The Difference Between Real Estate Investors and Real Estate Developers
Tuesday Dec 12th, 2023
Real estate has long been a popular form of investment, with many individuals and businesses looking to capitalize on the potential rewards of the market. Especially as we saw the property market boom in the summer of 2021, there were homeowners who decided to dip their toes into real estate investing.
Definition Of Real Estate Investor and Developer
Although they often work together, there is a difference between a real estate property investor and a property developer. Understanding the differences between the two is essential for anyone looking to enter the real estate market and begin making money.
Real Estate Property Investing
Real estate investors are individuals or companies who purchase properties with the intention of making a profit. They may buy properties to rent them out, resell them at a higher price, or make improvements and then resell them for a profit. Property investments can come in different forms like commercial or residential. As well, a real estate investor can also build up their portfolios through investment choices like:
Real Estate Investment Trusts (REITs): invest primarily in income-producing properties like multi-unit residential buildings or malls and offer payouts to the investor on a regular basis
Real Estate Limited Partnerships: usually used to develop real estate properties or manages new real estate properties.
Mortgage Investment Entities: pools money from investors to lend to borrowers who may not be able to obtain a loan from a bank.
Syndicated Mortgage Investments: when two or more people collaborate to invest in one single mortgage against real property.
As a real estate investor, you might consider working with real estate agents or pursuing your real estate license when you start buying and selling.
Real Estate Development
Developers, on the other hand, are individuals or companies that can purchase either raw land or improved land (a piece with an existing structure on it) and build other houses or units on it.
The most common pieces of land for property development are usually for residential and commercial properties. A commercial property developer should have a bit more experience and resources available because this type brings on a higher risk but can bring more success financially.
Some Key Differences Between A Real Estate Developer and Real Estate Investor
Now that we have defined the two roles, we can break down the key differences.
1. Risk Involved:
Because there is already property available to buy or sell, a real estate investor often takes on less risk than a developer. An investor typically purchases an existing house or unit, which means they don’t have to worry about the cost of construction or the potential for delays or other issues that can occur during the development process.
A real estate developer, on the other hand, takes on more risk since they are responsible for the entire development process, which can be expensive and time-consuming.
2. Capital Required:
Many forms of investing don't require a lot of cash on hand needed to finance your transaction. But, even though real estate often requires a strong cash flow to start to finance houses and properties, real estate investors typically need less capital to purchase an investment than a developer.
An investor can often purchase units like single-family homes with a combination of cash and financing, whereas a developer typically needs to secure a large amount of capital to cover the cost of a piece of property, construction, and other associated expenses. This obviously depends on the size and scope of the project, but a developer will still often require more capital to get started.
3. Time Commitment:
Another key difference between the two is the time commitment needed.
A real estate investor typically has a shorter time commitment than a developer. Investors can often purchase a property and begin generating income relatively quickly after the deal is complete, whereas a developer must commit to a lengthy planning and development process and be involved with the builders before they can begin to generate income.
Before you decide to invest in anything, you should be thinking about the profitability of the venture.
For real estate investors, they may be able to generate a steady stream of income from their investments, whereas a real estate developer may need to wait longer to generate income.
Real estate investing may also be able to generate income from a variety of investments, whereas a real estate developer typically needs to focus on the planning and developing of one project at a time. Developing a property will likely feel more like a full-time job whereas a real estate investment can help you build wealth and only take a bit of time.
5. Tax Implications:
With any investment, you have to consider the tax implications. Both investors and developers may be subject to taxes related to their real estate investments. However, the type of taxes and the amount of taxes owed may differ depending on the type of investment.
Getting into real estate means staying up to date and being aware of any regulations that you have to follow.
While real estate investor is a bit more drawn back from the actual property laws, they, along with developers must comply with a variety of regulations, including zoning laws and building codes.
For a real estate investor, staying up to date with and abiding by tenant laws and other regulations related to rental units will be important.
While you do not need a university college degree to get started, a real estate investor or property developer may need different levels of expertise to succeed. As stated above, a developer or investor may consider getting their license as a way of understanding the real estate industry.
An investor may need to understand the real estate market and how to assess the value of property investments, whereas a developer may need to understand the development process, including construction, financing, and zoning laws.
A real estate investor and developer can both be successful in the real estate industry.
However, it is important to understand the differences between the two, including the risks involved, capital required, time commitment, profitability, tax implications, regulations, and expertise needed.
Understanding these differences can help ensure that individuals and businesses make informed decisions when entering the real estate industry.