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Classifying Investors In Terms Of Time Frames
History has shown that the longer you hold onto your property, you are going to profit from it either from a sale or from increased equity. But if we are to match up a professional long term player against a professional short term player with similar resources, the short term player will trump. So what exactly is a short term player? Let’s explore investors in terms of time frames.
Long term investors. They are the stereotyped group that goes about their jobs knowing that they have a route to freedom in place. It will not be surprising to find that they fully intent not to sell their properties for eternity. They usually have a minimum holding period of 5 years and the focus of profitability or wealth accumulation comes from appreciation. These are prudent investors and will partially or fully redeem the debt on the mortgage whenever a windfall is received. Leverage is seen as risky. If the property is finally sold, they often decide to do so in a time where there is minimum closing costs so as to fully reap the rewards of their patience. Many will have fully paid up their property by that time as well.
Medium-term investors. Investors that fall into this category usually have a time frame of between 2 to 5 years. They usually decide on this time frame to cash in on appreciation while using rental income to cover mortgage payments in the short term. Proceeds will then be used to buy a bigger investment to start over again or buy a smaller house with residue net profit. Reducing the mortgage debt is a lesser priority and the key focus is cash flow to hang onto the house while it appreciates in value. They have a very different view on leverage compared to long term investors. They are aware of the risks of high leverage but are assured of their profitability as long as the exit strategy is executed within their time frame. They need to adhere to the time frame as most have calculated that their cash might have run out within those years.
Short term investors. Short term investors can be classified into 2 groups. Speculators and flippers. These investors have a short investment horizon that will be 2 years or less. Speculators are able to churn out huge profits in rising markets while flippers profit by adding value to a purchase and reselling it at a higher price. Since profits are realized quickly, the most successful short term investor will look to turnover as many properties as possible within as short a time as possible. Although they will be subject to higher capital gain taxes and stamp duties, a lower return is made up with higher frequency of turnovers.
Before talking about flippers, we should explore 2 other groups with vested short term interest. They are referrers and agents.
Referrers. If we are to define flippers as merely being a channel that a property transaction passes through, referrers have to be considered as a flipper as well. Some savvy people actually make a living scouting deals for investors. They play an important role in the market by being “in the loop” and making information available to closely guarded groups of investors.
- Vital and credible information that is collated by professional referrers include those related to
- Condition of property
- Analysis of neighbourhood
- Selling price and Asking price
- Expected price required to close
- Terms of closing
- Reasons for selling and buying
- Recent transactions in the neighbourhood
The speed that an investor can take action on these information is the value that a referrer adds to the clients he service. Referrers though only make a profit if a transaction occurs.
Agents. There are many types of agents that operate in real estate. These include those for insurance, brokering, etc. And the most prominent type of agents are those of real estate. Agents have huge extensive networks and marketing channels. If referrers operate in a niche market, agents will then operate in the mass market. A dealer of this type usually sell at a slight markup so as to profit from a transaction. The art is to markup enough for a profit worth the effort while not scaring off a buyer with a high price. They can make money from a buyer, seller, or even both ways. And they can often “double up” their profits by serving the party that buys or sells to their client. Buyers and sellers are not limited to individuals. They include banks, partners, investment groups, etc. If you are confused at this point, it is probably because you have limited the scope of real estate agents to brokering for individuals to buy and sell single houses.
Unlike flippers who take ownership of a property, agents’ primary objective is to move ownership of a property from party to party as quickly as possible. Although some people might see these actions as mercenary, they are essential for an efficient property market to function. This is a prime example of paying for a service just to tap into someone’s network.
Flippers. The concept of flipping a house is to buy one, fix it up with physical and aesthetic improvements, then sell it at a profit. Flippers may buy an apartment and go about their job on a per house basis or even buy a multi-unit complex and sell each unit individually. It really depends on their appetite and access to financial resources. And while flippers often go about doing business themselves as they enjoy the process, it is not unusual for referrers and agents to serve them. If you have the finances to flip multiple properties at one time, you do need to engage help from professionals for efficiency.
But unlike referrers and agents who serve long term and short term real estate buyers, flippers often only sell to long term buyers. This is because these segment of buyers are more likely home owners who are more willing to buy a property without thinking about making a profit from it. A veteran flipper would have maximized the potential added value and leave little room for “forced” appreciation. This leaves natural appreciation for the new home owner to accumulate equity over the long term.