There are many reasons you may want to start a real estate investing business. Investors typically become interested in real estate as a way to grow their cash through quick sales, or as a long-term investment that can provide rental income and asset appreciation over the course of several years.
It doesn’t matter if you want to take on more of a landlord-style role, flip homes, or deal in commercial real estate — knowing how to start your real estate investing business is the first big step toward success in this dynamic field of opportunity.
Take a few minutes to review the following sections that outline the steps involved in forming a real estate investing business. Even though your situation may be different from what other investors are doing, there are some universal truths you should understand before you go all-in.
Form Separate LLCs for Each Real Estate Investment
Once you have an eye on an investment property or have developed a game plan for your real estate investment business, it's time to form an LLC to protect your personal assets from liability. Surely you can already imagine how horrible it would be to face an expensive lawsuit...especially if you come out on the losing side. Creating an LLC for your business can protect your personal assets from being roped into a business-related lawsuit.
But one LLC might not be enough if you want to own multiple properties — consider creating a separate LLC for every property you own. This will further separate the liability for each property (including your personal assets) from lawsuits, foreclosure, and other unfortunate circumstances. The more properties you own, the higher the risks of something happening that might adversely affect your overall business, like a frivolous tenant lawsuit, tax issue, compliance problem or more. The minimal cost of setting up a new LLC for each separate property could be the best money you spend when starting a new real estate venture.
For future investors who are ready to form one or more LLCs for their real estate investment company right now, Incfile can help — no matter what state you want to do business in. Even if you think you have the process under control, consider the long list of benefits we offer business owners at minimal cost, such as the Incfile Gold Package. Working with a trusted LLC formation service to start your business can be like having an administrative assistant, business consultant and wealth of informative resources all in one place!
Consider a Series LLC
Throughout the course of your research, you may have heard the term series LLC and wondered if it applies to your investing strategy. A series LLC is a single business entity that essentially owns or oversees multiple separate others. The series LLC allows a real estate investor to keep all of their properties legally separate, but continue managing them under one umbrella LLC.
The benefit of this structure is the separation of risk, with the ability to have sole or multiple members managing the different property investments. For example, you may want to be the sole owner of several properties, but invite other members into other deals for a variety of reasons. The series LLC is only available in certain states, so do your research first to see if this is a viable option for your business.
Hire a Certified Public Accountant (CPA) & Do Your Homework
The right CPA can make your life as a business owner a lot easier, whether you own one property or 20. LLC formation comes with several tax-related benefits for business owners, and there are unique ways real estate investors can maximize their deductions and business expenses when tax time comes each year (or quarter, depending on your filing needs). At Incfile, we think this step is so crucial that we include one free hour of tax consulting for all our customers — no matter what size entity formation package you choose.
However, you also have to do your own homework and research to develop the knowledge and instincts to be successful in real estate investing. Those who are naturally curious and passionate will be best positioned to maximize the ROI on their investments. Make it a habit to research local, national and global real estate trends — you never know what you’ll learn or what new opportunities you'll discover.
Develop an Investment Strategy
Once you form the right legal entity to fit your business goals, you have to apply a smart investment strategy as you move forward. There are many potential pitfalls for real estate investors, no matter how experienced or knowledgeable you are.
For instance, you could invest in too many properties at once and over-extend your finances. What would happen if all those properties experienced a drop in value due to unexpected market conditions? You could lose your ability to finance new properties altogether. What would you do if you placed too much debt on a particular property right before a downturn in the market? What if you have a problem finding tenants for an extended period of time?
Make sure you have a plan for keeping enough capital to cover your investments while minimizing risks. As an investor, you can’t predict every twist and turn of market conditions. But you can plan for worst-case scenarios to figure out your best strategies for financing — whether you use your own cash, pitch to investors or apply for small business loans.
Pursuing a real estate investment business is a worthy goal — just make sure you consult with professionals for the best advice before you start investing. By understanding the ways you can mitigate risk now at minimal expense, you can potentially save yourself hours of headaches while protecting your hard-earned money and property assets from falling prey to lawsuits and more.
Are you ready tostart a business, form an LLC, or reorganize the structure of your real estate investment business to suit the changing needs of your portfolio?Talk to Incfile today! Our incorporation experts can help you evaluate your options with state-specific advice.
Ben Gran is a freelance writer from Des Moines, Iowa. Ben has written for Fortune 500 companies, the Governor of Iowa (who now serves as U.S. Secretary of Agriculture), the U.S. Secretary of the Navy, and many corporate clients. He writes about entrepreneurship, technology, food and other areas of great personal interest.