There is a big difference between being a casual real estate investor and a person who is seeking to grow an investment portfolio. In this episode, Bill examines a few of the distinctions and outlines what basic foundations you need to implement to build a solid real estate business foundation.
Definition of an Investor: ‘An investor is an individual who commits money to investment products, which may include real estate, with the expectation of financial gain.’
Notice, by this definition, an investor only ‘commits money.’ Ask yourself: Are you really just a real estate investor? Are you only investing your money in real estate, or are you planning on investing much more than money, such as your time, energy, efforts, and relationship resources?
If you just want to invest money, then that’s cool and understandable. With yields from 6% to 150%, real estate is a great totally passive investment.
If you are only planning on buying a few rental properties for $500 to $1000 extra income, flipping a house once a year or … then maybe it’s not necessary. But if you are looking at buying larger multifamily, apartments or commercial property, you’ll need to build the right business foundation.
If it is a business, you need to look at it differently. So, in this week’s podcast, I’m going to talk about setting up a real estate investing business entity for maximum benefit, safety and leverage for the long term.
Take a moment to look deeper into what’s behind the curtain. Even with a single ‘buy and hold investment property’, you can clearly see it is a small business. Need perspective? Consider the following facts:
When you expand on this idea by adding more revenue properties, or even other real estate investment strategies, it quickly becomes apparent, this is definitely a Business!
While it may be tempting to just give it a whirl as a sole proprietor, you may be taking unnecessary risk. If your business gets into any kind of legal hot water, your personal assets could be at risk. In addition, the right entity—LLC, or S or C Corporation, for example—may offer tax advantages. It’s also much easier to create a business credit profile and eventually get small business financing if you create a separate legal entity.
The success of your business will greatly depend on the quality of the team of professionals you bring together to support you.
Do NOT mix your personal bank account with your real estate investment account.
Begin by opening a separate bank account for each real estate portfolio. That means, even if you are buying your first investment property, open a separate bank account. All costs associated with that property (or even several properties) are drawn from this real estate account. All revenue will be deposited in this account. Portfolios can be defined and separated for different reasons.
From that account, there will be withdrawals and revenue or loan deposits
Get a real estate business-only credit card.
Just like your bank account, mixing your personal expenses with your business expenses creates confusion and additional work for you or your bookkeeper. Having a separate credit card is an efficient and very effective way of maintaining clear audit trails for the IRS, should an audit occur. Veteran real estate investors save hours of time, energy, and stress by making this one very simple change as quickly as possible. Everyone involved knows that a charge on this card is always business related.
Of course, you MUST remember to keep your receipts and allocate the expense… or there is a good chance you will have to pay the tax man.
“The Best Way You Can Predict Your Future Is To Create It.” – Stephen Covey
To create your future of investing in real estate, you need to have an idea of where you are going, and at least a basic outline for a plan as to how you will get there. The preceding tips and insights are just a start. They are meant to give you a preliminary context for treating your real estate investing like a business.
Conclusion: Some Key Things We Have Learned About Planning
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