A real estate investment business is a very profitable business but requires know-how and resources in order to compete with other competitors in the market. If you plan on starting a real estate investment business, there are 5 important things to know in order to get started and make for a successful business.
The first step to starting a real estate business is to set a formal business entity, be it an LLC or a corporation. More often than not, an LLC is often preferred to a corporation as it is a simpler entity to open and run. The importance of setting up a formal company to ‘house’ your real estate business because it acts as a shield between you the person and the company. The most important reason for this feature is possibly because of the fact that it protects you from being sued personally if the company gets sued, but it also protects your personal assets such as your home, vehicles, investments and bank accounts.
By setting up an LLC, you and your business will be regarded as two separate entities. Therefore, should your real estate investment business face some sort of financial strain, your personal assets will be protected and cannot be seized in order to compensate for your business’s financial shortfall. Besides personal protection of assets, an LLC also comes with tax benefits such as pass-through taxes where LLC owners are not required to file a corporate tax return. Instead, they simply submit their individual tax returns, thereby eliminating the incidence of double taxation.
When you set up an LLC for the business, it is a separate entity and therefore it should have a separate checking account. A separate account allows you to separate your personal finances from your business finances. Doing this helps in keeping up that ‘veil’ than an LLC provides for you, which means that you should never use company funds for personal expenses.
At times it may be hard to distinguish between a business expense and a personal expense but a laptop or broadband internet could also be categorized as a business expense if it is being used to conduct your business, even though you sometimes use it for personal work. Meeting with certain investors for coffee or lunch is also arguably a business expense. However, you should be sure to keep track of all these expenses so that it is taxed accordingly and you are not breaking any tax laws. Another advantage of a separate business checking account is that it allows you to capture all your data related to your business expenses and income. The bank will have a digital copy of all your transactions.
The most important part of starting a real estate investment business is the actual buying of the property. Do your research on the property market and identify key areas that you are interested in buying in. Also, keep up to date on planned developments in your city. You can find an investment property on sites like LoopNet, Auction.com, Craigslist, Trulia and Realtor. Networking with real estate agents within the investment market is also a good way to find an investment property to start your business. Real estate agents come across all kinds of deals as they have a large network of clients and information. If you’re lucky, you could land a property facing foreclosure and get it at a good rate.
There are a number of ways in which you can secure financing for your investment property. If you have been saving up for a while and you have the capital to finance your property by yourself then that’s great. However, for most people, they will require some assistance. You could secure financing with an investment property mortgage. You have to however have at least six months of cash to finance the taxes, insurance and any other payments related to the home.
Another means of securing finance is through a government-backed loan. These FHA or VA loans are specifically for first-time home-owners and boasts low-interest rates of 3.5%. One important aspect to note with this type of loan is that the home you purchase has to be occupied by you for at least 12 months. Thereafter, you can flip the property and kickstart your real estate investment business. Peer-to-peer lending is another means of lending which has become quite popular. Essentially, borrowers are connected with investors and the interest rate is dependent on the investor. You could stand to lend the full amount that you need to secure a property however the interest rate may be higher than conventional borrowing methods.
Closing on a property is the final and usually most rewarding stage of purchasing a property. It is when the property is transferred to your name and you officially become the new owner and titleholder. Before closing off on the property purchase with the help of a real estate closing attorney, it is advisable to do a title search and title insurance. This confirms a property’s ownership and determines whether there are any claims on the property. If there are claims on the property, this should be resolved before transferring the property onto your name. A real estate attorney is crucial in this step of a real estate transaction.
A real estate attorney can handle all the legal matters, eliminate any potential risk and ensure that the deal is closed properly. Before finalizing the deal, be sure to do a final home inspection of the property. If you find an issue that was not disclosed prior to the agreement, you have the opportunity of backing out of the deal. Most real estate investment buyers don’t realize that even though a price has been agreed upon, you can try to renegotiate the offer if you discover something that does not live up to your expectations or what has been described to you.
Finally, it’s important to understand all the legal documents included in the agreement. This is something that your real estate attorney can assist with to ensure that you fully understand what you are agreeing to. Very importantly, read the fine print and check that the interest rate is correct as all legal paperwork is binding.
Starting a real estate investment business takes is not easy and it involves lots of planning in order for it to successfully take off. There are several legal steps involved which should be adhered to and having a real estate attorney to advise you will definitely make the process easier. In the long run, a real estate business can be extremely profitable when it is done correctly. We have outlined 5 important steps that serve as a guideline to anyone planning to start a real estate investment business. By following our guidelines, you can protect your personal assets and build a profitable real estate business even if you don’t have all the capital, to begin with.
About the Author Jerome Quinn, Jr. began learning the law as a teenager working in his father’s
law office. After law school he started his legal career representing families, individuals
and small businesses that had been taken advantage of by financial
institutions and fiduciaries. Read More