How to Start a Real Estate Business: Key Steps for Success

Start your real estate business with success.

Starting a real estate business can be a lucrative venture. Real estate investment provides various avenues for building wealth and achieving financial freedom, such as generating passive income through rental properties or earning profits through property sales. However, there is much to learn about real estate investing before closing deals.

Real estate investing (REI) offers endless opportunities for growth and success. But starting a real estate company requires preparation, creating a business plan, building a real estate team, and attending networking events. Although investing in real estate sounds challenging, the rewards can be great.

This article explores the key steps for starting a successful real estate business. From creating a business plan to building a strong personal network, you will learn about the tools and resources you need to become a successful real estate investor and how to start a real estate business.

What is a Real Estate Business?

A real estate business involves buying, selling, or renting properties for profit. Investing in real estate can provide passive income and long-term financial stability. Starting a real estate business requires a solid business plan, knowledge of real estate law and regulations, and an understanding of marketing strategies.

Investing in real estate can involve owning residential real estate, such as a single-family home, to rent out and then enjoying recurring rental income from rent checks. Or you could invest in commercial real estate by owning office buildings, multifamily apartments, or retail spaces. Vacation homes and income properties are other options.

Finally, some investors make money by house flipping. This strategy involves buying distressed investment properties to fix up and then selling them for a profit.

Of course, starting any business is challenging. However, the reward of owning real estate can make any effort worthwhile.

Steps To Start Your Real Estate Business

Starting your own real estate business allows you to create a successful career and generate wealth through real estate investing. You control your financial goals, investment opportunities, and marketing strategy as a business owner. When executed correctly, you have the potential for long-term passive income and positive cash flow.

Here are four steps required before registering your real estate business.

1. Have clear investment goals

First, decide the type of investor you want to be. Many real estate investors start by house hacking. This business strategy involves renting out a part of the property where you live. Another business idea for beginners usually involves buying a property to rent out or house flipping.

It’s also advisable at the outset to write your mission statement—a clear message of intent about the purpose and motivation of your new real estate business. Your mission statement becomes the initial part of your business plan.

2. Carry out market research

After deciding on your own real estate business investing goals, the next important step is conducting market research, which involves studying the local market to identify promising investment opportunities. Identify your target market, and look for neighborhoods with high rental demand. Keep an eye on future developments that could impact the rental market positively.

3. Create a real estate business plan

The adage goes, “Fail to plan, and you are planning to fail.” Therefore, a good business plan is crucial to success. Map your investment journey based on your goals.

4. Calculate the costs of starting a real estate enterprise

One of the benefits of starting a real estate business is that it’s relatively cheap to start. You don’t need a master’s degree or to rent office space or invest in expensive equipment.

Did you know you already have the necessary equipment? All you need is a laptop and a good internet connection.

Some of the set-up costs of starting a real estate company include:

The registration fee for setting up a business entity
Business insurance
A business license and permit (check with local state regulations)
Financial software
Marketing materials

Is the Real Estate Business Profitable?

Overall, the real estate business is profitable for those who do their homework and put in the necessary time and effort.

Here is how investors make money from real estate:

Income from real estate profits

The most significant advantage for property investors is the consistent cash flow they receive. For instance, a rental property owner earns regular income from monthly rent payments. If you make smart investment choices, the rent you receive can cover your mortgage payments and expenses while still generating passive income for you.

Real estate profits through appreciation

And that’s not all. When the value of your property goes up over time, you can enjoy additional financial benefits.

Investment properties tend to increase in value over time. Appreciation can happen due to the location becoming more desirable. Or capital improvements in the property can increase its value. Additionally, you can make a lot of money rehabbing or house flipping.

For example, a property you buy today for $200,000 could be worth $250,000 in two or three years. Or you could buy a distressed property for a knock-down price, rehab it, and sell it for a substantial profit.

Benefits of Starting a Real Estate Business

What are the compelling reasons for getting started in the real estate industry? Here are some benefits of starting a real estate business.

Real estate tax benefits

Becoming a real estate investor gives you tax breaks. For example, the deductions on your tax return can include property depreciation, rental property tax, property management fees, mortgage interest, and improvements.

Additionally, you can benefit from a 1031 exchange. This investing tool allows you to defer capital gains and depreciation recapture tax.

Protection from inflation

Real estate investments are an excellent inflation hedge. Property values and rents typically rise along with the costs of goods and services. Therefore, you benefit from property appreciation and increased monthly income as everything else becomes more expensive.

Control over your business

When you own rental units, you have full control over your investment decisions, allowing you to be the captain of your real estate journey. You get to choose your investment strategy and decide based on your goals and preferences.

Unlike the stock market or bonds, real estate investments tend to be more stable and predictable, offering a sense of security to rookie investors.

Structuring Your Real Estate Business

You must sort out your new business structure before closing your first real estate transaction. As an investor, you typically don’t need a real estate broker or real estate license to manage rental properties, which makes real estate businesses more accessible for beginners.

First, however, you must register your real estate business with the IRS. The most common business structures are the following:

Limited liability company (LLC)
Limited partnership
Sole proprietorship
Partnership
Corporation
S Corporation

So which legal business structure is best for starting as an investor? Many real estate companies choose the LLC option. This structure limits your personal liability and has better tax breaks than being a sole proprietor. Additionally, you may find it easier to secure loans if you’re registered as an LLC.

How to form a real estate LLC

The process to register a real estate business is the following (although it can vary from state to state):

Choose a unique business trading name.
File an Article of Organization.
Create an operating agreement for the new business.
Publish an intent to file.
Apply to the IRS for a tax identification number.

Before you begin the registration process, it’s important to check your local state laws. There might be additional requirements, fees, or permits that you need to consider before officially starting your real estate career.

Opening Bank Accounts and Managing Finances

After registering your new business and getting a tax ID number, the next crucial step is to open a business bank account. A separate bank account keeps business finances separate from personal finances, which is essential for bookkeeping and tax purposes. But before going to your local bank, you should determine the best bank for real estate investors.

Typically, business accounts offer products specifically for investors and registered companies. These can include deals for commercial loans, rewards, and integration with accounting software. However, you may have to pay transaction fees or have restrictions using ATMs with a business checking account.

Here are some things to check out when deciding on the best bank for small business owners:

Account fees: Some banks charge fees for transactions over a certain limit. Other banks charge monthly fees.
Card services: You will likely require debit or credit cards for property management or repairs. Choose a bank with card services that best suits your financial needs.
Physical branch or online only: Are you happy doing all banking online? Or do you also need to visit a brick-and-mortar bank?
Digital tools: Banks offering services to businesses may provide free software to track business performance.
Financing options: You will probably need loans to finance projects to start and increase an investment portfolio. Therefore, comparing loan amounts, interest rates, and terms makes financial sense.

The importance of bookkeeping and accounting

Every successful real estate professional must record all financial transactions. These include income, expenses, and investments. And it’s good to remember that your bookkeeping and accounting system isn’t only about tracking your money. It’s vital for your tax returns, securing financing, and planning future investments.

While accounting software can be helpful, it’s worthwhile to consider hiring an accountant, especially one with expertise in the real estate industry. A knowledgeable accountant can offer valuable financial advice, such as strategies to minimize your tax liability, plan for future investments, and ensure accurate filing of tax returns.

Additionally, a good real estate accountant stays current on the latest tax updates and real estate codes. They can also be the go-between for banks, lawyers, advisors, and other real estate professionals. In the long run, a good accountant can save you money by taking advantage of tax breaks.

Obtaining Insurance Coverage

Before buying a rental property, ensuring you have adequate insurance makes sense. Ideally, you should arrange business insurance when you receive your tax ID number. This type of insurance protects your business from losses related to unexpected events like accidents and lawsuits.

However, depending on your business structure and type of real estate investment, you may need additional insurance. Here are common insurance policies in the real estate industry:

Property insurance: Also called landlord insurance, this covers financial losses to the property caused by fire, vandalism, or theft. However, it doesn’t cover a tenant’s personal items.
Liability insurance: This covers you in case someone gets hurt or has an accident on your property.
Flood insurance: If the property is in a flood zone or prone to hurricanes, it’s worth covering potential losses against flooding. Remember, standard property insurance typically doesn’t cover flood damage.
Tenant rent default insurance: Also called Rent Guarantee Insurance, this protects against loss of rental income if a tenant fails to pay rent. This coverage helps safeguard your cash flow and protect your profits from potential tenant payment issues.
Loss of income coverage: Suppose a natural disaster damages your property and requires extensive repairs. In that case, loss of income coverage can help offset financial losses if the property is uninhabitable for a period.

Depending on the type of real estate business, other types of insurance can include:

Sewer backup and sump overflow
Title insurance
Pet coverage
Worker’s compensation
Builder’s risk insurance
General contractor insurance
An umbrella insurance policy

Insurance policies for small real estate businesses help protect your capital and regular income in case of unforeseen events.

Building Your Real Estate Business Team

The best investors know they cannot go it alone. Behind every successful rental unit owner is a team of professionals offering real estate business services.

Because real estate is a complex industry, you need a team that can support you. These professionals bring their expertise, knowledge, and skills to help you grow your business, find potential clients, close lucrative deals, and succeed in your real estate venture.

Who are the key players in a successful real estate business team? Here are six:

Real estate agent: Real estate agents connect buyers and sellers and help facilitate the property deal. They also have access to multiple listing services (MLS).
Rental property manager: Property managers handle all the details, from finding tenants and collecting rent to handling repairs and maintenance. They make your life easier and help maximize your rental income. By hiring a property management business, there are no more headaches of managing properties yourself.
Contractors: A team of professionals is usually needed for essential repairs, maintenance, or investment property rehabbing.
Private money lenders: Private money lending is an alternative to getting a mortgage from a bank. Typically, these loans are used to finance “fix and flip” properties.
Real estate lawyer: One of the most crucial players on the team is an attorney specializing in the real estate industry. You need the lawyer to review all legal documentation, draw up rental agreements, and handle negotiations.
Home inspector: A home inspector can help you avoid purchasing a money pit. They inspect the property’s structure for serious defects and repair issues.

Of course, depending on your investment plans, those offering other real estate services may be necessary. These may include architects, appraisers, leasing agents, and title companies.

Developing a Marketing Plan

When delving into how to start a real estate business, remember that a solid marketing strategy is the only way to stand out in a crowded market. Remember, small real estate businesses must compete against established industry players. By implementing a mix of effective marketing strategies, you can attract potential clients, whether buyers, sellers, renters, and investors, to kick-start your real estate business.

What key steps are involved in marketing your new real estate business? Let’s look at four ways those with their own real estate company market their business:

Branding: What makes your business different from similar ones in the neighborhood? It’s vital to develop a personal brand, which includes a compelling story and a clear message. In other words, develop a unique value proposition to attract prospective tenants and reduce vacancies. Find out how to brand your real estate business.
Online marketing channels: Marketing strategies are the best way to get your message out there. You should ensure you have an easy-to-use, mobile-responsive real estate website. Build a following on social media. Use your website to capture email addresses to send emails to your target audience. Invest in social media ads. Have a blog on your real estate website.
Launch marketing campaigns: For a marketing campaign to succeed, you must know your target audience. Identifying tenant personas can help you target specific segments using various online channels. Also, don’t forget traditional marketing channels, like flyers and direct mail campaigns.
Use online real estate platforms: Leverage platforms like BiggerPockets to connect with developers. A fantastic starting point is the BiggerPockets Forums, where you can gain valuable advice from experienced professionals who have successfully overcome the challenges of starting a real estate business.

Managing Risk

Real estate investing is one of the best investment options available. Indeed, some investors rate it as highly as gold. However, as with all types of investment, it comes with certain financial risks. Therefore, understanding and managing the risks is crucial before closing your first deal.

What are some of the financial risks that every aspiring investor should be aware of? There are typically two major risks: financial investing risks and legal issues.

The most common risk investors face is poor cash flow. And there can be several reasons why a property fails to generate regular income. Reasons for negative cash flow can include problem tenants, high vacancies, bad neighborhoods, or changing real estate market conditions. Also, properties can lose value, impacting profits from a sale.

Unfortunately, some new real estate businesses fail to assess the legal risks of owning and managing properties. Of course, insurance can help mitigate financial losses caused by a lawsuit or natural disaster. However, changes in landlord-tenant laws or other legal issues could put your business success at risk.

Here are some common legal issues to avoid when dealing with real estate:

Discrimination: The Fair Housing Act makes it illegal to refuse to rent or sell a property to someone based on discriminatory grounds. These include sex, race, disability, familial status, gender, color, religion, or national origin.
Nondisclosure: You must disclose any lead-based paint hazards on the property. Depending on state laws, you may be required to disclose certain circumstances to prospective house buyers. These can include flood damage, deaths due to violent crimes, and environmental hazards.
Evictions: It’s illegal to conduct a “self-help” eviction. This type of “eviction” could involve shutting off utilities, changing the locks, or forcing a tenant out without a court order. Even if the tenant has violated a clause in the rental agreement, you cannot evict them yourself.
Sales and lease agreements: You can get into legal and financial trouble if you break a rental agreement’s or sales contract’s terms.
The implied covenant of quiet enjoyment: Remember, tenants typically have more rights to apartments than the rental property owners. Therefore, you cannot turn up unannounced unless it’s an emergency. Also, you must ensure the property is in habitable condition. You also may be legally liable for failing to remedy issues caused by delinquent tenants.

The better you understand and manage the risks associated with owning real estate, the more chance that you can avoid costly mistakes. You also protect your investments in the long run.

Common mistakes startup real estate investors make

Identifying and avoiding new investors’ most common mistakes is the best way to prevent your real estate business dreams from becoming a nightmare.

Failing to carry out due diligence on a housing market or potential investment asset
Not using a real estate agent or real estate brokerage when buying a selling a property
Trying to do everything yourself
Not budgeting for repairs and maintenance
Overpaying for a rental property
Underestimating the rehab costs when house flipping
Not screening tenants thoroughly or carrying out comprehensive background checks
Start investing thinking it’s a “get rich quick” scheme
Not having your personal finances in order before starting out
Buying a property without an inspection or appraisal
Starting a real estate business without an exit strategy
Viewing a rental property as your personal residence

Starting a Real Estate Business FAQs

How much does it cost to start a real estate business?

As a general rule, a business owner starting a real estate venture should have at least $50,000 saved. Many real estate businesses start out with more, and other real estate businesses start out with less, but $50,000 provides you with a strong financial foundation in case unforeseen situations arise.

Another factor is whether your target market is residential real estate or commercial real estate. The former usually requires less capital than the latter for those getting started as a business owner.

When is a good time to start a real estate business?

How to start a real estate business at the right time? Avoid trying to time the market too closely. Of course, economic conditions and interest rates play a role, but remember that such investing is a marathon, not a sprint.

Do I need a real estate license?

While you do not need a license to start a real estate company, becoming a licensed real estate agent offers various advantages. Having easy access to the MLS is just one great benefit. However, the long-term payoff results from the invaluable knowledge obtained while studying in order to pass the real estate exam.

You will have to work with a licensed real estate brokerage, but that’s not a negative. Real estate brokers oversee the work of real estate agents and ensure that all laws and regulations are followed.

Conclusion

Starting a real estate career is an exciting prospect. However, knowing how to start a lucrative real estate company requires careful business planning, a detailed strategy, and building a solid business team. Business success in the industry also involves managing the risks of owning a real estate business.

If you follow these key steps for success, your property investments will help you build wealth and gain financial freedom.