SHOW NOTES FOR EPISODE 102 – HOW TO SET UP YOUR REAL ESTATE BUSINESS FOR SUCCESS

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.

What is a real estate investor?

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.

Gain Perspective

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:

• You have purchased a property, which is your asset
• A lender holds a mortgage on the property which you have an obligation to pay
• You are selling the use of the property space for a fee called rental income/revenue
• You have a client or clients, who are your tenants
• You have necessary expenses for the property, including such things as maintenance, advertising, renovations, appliance repairs, property management, etc.
• You have very real and necessary business operating expenses such as your phones, vehicle, office supplies, a bookkeeper, etc.
• The IRS wants to know the details of this asset/business. You are required to submit annual year end information for tax purposes.
• Your intention of investing in the property is to create financial gain through positive cash flow, and equity appreciation. This is called a profit.

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!

The Basics

Setting-Up a Business Entity

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.

• You’ll want to set-up an entity with a separate tax i.d. from your personal social security number. This will ultimately benefit you on helping you by protecting your personal credit score/rating
• There are also the tax benefits as all business expenses will be applied against the business tax ID
• As far as what type, I personally recommend setting up an LLC (this is relatively easy – you can set up an LLC through LegalZoom.com for as little as $149.  Or you can go for a C or S Corp.
• Also, I would recommend an entity that does not have your name in it. Something like C-4 Properties, as opposed to Harold Jones Properties (unless of course your name isn’t Harold Jones, haha) I personally already blew this for my business entity but was smarter when it came to my out-of-state separate entities in other states.  The reason for this will become clear once you set up measures for asset protection.

Establishing a Location

• As you will want to establish separate business credit, Ty Crandall, you was our guest on episode 099 – Funding your Real Estate Investments with Business Credit, recommends
• Getting a virtual address, not a UPS or mail center mail box. The reason for this is that banks or other credit-granting organizations oftimes will do a google street view check as part of their underwriting and if they see that your address is a mail box business, that can affect loan approval, especially as you seek larger credit lines.
• You can get a virtual office that receives your mail, but, when you need an office or board room for meetings or presentations, you can always book those rooms by the hour.

Get a Business Phone Number

• You may not have to get an expensive business landline from your local telecom, but you do need a number to give out to clients and customers, and it should sound professional. You may be able to use a service like Google Voice or get a virtual business telephone service or answering service.  I would recommend a company like GotoPhone.com, 800.com (free).  And get your company listed in the online yellow pages.  Business creditors may try to look you up to see if you are legit!
• Get your company listed in the online Yellow Pages.  Again, loan underwriters will check  this resource to verify your business.

Build Your Team

The success of your business will greatly depend on the quality of the team of professionals you bring together to support you.

• Mortgage Broker
• Banker
• Real Estate Attorney – Preferably one who is also an investor
• CPA – Preferably one who has many REI clients and is also a real estate investor
• Bookkeeper
• Mentor
• Insurance
• Wholesalers
• Out-of-State Teams
  • Local attorney
  • Property Manager
  • Contractors
  • Handyman
  • Inspectors
  • Appraisers
  • Title Companies

Separate Your Business and Your Consumer Credit

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

• Rent (in)
• Mortgage Payments
• Maintenance expenses
• Renovation costs
• Building insurance
• Applicable operating and business expenses
• Property management fees

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.

• Get a card with a good points program
• This card is paid from the real estate business bank account
• Proportionate share of costs are charged to the appropriate property (a function of bookkeeping)

“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

• Keep It Simple for Success
• Have a plan and move forward through times of uncertainty and fear
• Partner with people with complementary strengths
• Know that CHAOS always shows up in business
• Work your plan and don’t compare yourself to others
• Grow slow and steady
• Know where your money is, and know where your money is going

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