Given the state of the economy today, more and more people are choosing to invest in real estate because of the potential for high returns. However, an overwhelming majority of the people who start real estate investment businesses fail as quickly as they start.
If you are considering starting a real estate investing business, taking the time to plan and research will help you achieve a steadier foothold in the industry. Here are the crucial steps you need to follow:
1. Create a Business Plan.
Real estate investing businesses perform two basic tasks: invest in real estate and trade in real estate. When you have a real estate investing business, you purchase properties to either rent out or fix and flip at a higher price.
If it’s the former, you also need to think about the lease model: do you prefer long-term leases, Airbnbs, or a combination of the two? If you choose the latter, you are most likely going to buy homes on an as-is basis like what companies such as Fair Cash Deal do, and sell it at a higher price after making significant improvements and adding certain amenities.
On top of figuring out which one of the two is the more lucrative or feasible option for you, you also need to consider the type of properties you want to specialize in. Some possible options are multi-family homes, condos, or single-family homes.
Once you figure out the specific details of your business, start creating a business plan that will outline all of these things. An attorney or real estate professional will be helpful during this time, as well as when you eventually decide to incorporate your business.
2. Choose a Legal Entity.
Although it is definitely possible to start investing in real estate in your name, that’s just asking for a world of legal and tax troubles. Always create your business as a business. You have several options depending on the tax status that suits you best. Keep in mind, however, that most real estate investment businesses are set up as limited liability companies or LLCs.
Here are some of the top benefits of setting up for your real estate investing business as an LLC:
- LLCs allow business owners to legally separate their personal property and finances from any liability in case of catastrophic events, such as a lawsuit.
- In most states and jurisdictions, setting up an LLC only requires two major requirements: filing articles of incorporation with the relevant government body and maintaining a business in good standing.
- When it comes to delegating management responsibilities, LLCs tend to be more flexible since they can easily be managed by their owners or third-party managers. In contrast, corporations are required to have directors and officers.
- In certain states, LLCs pay lower state registration and maintenance fees compared to corporations because fees are structured in such a way that the fees are directly proportional to the number of authorized shares.
- LLCs also enjoy greater flexibility when it comes to profit distribution. Unlike S corps, cash flow distributions are not required to be pro rata. This means that you can easily financially reward the efforts of certain members through your preferred division of the available cash flow.
- LLCs can also avoid paying transfer and recording taxes and fees, which can be quite hefty in certain states. This is because it is possible to transfer ownership of an LLC to family members without the need to formally execute and record a new deed.
3. Check Your Finances.
Once you have a concrete plan in place, make sure that you also take a look at your capital. Real estate investments mean that you need a lot of purchasing power. When you start, you want to leverage your buying power to obtain as many viable properties as possible. Click here for an example of a company that purchases homes in any condition for a fair cash price.
Here are some great tips to keep in mind:
- Review your banking statements and calculate your current cash reserves, as well as future cash flow that will be dedicated entirely to your business. Have at least 6 months of living expenses as part of your personal funds.
- Speak to several lenders about the rules they have for establishing credit for real estate investors like you.
- Get the latest copy of your credit report. If you have any existing debt, start paying them down aggressively. Lenders will always check out your credit history before they approve your loans.
The real estate investment industry can be a very attractive option for those who want to start building their wealth. However, it also comes with a high risk of failure. Make sure that you are fully informed about the financial and legal issues involved in creating and maintaining your real estate investing business to ensure that you come out on top.