lorenzo-hills-real-estate-investor-motivationsWhat Motivates and Propels Investors?

A practical guide to understand the motivations and investment risk of today’s investors.

Why do investors invest? Is the question. Why do some choose to invest in real property, or to choose a certain real estate investment over another? Why does an investor pay a particular price to “buy in.” The answer to those questions is the purpose of this writing. This writing will lay the foundation to understanding what motivates investors to invest and the risk of investments they take on.

First and foremost, investors have a slew of investment opportunities to choose from in today’s complex world. For example in real estate, there are many different kinds of property types, asset classes, and often several investment positions within a property (that is called, senior debt, equity, mezzanine, etc.).

Capital is cash. Capital can be investment funds that have an origin from savings, retained profits, and borrowed money. It can also be various types of long-term financial assets.

Investor simply is anyone or entity with capital to invest in anything. An investor can be any individual, partnerships, corporation, REITs, fund, or private company. An investor can be real estate or non-real estate oriented. Investors can take on various positions within an investment. The positions taken can vary from equity position, debt position, or a combination called a hybrid investor. An hybrid investor may like the returns on the position of being subordinate to the senior debt and bearing the losses ahead of the senior lender, as an example.

There are different types of investment objectives and risk-related pressures for various investors. For example, regulations and restrictions have restricted insurance companies and REITs from some real estate investment opportunities. Investors in high income tax brackets may seek sophisticated tax shelter opportunities. Some investors because of legal restrictions may seek fixed-income investments. Some are looking for speculative investments, some are seeking high leverage play.

Five Basic Investment Concepts

But no matter how sophisticated the investment; the motivation and risk analysis is the same. There are five basic concepts that motivate any investor to move forward on an opportunity. It does not matter whether the individual is a beginner investor or a complicated financial institution investing around the world. These motivation concepts are:

  1. Opportunity Cost
  2. Time Value of Money
  3. Present Value
  4. ROI – Return on Investment
  5. Ideal Investment