Three Types of Real Estate Investors
There are three types of real estate investors. There’s the Tourist, the Committed (mostly), and the Genius.
- The Tourist
The Tourist is somebody who converts their owner-occupied property into a rental and retains it, or buys a small, inexpensive studio or a one-bedroom condo to take a run at real estate investing. During the first years they fail to vet tenants properly, perhaps get caught in a special assessment through the strata, make the mistake of putting themselves on the strata council… but learn the valuable life lessons that come from being part of a strata council (it’s always worth doing at least once in your life).
But, by the end of that five-year term or before, they decide that this is just not for them. This decision is 100% based on emotion. Those emotions were triggered by their failing, in most cases, to take proper steps to protect themselves from bad tenants, from purchasing property bordering on a special assessment, etc.
They maybe get a little bit of a lift in the market or maybe a bit of paydown in the mortgage; most likely the Realtor fees on the way out, coupled with the property transfer tax they paid on the way in, cancel out any gains. If they’re lucky they walk away breaking even, having learned some life lessons and that’s it.
- The Committed (mostly)
The second type of investor, the Committed (mostly), makes it through a second five-year term, or the better part thereof. If you hold a property for seven, eight, nine years, it’s highly unlikely that the property will not be worth somewhat more than what you paid. Typically, this is more than enough to cover the Realtor fees on the way out and the property transfer tax paid going in. You’re almost certain after this time to have some kind of capital gain on that property. And, you’ll have had that much more time for mortgage paydown, which in today’s market with today’s interest rates, the rate of paydown (more than 50% of each monthly payment is principal paydown; that’s more than 50 cents per dollar).
So, with that much more of a reduction in the mortgage balance and that much more of an increase in the value, the Committed (mostly) come away feeling pretty smart. They’ve made a good profit on their experience. They maybe got lucky and dodged a few bullets as far as tenants or special assessments on the property, or significant maintenance or upkeep if it’s a detached house. It’s often rising markets which make them feel it’s the right time to sell. Again, they talk themselves into selling for any number of reasons, and this is usually 99.9% emotion that drives the sale. There are other factors in their life that have triggered that sale. It’s very rarely a decision made purely in a vacuum of logic. Anybody who has sold a property – an investment property in particular that they’ve owned previously – is probably nodding their heads as they read these words.
- The Genius
The third and final type of investor is the Genius. The Genius isn’t really any smarter than the other two. By default, they’re a Genius simply because they hung on for that third final term or beyond.
Percentage-wise, the Tourist investor is probably more than 50% of people who purchase or hold an investment property, more than 25% fall into the Committed (mostly), and the Genius is a category of probably less than 1 in 10. But the Genius’s mortgages come down so much, their net rents have risen so much, and their property values have risen so much, they truly feel like a genius.