Starting Your Own Real Estate Investment Business
Investing in real estate is a great way to increase your wealth. Even so, the risks involved in this changeable industry are what keep many from taking the plunge. The ins and outs of navigating through the numerous financial and legal challenges can be overwhelming to say the least, for instance. Still, because of its wealth potential, people are willing to take the risk to add to their coffers. To be successful in this business, consider the following matters before venturing into the real estate market.
If you plan to venture into the real estate market, there are two things you decide upon.
• Will you flip houses?
• Are you planning to be a long-term investor?
If you have been keeping up with the housing market industry, you probably noticed that house-flipping is on fire. There are plenty of networks televising how investors are capitalizing on this wealth creating trend. However, don’t use that as your only guide.
Flipping houses includes locating a piece of property that needs renovating or fixing to boost its value, purchasing it and then selling it for a profit. In some cases, it may only take 30-to-60 days for the entire process and profits can be upwards of several thousand dollars to several hundred thousand dollars. But, it depends on the market, how much of an investment and how fast the property can be sold.
Sometimes, first-time flippers not understanding the entire flipping process as a whole, may spend more money than a house is worth or are unable to get a quick turn-around; end up losing money. For example, too much money is allocated towards renovations that may or may not be necessary, lack of understanding, or carry the burden of a high-cost loan that becomes due after 30 to 90 days but lasts much longer.
Investing for the long run involves purchasing properties that extends a distinct business opportunity. For example, this financial opportunity is generally in the form of multiple unit residential properties. In most cases, these types of properties are bought because they tend to provide the owner with rental income and may not necessitate a lot of renovation at the outset.
Compared to other real estate investments, rental units are solid in terms of income, however, turning a profit may take a while. Nevertheless, the thought of having money available after all the bills are paid is ideal, then again as the verifiable amount netted is taxed against mortgage payments. As such, first-time landlords are commonly fortunate to break-even.
Funding For Property Investments
For most people, it’s necessary to have financial support when purchasing investment properties. Don’t despair. There are several ways to obtain financing. For example, you could choose the zero-down method, 5 percent down method, or find an independent wealthy partner. Any one or combination might be your best choice.
• Zero-down: The zero-down method is possible, but is high-risk if you can’t lock in on revenue right away.
• Five percent down payment: There is a reasonable amount of money available and as such, lenders are eyeing your dollar. Various lenders are offering down payments as low as 5 percent for real estate investment properties. To locate the best loan-terms, make the effort to apply for loans at several lending institutions.
• Wealthy partner: Finding a wealthy partner is the ideal situation, but make sure you have an exit plan in place (you never know how things may turn out).
Tip: As a rule-of-thumb, acquire more capital than you need for renovation of purchased properties. Thus, the necessary make-over to a property can help increase its value and net you a higher profit.
As a real estate investor, it is probably a good idea to form a corporation to limit your personal liability. Although there are a few selections to choose from (e.g., C-Corporation, S-Corporation, Limited Liability Corporation (LLC)), for the most part, real estate investment businesses are setup as LLCs.
It doesn’t take much to form an LLC. The following steps will have you on your way in no time:
1. Select/Reserve Legal Name if applicable to your state
2. Draft and file your Articles of Incorporation with your Secretary of State
3. Determine Business Leadership
4. Establish the Number of Owners
5. Apply for Business License/Certificates
6. File Form SS-4 or apply online at the Internal Revenue Service website to obtain an Employer Identification Number (EIN).
7. Apply for Tax ID Numbers (and any other ID numbers required by state and local government agencies)
Tip: When starting any business venture, always seek the counsel of a lawyer (preferably a real estate lawyer) and/or a financial advisor.
Your business structure does not exempt your business from being sued. However, having insurance will help protect your business financially. It’s best for long-term rental property investors to have an insurance policy in place that spells out and clarifies everything that is covered. Also, this policy should state specifically what are the renter’s obligations.
The same goes for short-term investment properties. Insurance is necessary for either case, but because it’s short-term it’s not necessary to carry long-term insurance if you’re planning on selling the property as quick as possible.
As always, there are exclusions to the rules. For example, most insurance companies will insure against black mold. As such, this can be a real problem for investors. So, always have a backup plan in the case that something like this should happen. Consult your real estate lawyer to determine what is the best route to take in cases where such occurrences take place.
Partner with a Realtor
The real estate business can be quite challenging to those just starting out. It’s a good practice to consider connecting with a more experienced real estate investor to learn many of the ins and outs of this business. Although it means there will be a sharing of profits, it will give you the benefit of learning how to avoid the many pitfalls that can cause a first-timer to lose a lot of their initial investment.
Besides, realtors know the market within a specific topographical locale much more than you as being a beginner. Thus, your goal should be to find houses in bad shape in the best neighborhoods and renovate them to get a higher return on your investment. In other words, avoid areas that are losing value. Although this may mean giving up a portion of your expected return, it’s an experience that will benefit you in the long run should you decide to set out on your own. A great Realtor in the Surrey Real Estate market is Becky Zhou Hill, they have extensive knowledge in the BC market.
Downside of Starting Small
For most businesses, starting small is ideal, but in the case of real estate investment, starting small is not always the best option. Buying rental units/single family dwellings is typical of newcomers to buying real estate. However, because of the high mortgage, continued maintenance, and renovation budgets, the investors’ money gets eaten up before they can begin to see a profit.
Consequently, as a newcomer to the real estate business, it’s probably a good idea to find a wealthy partner to help you purchase bigger properties to obtain higher profits. As with any business venture, always do your due diligence to learn the ins and outs before investing.
Happy property buying!