What kind of investor are you? This is probably the single most important question you can ask yourself when deciding how to invest in real estate, whether it be in Costa Rica or elsewhere. The answers to this question will set the foundation for the creation of your asset portfolio strategy and clarify the decision-making process along the way. The kind of investor you are is a reflection of your personal values, risk tolerance, and what you believe in. Making real estate investments and the returns they provide are an important tool that can enable you to achieve your goals. Having clarity on both personal and business goals is of incredible significance towards achieving happiness. How well do you react when times are rough? What do you do when times are uncertain? How much debt do you currently have? Are you an adventure seeker? Do you like to manage your time as you please? These are just a few questions that will help you start identifying your strengths, your weaknesses, and the things you have to accomplish in order to be a better investor. Identifying where you fit into the following three important aspects of creating your portfolio will determine the type of investor you are
Risk and variability tolerance
Real estate investment is a cyclical industry, changing constantly depending on a series of macroeconomic, demographic and political factors. The level of risk in your portfolio will determine the volatility of your returns for both the positive and the negative outcomes. The level of risk should be adequate to your experience in the real estate markets and how well you understand the industry. It’s important to have solid cash generating investments that will allow you to cover your living expenses at the beginning of your journey. If this foundation is strong enough, it will allow you to do riskier deals without compromising the basics in the future. Finding the right formula in the risk scale will make your life as an investor an enjoyable ride.
Asset value and cash returns
There are two major ways to generate positive returns in real estate. The first one occurs when a sale of a property that has increased its value over time creates a profit for the investor, therefore, boosting the portfolio’s value; the second one comes from rental income collected by leasing out the property to tenants, generating positive monthly cash inflows. Investors may lean more towards one way or another. A smart, successful real estate investor is able to create its investment base by having properties in both categories, or even better, picking the ones that generate returns in both ways.
Active vs Passive Investor
An active investor is deeply involved in the creation of value for the properties at hand. They are actively looking for deals to invest in, selling properties, flipping houses and even building spec homes for sale to external clients. On the other hand, passive investors free up their time by trusting real estate mutual funds, investment trusts and property management companies to manage their capital, properties and operations. It’s probably that a person will be both a passive and active investor at some point in life.
The ultimate personal goal should be to live a happy life with the people we care about, and investing wisely in real estate by understanding what kind of investor you are, could play an important role in the overall puzzle.
