The word “investor” is quite a general term that means different things to different people. A clarification needs to be made on what “investor” means in terms of real estate. There are three types of investors: lending, equity and hybrid (or combination). Let’s take a look at these three types of investors more closely.
A lending investor is someone who will loan you money on a real estate deal. You will pay them an interest rate and you retain 100% ownership of the property. You will pay them back on certain terms at a certain time.
An equity investor is someone who will give you the money but they want a percent ownership in the property. In return, they get a percentage of the cash flow and a percentage of the appreciation.
A Hybrid or combination investor is someone who can receive an interest rate and equity participation in the project.
All three of these types of investors have merit. As a general rule, lending investors are preferred because you don’t have to pay as much return. Equity investors are going to end up costing you more money but they may have the benefit of not needing any monthly cash flow. One type of investor is not necessarily better than another. It really is dependent on what suits your needs at that point in time. Generally speaking, you will pay less return with a lending investor.
Knowing what investor you need to deal with on a project is very important. If you know the type of investor you are dealing with then you will know how to “package” the product. You will be able to determine how to match your investment product to their needs and meet your needs as well.
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