passive investors entrusting them with their money, they find themselves under high pressure.

• High experience, expertise, and reputation requirements: A private equity firm must consist of experienced, educated, and reputable professionals to be able to get trust from passive investors.

• Regulatory and legal challenges: Private equity firms are subject to strict securities laws and regulations, making compliance a crucial aspect of their operations. Non-compliance can result in significant penalties and reputational damage.

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About the author

Michael Alladawi, CEO & Founder of Revive Real Estate, is a Southern California real estate veteran with a proven track record as a builder, investor, and respected home flipper. Michael created Revive Real Estate to share his industry knowledge and help homeowners maximize their profits when selling their homes. Michael’s passion for his work is as big as his desire to create lasting partnerships. For Michael, it all comes down to how much value one offers, both in business and life relationships.

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