Is Your Real Estate Business Supported By Toothpicks and Band-Aids?
Many real estate investors jump and decide to “go into business”; just like that. Something piques their interest and one day they come across a house. Maybe a “friend of a friend” knows about a great deal someone is selling. The next thing you know, without much hesitation and almost no due diligence, they have managed to buy their first investment property. They are a bona fide real estate investor!
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Suddenly this brand new real estate investor realizes he has no idea what to do next and doubt creeps in. Is this house really a good deal? (Probably not unless he happens to be extraordinarily lucky; especially since there’s very little chance he even knows what a good deal is.) What about the repairs? He’s not too worried since anyone can see it needs paint, carpet and other cosmetics.
This fellow, Nick, didn’t even think about the major systems. Just because the furnace and AC came on and he didn’t see any obvious signs of roof leaks, he assumed everything was good. He also wrongly assumed buyers would just take his word for that.
Without any real experience inspecting houses, Nick decides on some cosmetic repairs and heads over to Craigslist to find a "handyman" (Band-Aids). Never mind that he needs a contractor or an inspector to really check out the house. He just wants to get the work done and sell the house; he wants his projected profit of "15K" out of the house. He has plans for that money! You might be asking, "where did he get that 15k figure"? Well, it just seemed like a good number based on what the house next to his sold for. I should add that Nick never actually looked at that house.
Nick gets the work done which can only be called “marginal” at best and is now weeks behind schedule. He finally sticks a sign in the yard and a few people come by, but there are no interested buyers. There’s no money left in the budget to hire a Realtor. What we have here is a panicked first time investor. You can probably figure out how this story ends; badly.
But this is only the beginning of Nick’s problems. The way that he “went into business” spelled trouble from the beginning. He had no legal structure or protection. And, he failed to have the proper contracts for his business.
Are You Serious About Building a Business?
Then you need to get serious about building a strong foundation; not a “house of cards” that will come tumbling down at the first sign of trouble. You have to take the steps needed to protect your business from financial loss which can come about in many ways such as unexpected large tax bills, property loss due to not putting the proper insurance in place, and problems with city, state and federal entities because you failed to set your business up properly.
Here are some steps you can begin with. This list is by no means inclusive, but it is meant to point you in the right direction.
7 Steps to Take Before you buy your first property:
1. Decide on a legal structure for your business. Consult with both an attorney and a CPA. You will need to have an honest discussion about exactly how you will be conducting your business. A rehabber or wholesaler may set up their business much differently than a buy and hold landlord. The tax implications will be different for each exit strategy.
2. Register your business name and get a tax ID. This will take care of your federal legal obligations. Your attorney or CPA can take care of this at your first meeting.
3. Next you need to register your business with your state and local organizations. You will get tax tables in the mail once you have registered with the local, state and federal organizations.
5. Check to see if you need any need any permits or licenses. Your attorney can also help you with this.
6. Meet with an insurance representative to determine exactly what types of insurance coverage you will need to protect yourself and your business. Be sure the insurance company you choose can grow with you as your business changes and grows.
For instance if you are a rehabber, make sure that if you decide to be a buy and hold landlord down the line that they can provide coverage. Often times your insurance company will offer some type if “umbrella” policy that will close any liability gaps. It’s a good idea to take advantage of this if it is offered.
7. Talk with your attorney at your initial meeting about buying property in a trust to limit your legal liability. I had my real estate attorney set up my LLC for my business. He also does all of my closings. Since he knows my business, he is better able to advise me whenever I have a question or concern. A real estate attorney can also keep his clients up to date on any changes in the laws that might affect their business.
Did you notice what we were doing?
We just started the process of building your team which is crucial to the success of your business. As you grow and your business evolves you will naturally add more team members. Your team will be there to advise you, help you do things correctly (and legally) and will be there to protect you.
Build a Solid Foundation for your business before you buy any property and you will never be sorry.
What steps did you take before buying your first investment property? Do you have any advice for newbies so that they get off on the right foot from the beginning?