Real Estate as a Business
What is the difference between doing real estate as a business and just individually investing in real estate?
Technically, there's no difference. The difference is going to be in your mindset, how you approach tasks, how diligently you structure the pieces around your investing, etc.
When someone talks about "treating investing as a business," they generally just mean to approach investing with the goal of expanding, scaling, optimizing and overall just making things more efficient. They will ultimately increase profits, reduces headaches and let you focus on the bigger ticket items of real estate (finding deal and finding money) as opposed to dealing with all the little day-to-day issues (which you can let others in your business handle).
This is how i see it.
S Corporation : real estate as a business : Active Income
Schedule E: individually investing in real estate: Passive Income
To me it is about volume and time spent perusing success.
Originally posted by @James Park:
This is how i see it.
S Corporation : real estate as a business : Active Income
Schedule E: individually investing in real estate: Passive Income
My passive rental income flows through an S-Corporation...where does that leave me? :-)
That is a good question @Joshua Chen. To me there are different criteria that could make RE a business. Of course there is the IRS definition of "Professional" which means you work in RE a certain amount of hours etc; and then there is then issue of the LLC which characterizes the holding as a business entity. Warren Buffet even calls a RE investment a little business. Then there are those that make a living in RE and that to me is the definition of being in business or as RE as a business.
For me I consider myself, at least up to this point, an investor enjoying passive income. Before I retired from a w-2 it was just that. Now since it is half my income and a larger part of my work time I am approaching business status (in my mind). Technically, according to the IRS I am still an investor. And as far as insurance goes I am borderline residential and commercial. They are saying I am over the line and exposed to risk; commercial sounds like business.
Same way with investing in distressed properties. Have not flipped, only kept for personal use. Again, borderline business activity but still investor status. Will need to sell something going forward but will be property held for awhile. Again avoiding the anti-flipping law that says flipping is a business that needs a contractors license.
Then there is your personal conduct. Do you operate in a business like manner or are you a novice. RE management must be run like a business or you risk losing everything. I do think of managing properties as a small business and take it very seriously. Guess you could say I am in the business of managing my properties.
Originally posted by @Joshua Chen:
What is the difference between doing real estate as a business and just individually investing in real estate?
In many ways, I think it's the difference between succeeding and failing. Regardless of how much you're investing (full time or on the side). You need to treat real estate as a business and not a hobby. I wrote more about this concept here if you'd like to check it out: http://www.biggerpockets.com/renewsblog/2015/01/14/real-estate-business-not-hobby/
I guess that will leave you as "Extraordinary". :-)
Originally posted by @J Scott:
Originally posted by @James Park:This is how i see it.
S Corporation : real estate as a business : Active Income
Schedule E: individually investing in real estate: Passive Income
My passive rental income flows through an S-Corporation...where does that leave me? :-)