When starting out as a real estate investor, it can be very easy to overcomplicate things. There is so much advice and so many products out there that it can sometimes be difficult to know what advice to follow and what you actually need to get started.
What I see happening because of this is a lot of newbie investors who make things harder than they need to be. They want to get this thing or that item set up BEFORE they even buy their first property. To be sure, there are a few complicated things that a newbie investor should be focused on, but there are many others that they often THINK they need, but really do not — at least not until they have been in the business a while.
So what does a newbie real estate investor not need to complicate their startup with? Here are my thoughts.
3 Things Newbies DON’T Need
A Corporate Structure
One of the many questions I get from people looking to get started is, “Should I set up an LLC or an S Corp?” My answer to them is neither. When you are just starting out in the real estate game, an LLC or S Corp is just not necessary and will only complicate things. You simply do not need the extra paperwork, the extra tax returns, the extra filing fees and other expenses if you only have a few rental properties or plan to flip a few houses. Your risk is not that great, and extra insurance will cover you. Plus, nobody is likely to lend to your new corporation so you can’t title your properties in the corporation anyway.
A corporate structure is something you may want to consider as your business grows and you acquire more properties, do more deals or hire employees. In fact you may want to consider more than one. But for now, don’t complicate things, and let’s worry about corporate structure later.
Property Management Software
Another question I often get is about the property management software I use. I will tell them, but I also explain that it can be expensive and for the beginner, completely unnecessary. When you are just starting out, you really need nothing more than a piece of paper listing income and expenses. If you want to get a bit fancier, you can use an Excel spreadsheet. But in no way, shape or form does a person who has one, five, 10 or even perhaps 25 rental properties need sophisticated property management software.
If you are lucky enough to grow your business and increase your number of holdings, then yes, a property management software system starts to make some sense. But at the start, it is not necessary and really only complicates things. You are learning so much; why add a new software program to that already steep learning curve?
Yes, I know, everyone has a website or some other form of internet presence these days, but when you are just starting out, an internet presence just complicates things and sidetracks your focus. What do you really need a website for if you only have five rentals? You don’t. Posting on Craigslist and elsewhere will do just fine. Are you building a website to generate leads? Okay, I might give you that one, but most of the time the newbie who is just starting out needs to put their focus elsewhere.
Yes, I agree that a presence on the web makes you look more professional, but these things will come with time. For now, reserve your domain names perhaps, but don’t overcomplicate things with a website that may need frequent updating and revisions.
So, what should you be focusing on?
4 Things Newbies DO Need
This is an absolute must. A plan is your roadmap from point A to point B. Want to retire in five years by replacing your job income with passive income? You need a plan. Want to purchase buy and holds with cash from wholesaling profits? You need a plan. What should be in your plan? I do not know, as it needs to be tailored to you. But I and others have written about plans. Read up on forming a plan and spend some time writing one down.
You cannot do this business alone. I have seen many try and simply get very tired and very frustrated. You will need a team to help you even if you only have a couple of rental properties or do a couple of flips. Who might you need? An attorney, contractor and accountant are a few that come to mind. These people can dispense valuable advice, keep you out of trouble, get you through some tight spots and help you grow your business.
A Solid Lease and Contracts
If you are going to be a buy and hold investor, you are going to need to have a very solid lease. If you plan to flip, you need a solid purchase and sale contract. These must be tailored to the particular rules and laws of your jurisdiction, and you need one that will protect you when something goes wrong (notice I said “when” there). Do not rely on store bought forms. Have these documents drafted and reviewed by an attorney from your team. Trust me, when you get into court, you will be glad you did.
Properties require repairs and upkeep. Deposits and down payments need to be made. That all takes money. If you spend all of the money you make and do not keep any in reserve, you are heading for trouble. You need to plan now how much money you are going to put aside each month. Put it in a special account that is difficult to get to if you must, but just keep some capital aside.
Don’t let yourself get bogged down and try to overcomplicate what can already be a complicated business. The first thing is to just get started and to build your business. The other things will fall into place as you need then.
Newbies: What items are you focusing on right now? Experienced investors: Looking back, what do you wish you hadn’t overcomplicated your business with starting out?
Let me know with a comment!