598: The Business of Real Estate Investing

February 18, 2022bmanasseroUncategorizedNo comments

SHOW NOTES FOR EPISODE 598: THE BUSINESS OF REAL ESTATE INVESTING

If you are generating income and/or a profit through your real estate activities, you are in a business. And if you don’t treat it as such, not only will you miss out on tremendous opportunities but you could face legal issues down the road. In today’s podcast, Bill will discuss the basic business foundations you need to not only protect yourself and your assets but to build a successful real estate enterprise.

10 Steps to Real Estate Investing Success

Here are links to the 4 previous episodes:

Introduction

Real Estate Investing is a business. It’s that simple. If you are generating income and/or a profit through real estate activities, you are in a business. And if you don’t treat it as such, not only will you miss out on tremendous opportunities but you may face legal issues down the road.

In today’s podcast I will discuss what basic foundations you need to implement to not only protect yourself and your assets but build a solid real estate business foundation, designed for success.

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 only, then that’s cool and understandable. With yields from 6% to 150%, real estate is a great totally passive investment.

However, if you are only planning on buying a few rental properties, wholesaling, flipping, etc. to generate extra income you need to treat it as a business. And if you are looking at building a significant income, building a portfolio and creating a legacy to eventually hand down to your family, then you’ll definitely need to build the right business foundation.

Since it is a business, you need to look at it differently. That’s why 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. 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 called “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, attorney, CPA, 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. aside from your personal social security number. This will ultimately benefit you in multiple ways. But one key advantage is in helping you by protecting your personal credit score/rating and helping you establish business credit for major property acquisitions.

There are also the tax benefits, that come in the form of all business expenses, that will be applied against the business tax ID

As far as what type type of entity to establish for your business, 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 all out for a C or S Corp. You should discuss this with your accountant before deciding.

Also, I would recommend establishing a business 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 when I set up my first business entity. Later, I figured it out and made sure all my properties had LLCs. The reason for this will become clear once you set up measures for asset protection.

Links on Asset Protection and Setting Up Your Real Estate Business:

Establishing a Location

Getting a virtual address, not your home, 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 – MAIL BOXES R US – that can affect loan approval, especially as you seek larger credit lines.

You can find virtual offices that are inexpensive, receives your mail, and, 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.

Stationary and Business cards

Again, it just adds to the professional nature of your business for banks, networking, etc.

Record Keeping

One of the greatest benefits of having a real estate investing business are the amazing tax benefits. But to realize those benefits you need to keep excellent records.

One of the best ways to do this is to set-up your business from day one with on Quicken or QuickBooks accounting system. If you are nor real bsiness or tax savvy, ask you Real Estate CPA or a bookkeeper friend to help you set this up.

Here are some of the numbers you will need to track…

Detailed breakdown of all income
- Not just rents
- Fees like late fees, returned check fees, pet fees, key fees
- Coin operated washers & dryers
- Extra storage fees
- Extra parking space fees
- Just to know a few
Mortgage interest
Depreciation
Accelerated depreciation
Property taxes (both county and city)
Detailed expenses
All the money you spend on your business and properties
Business expenses can include
- Bookkeeping
- Banking fees
- CPA
- Attorney
- Advertising expense (usually to get tenants)
- Virtual office expense (phone, stationary, etc.)
Property expenses
- Repairs
- Maintenance
- Lawncare and landscaping
- Utilities
- Property management
- Trash pick-up

I would also recommend reading a GREAT book called Profits First by Michael Michalowicz. He started a revolution in business by setting up businesses that take their profits first and then pay expenses. Most businesses do the opposite and whatever is left over goes to the business owner.

Here is a podcast where we interviewed Michael Michalowicz: 235: Clockwork: Designing Your Business to Run Itself With Mike Michalowicz

Your Team

The next thing you will do is to set-up your team. Now, I know what you may already be thinking… “Now, wait a minute…a team… I can barely afford to pay myself, let alone hire employees…” That’s not what I’m talking about (at least not yet. When you achieve a 7 figure income, you might start looking to hire staff – or at least virtual assistants). I’m talking about the experts who will, from the beginning, help you achieve your success.

But I’ll get into that in more detail next week.

In Conclusion

The sooner you start treating everything you do as a business, the sooner you will be successful. There is a fine line that separates successful businesses from those who languish in mediocrity. A real estate investing business is no different. If you don’t treat it like you would any other business, you will not maximize your profits and can quickly run into trouble. Being an investor means more than finding good properties and doing good work. If you treat your real estate business like the business it deserves to be, you will gain access to more opportunities than you could have ever imagined.

Well that’s it for today…

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bmanassero

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