So, Your Real Estate Investing Side Hustle Has Grown into a Business.What Now?

Often, when I’m meeting with potential note or note fund investors, I’ll asked them, “What type of investor are you?” Some know exactly what type they are, and others have to stop and think about it. Of course, they all want return of capital, as well as a return on their capital, but that’s not really what I’m getting at.

Think about it: Are you an active or passive investor? What type of time commitment can you make, and what’s your knowledge base? What are your investing goals (both short and long-term)? And finally, how do you make a living today?

The answers to these questions are telling. For example, an active investor, someone who has an extensive knowledge base about notes and has time on his/her hands may be well-suited to purchase notes. That said, an investor who is looking for a more passive investment (“mailbox money”) may be better suited to invest in a note fund. Having this information is critical because once we know who our client is, we know the best way to serve him or her.

When it comes to hard real estate, a lot of those questions still hold up. Most importantly, though, you need to define what type of investor you are in order to know what type of real estate investments are the right fit for you. That said, this can be difficult to determine when you’re just starting out in real estate.

Personally, I started as a part-time agent who invested his real estate commissions into buy-and-hold rental properties that I self-managed because I was fairly handy from owning a painting company. In the beginning, I just wanted to buy one house a year, and then later I just wanted to own 20 free and clear properties. Next thing you know, once I had tasted life as a landlord, my goal grew to owning 100 properties.

When I was 42, though, everything changed. I injured my back to the extent that I had to end my career in contracting. On the bright side, this forced retirement allowed me to focus 100 percent of my efforts on my real estate business, which by then included sales, title, and property management, along with managing my own portfolio of properties. Never one to sit still, I soon found my way to real estate note investing.

Related: 7 Ways to Constructively Give Criticism for a Better Real Estate Business

My growth pattern was similar with institutional notes. A few friends and I started out as note investors with our own money and got our feet wet with four loans. Over time, we started raising more capital and buying more notes, and this sideline quickly morphed into a full-blown business. Fast forward 10 years, and we’re still growing.

So, if you started out investing in real estate as a side hustle like I did, how do you know when it’s turning into a business?

3 Pillars of Business Development

You’ll know your sideline is becoming more of a business when you start to encounter what I call the three pillars of business development:

Sourcing (of product or deal flow)
Capital (for acquisitions, development, marketing…)
Scalability (the number of deals you could do if they were all free and freely available and/or if you had an unlimited supply of capital)

We tend to be a master of one or maybe two of these three at any given time.

For example, at my note company, in the beginning, we needed more capital to buy notes, and then later, the need was for more sources of notes to buy, and then it was more of a scaling challenge with staffing, systems, software, etc.

You get the idea. Well, it’s similar with real estate.

The “E-Myth”

On my path to building a business, I’ll never forget the impact of reading Michael Gerber’s book The E-Myth Revisited: Why Most Small Businesses Don’t Work and What to Do About It for the first time. What stood out to me the most with the book was Gerber’s belief that you should set up your business like a systems-driven franchise does. In other words, the business should run according to documented processes from day one.

Another “ah ha” from Gerber’s book was the idea that the founder (me!) no longer needed to “wear all the hats” in the organization. Highly functional, systems-based companies didn’t require the founders to keep the business going through individual genius or superhuman effort.

And yes, fellow control freak, eventually you will have to learn how to let go and elevate and delegate.

Although I finally got comfortable delegating to our senior leadership team and capable employees, when it came to delegating management of my real estate portfolio and investments, I was resistant. In fact, it wasn’t too long ago that I was still trying to do everything myself.

You quickly realize, though, that if your business revolves around you, it can’t continue to run on its own in the event that something happens (e.g. if you get hit by a bus). Until it can run on its own, it may be more of a job than a business.

What Stage Are You In?

So, what about you—has your real estate investing grown into a full-on business?

If so, when did you realize you were no longer just doing real estate on the side but also a true business owner? And whether you’re at that stage or not yet, what growing pains are you experiencing?

Let’s talk below.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.