Establish A Business Structure
For business purposes, you will need to select the type of business entity you want your company to be. Typically, you can start a real estate investment company as a sole proprietor, a partnership, a limited liability company , a C-Corp, or an S-Corp. There are some small real estate businesses that are operated with no formal legal entity as is the case with a real estate sole proprietorship. However, due to the liability risk in real estate deals, it would be wise to form an entity that distinguishes your personal assets from those of your business. You can do this through incorporation.
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Incorporation will help to minimize your risk and protect your personal assets. Moreover, with corporations, you can sell shares in the business and access more capital from other real estate investors. However, they are subject to double-taxation. Apart from the taxes the corporation pays, you will also be expected to pay taxes on the personal income you get from the corporation.
A real estate LLC is the most common structure for real estate investment companies. It offers benefits relative to other entity forms. For instance, it provides greater flexibility when delegating management responsibilities and in the distribution of profits. However, you may want to check with a real estate attorney or corporate accountant to determine the best way to structure your business.
Nurture Relationships With Others In The Industry
As you work to grow your business, the best way to find good tenants, contractors, investors, buyers, and sellers is to build your network. Attend networking events and conferences and have an active online presence. Be willing to help out others by offering advice, mentorship, or introductions to your connections.
When you meet new people, follow up and work to maintain your relationships. While nurturing your network takes some effort, you never know who will send you a good deal later on. For your business to succeed, youll need the best rates from contractors, invitations to participate in the best investments, and high-quality mentors to turn to for advice.
Key Takeaways
- The first step in starting a real estate business is writing a clear and concise business plan where you identify your company goals and strategies for achieving them.
- Choose the right business structure to maximize tax benefits and protect your personal assets from liabilities accrued by the company.
- Discuss financing options with multiple lenders, including traditional mortgage lenders, private lenders, and investment groups to ensure youre getting the best rates.
- The best way to grow your business once its established is to build and nurture your network within the real estate industry.
Purchase Real Estate Investment Trusts
REITs are not the first thing that comes to mind when starting a real estate investment. However, they are a great way to get into real estate on a non-physical degree. So, what are REITs anyway?
Simply put, REITs are companies that own commercial real estate. This can be in the form of hotels, office buildings, condominiums, apartments, and retail spaces. Many investors liken REITs to mutual funds. They typically compensate you generously with dividends, making them an attractive option for many retirees. Furthermore, you have a choice to reinvest whatever you earn back into REITs or diversify your investments.
Beginners will initially find REITs complicated, though. Not all REITs are made equal, with only some traded on a public scale. There are also different types, and the one you choose will define how big a risk is involved. If you want to give REITs a try but have no idea where to start, consider publicly-traded REITs first. You will need a brokerage account to do so, but setting one up only takes a few minutes.
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What Is A Real Estate Business
A real estate business is a business entity that deals with the buying, selling, management, or investment of real estate properties. According to The Balance, real estate is defined as the property, land, buildings, air rights above the land and underground rights below the land.
Today, many face an unfortunate reality: less than five percent of people who reach age 65 have enough money to retire or are financially secure enough, according to the US census bureau. If you want to set yourself up for a stress-free retirement, it may be time to consider starting a real estate investing business to achieve your personal financial goals.
Starting a real estate investment business will not be easy, but it will be well worth the work with the right preparation. Best of all, there are several resources on small business systems that can make the learning process easier and more efficient. Read through our guide below after all, it is designed to help you succeed.
The Best Business Structure For Real Estate Investors
If you are considering turning your real estate investment projects into a business, you will need to give serious consideration to what type of business you want it to be.
The right solution depends on your specific situation, but a few key questions to ask yourself are:
- How will I structure my real estate investment company?
- How many people will own the business?
- What are my concerns for liability?
- How much do I care about tax benefits?
- How much effort do I want to put into creating an overarching business entity?
Read on to learn the different types of business structures you should consider, and the pros and cons of each type of business structure.
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Is Inflation The Same As Appreciation
No. An appreciation rate, such as in the case of real estate, relates to the amount a property’s value increases over time. When a property’s value appreciates, it is increasing in response to market demand, not the power of the dollar.
Therefore, real estate can sometimes appreciate more than the rate of inflation, and sometimes it can depreciate despite an inflationary economy.
Exceptions For Asset Protection
In real estate, not everything is black and white. While the asset protection benefit is a significant factor in why investors choose this business strategy, it does have some fine print. There are unique situations that leave your personal assets unprotected, and its important to know what these situations are before you start the LLC. Also, there are circumstances when an LLC makes it harder to settle a legal dispute. Being well educated and informed about these variables will prevent any unpleasant surprises in the future.
In our 20+ years of real estate experience, weve learned a few things. And one thing is for sure: real estate has its risk and rewards. Weve been through them both. Forming a holding company for your real estate investments is one way to prevent chaos if something happens in one of your properties that results in a lawsuit. While the idea of an LLC real estate structure is popular amongst seasoned real estate professionals, newbies are getting in on the action as well. This strategy, although not perfect, can have numerous advantages in 2019 that help investors build their portfolios, acquire wealth, and minimize their risks.
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Real Estate Profits Through Income
Simply put, residential and commercial real estate generate income through rent. Tenants pay an agreed-upon amount per month which can increase through inflation and demand. After your costs are taken out, you claim the remaining portion as income. A smart move for your real estate business is to invest in a property in a desirable location, offering you the ability to secure tenants easily.
Depending on your rights to the land, raw land can also generate income as companies may pay regular payments for any new structures built on the land or royalties for any discoveries made. These include but are not limited to new access roads, pipelines, cell towers, pipelines, or pump jacks. It is common for raw land to be rented for agricultural purposes, and some land may have valuable harvestable assets that can be collected periodically.
What Is A Real Estate Investment Business Plan And Why Do I Need One
To get started on your real estate investment journey, you’ll need a real estate investment business plan that details all of the components of your business and helps you to strategize for success.
This is because having a business plan for real estate investing is like having a detailed roadmap that tells you how to get to your desired destination. By enabling you to clearly organize your investment goals, your plan can help you define the methods you’ll use to achieve them and you’ll be viewed as a more legitimate real estate business, as well.
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Still Not Sure About How It Works Here Are A Few Real Estate Holding Company Examples:
Lets say you buy an investment property, a tenant falls down the stairs and decides to sue you for their clumsiness. They could come after your personal assets via a personal injury lawsuit.
Or maybe you and your tenant disagree about whether or not you will be returning their security deposit. They could decide to settle it in court, putting your personal assets on the line.
When you create an LLC, the only assets in jeopardy are those owned by the LLC. This means your home, car, bank account, and other assets arent in danger if a tenant decides to sue.
There are many reasons why working through an LLC is considered one of the best business structures for investors:
Get Your Finances In Order
With your business structure in place, youre ready to secure funding for your real estate investment business. Reach out to multiple lenders to discuss your investment plans. Research from Freddie Mac found that borrowers who get quotes from five different lenders save an average of $2,914 over the life of the loan.
As interest rates have reached 40-year highs in 2022, its more important than ever for the profitability of your business to find a good lender. Look into financing options outside of traditional mortgage lenders. Reach out to private lenders with a description of your business plan. Dont settle until youve found the best option.
If youre not sure how to find investors, attend networking events or reach out to others in the real estate industry to ask if they know any investors interested in a new deal. Youll have the most success finding investors if you have a really solid business plan. If you struggle to find investors at first, consider going back to the drawing board with your business plan to make it more appealing.
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Write A Business Plan
Your business plan is not only a great sales tool, but it will also help you to think more deeply into your real estate investing business from varying angles. Of course, a big part of your business plan is to keep you on track through the growth of your business. However, it is very important that you write your business plan in a way that will make lenders and your other business partners want to work with you.
There are certain elements that must be included in your business plan. All of these elements should be included, but by no means think that you cant add more if you choose. The required elements are :
- Executive Summary
- Important Assumptions
- Closing Statement
Once again, all of the sections above should be included somewhere in your business plan in order to comprehensively lay out your complete business on paper. Starting your business without a business plan is like going to war without a strategy or tactics. In war, without a comprehensive plan outlining everything possible, you are setting yourself up for slaughter. The same goes with real estate investing.
Choose A Real Estate Investing Strategy
After researching the basics of real estate investing, the next step would be choosing a real estate investment strategy. When starting a real estate investment business, these are the most common rental strategies:
1- Long-term or traditional buy and hold. This strategy, as the name implies, involves buying an investment property with the aim of renting it out for a long period until it is sold again. Profits are made after subtracting costs from monthly collected rent.
2- Short-term or Airbnb rentals. Unlike the first strategy, a short-term rental is rented out for short periods, a maximum of 6 months. Tenants of short-term rentals pay per night of stay.
Location is the most important word in real estate. The location of the investment property decides whether you should opt for a long-term or a short-term rental strategy.
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Draft Your Marketing Plan
Many business owners view marketing as a “nice-to-have” rather than a necessity, but the truth is that marketing can help you build the foundation for your business right from the start.
Remember, your brand is more than just a logo, and you can use it to determine who your target audience is, how you speak and relate to them and how you build strong relationships that will help you achieve your goals.
Who Needs A Real Estate Investment Fund
A real estate investment fund is a good choice for passive investors with an interest in commercial real estate. A skilled sponsor handles the management and operations of the assets, excusing you from the hands-on work.
Also, the combined funds give investors access to investment opportunities that cannot be achieved through individual purchases, so this is a great choice for those just getting into real estate investing. The fund is used to buy properties in several locations, diluting the risk.
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Why Should You Invest In Real Estate In Today’s Climate
Real estate in the U.S. is hot really hot.
But here’s the kickerthese numbers simply aren’t sustainable for the long-term.
As we progress through the ’20s and beyond, more experts are predicting that the rising interest rates will price many buyers out of the market, which will give the housing supply a chance to breathe with less demand.
As a leading real estate marketplace, Zillow also forecasts that prices will cool off as 2022 sees just a projected 11 percent price increase by the end of the year, down from the 20 percent year-over-year increase that we saw in 2021.
What this means is that despite current conditions, experts predict that more properties will become available with fewer buyers ready to snatch them up. This softens the market for savvy investors who can then leverage their investments to acquire additional properties.
Traditional Real Estate Investing
The first option is in traditional real estate investing, which involves buying rental properties and renting them out to tenants.
Traditional real estate investing is a popular way to grow your wealth, but it also comes with some cons that you should look at before you make the leap.
Traditional real estate investing requires searching dozens of listings and visiting several properties before you decide on the right property suitable for rental purposes.
Aside from that, you will also spend a considerable amount of time searching for tenants, showing the property to tenants, and staging the home when showing the properties to tenants. Maintenance and property management are often overlooked duties that are vital to successful rental real estate investments.
If you decide to purchase the home as an owner occupied home, there is an additional risk where you are responsible for a large mortgage loan on the property with a substantial risk in the event of a decline in the housing market.
While these risks are not enough to turn someone off entirely from traditional real estate investments, you have to know what you are getting yourself into before you make the decision.
A newer option to get started down the traditional real estate path is Roofstock. Roofstock allows you to buy cash-flowing single family homes across the United States. You can fully purchase your rental properties online, and they have tools to help you manage them as well.
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Work Out A Reasonable Pricing For Your Services & Products
From a quantitative perspective, investing in real estate is somewhat like investing in stocks. In order to profit in real estate investments, investors must determine the value of the properties they buy and make educated guesses about how much profit these investments will generate, whether through property appreciation, rental income or a combination of both.
Equity valuation is typically conducted through two basic methodologies: absolute value and relative value. The same is true for property assessment. Discounting future net operating income by the appropriate discount rate for real estate is similar to discounted cash flow valuations for stock, while integrating the gross income multiplier model in real estate is comparable to relative value valuations with stocks.
Vacation Rentals Tend To Suffer
When the population has to adapt to rising costs and budget accordingly, travel is usually one of the first luxuries to get shelved. Consequently, vacation rentals, especially in locations highly dependent upon the tourist trade, can suffer void periods and low demand.
In addition, communities that specialize in retirement living can also be impacted as many would-be buyers choose to ride out the economic instability before making the transition.
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Brainstorm Possible Ways To Retain Clients & Customers
In general you will need to focus on real estate related activities which are done by customers when they actually dont move to another home to be able to strive.
Be proactive, respond to comments but dont be eager! A non eager way to keep your contact data around would be to curate content, present content on your blog where the contact data is shown, take it on pictures, link your blog with posts, use call to action solutions offered by the appropriate media
If you have a larger brand which would mean the contact is not that personal than you may be interested in partnering with companies dealing with stuff people do with their property, but you may still use the above mentioned techniques.
