Is Real Estate a business or an Investment?

Question

Andrew Johnson · Answer

@Maurice Bunn Even with a PM it will feel like an investment when things are going well and a business when things aren't.  When things are good and the money is just being deposited in your account it can feel like an annuity.  Maybe you spend some time reviewing the cash-flow statements but that's about it.  When vacancy is high, capital expenses are needed, evictions happen, etc. it starts to look and feel like a business pretty darn quick.  Oh, and come tax time you'd also better think of it like running a business!

Thomas S. · Answer

Purchasing income real estate is a investment. If you are a landlord then you are operating a business.

The majority of investors operate a business.

Those that place their money in a REIT or have zero involvement in the operations or decisions involved in the real estate are strictly investors.

Dustin Beam · Answer

I casually look fairly regularly, if that makes sense. But you're right, I haven't bought any property since my first purchase. The reason why is easy: gotta find a good deal and have the capital to get it.

My capital is limited so I'm probably stuck in the 4plex or smaller range. And of course, the hardest thing of all is finding a good deal. Pretty much anything in my area that is listed through the MLS is priced approx 100 times more than the monthly rent. From my experience, that's way too thin of margins to make work. Unfortunately, there must be plenty of investors that buy here that disagree lol :)

P.J. Bremner · Answer

@Maurice Bunn

Pros: more cash flow compared to traditional rental, 0 vacancy in 5 years, 0 evictions (students don't know how to be professional tenants), more control of your investment.

Cons: Increased repairs, more work compared to traditional rentals, city can shut you down if you do it the wrong way, exit strategy is tougher because a home that would work as a great student house is generally not a good house for 90% of families looking for a primary residence.

P.J. Bremner · Answer

@Maurice Bunn

For me, it can certainly be BOTH or NEITHER.  I run a student housing business, which is certainly hands on and very much a business rather than an investment.  Granted, the homes I own have all gone up in value significantly since 2012 and there are investment elements there, but if I were to stop managing my student homes, they would fall apart and I would have nothing left.  If I were to buy a turnkey rental somewhere, have another company manage it, pay my CPA to handle all the numbers and make sure they are profitable, it would very much be a passive investment.

On the flip side, someone who has no clue what they are doing and buys the wrong property at the wrong time with the wrong financing, etc. is neither running a business nor are they investing.  They are throwing money away.  Prime example of this: look back at 2003 - 2006 when people were buying homes that made no investment sense.  Most certainly thought they were investing, but really they were speculating.  I prefer my speculation to include a mixed drink and involve playing cards (Vegas, poker, i'll speculate all day long lol).  Hope that helps a little?

Andrew M. · Answer

I don't believe the two are mutually exclusive, real estate can be both a business and an investment. I view it as something of a spectrum which mainly depends on how passive your real estate involvement is. The more passive it is the more I would view it as an investment, vice versa.

Johann Jells · Answer

That would be considered a good deal around here these days!

I'm surprised no one has pointed out that the IRS has clear guidelines for discriminating whether you're an investor or have a business.  It's rather hard to prove the latter for many of us, the IRS considers RE passive investing by default. It's a tough one, because most simple investments require no participation, but running rental properties does, but you might not get credit for it. Unless you're taking losses where this gets real for some of us is college financial aid, where business assets get treated differently from investments.

To be a real estate professional, a taxpayer must provide more than one-half of his or her total personal services in real property trades or businesses in which he or she materially participates and perform more than 750 hours of services during the tax year in real property trades or businesses.

Dustin Beam · Answer

For what I'm doing (self manage) I consider it more of a business. But I want it to be an investment. I don't know how rentals could ever be 100% investment unless you're not worried in the slightest of getting ripped off. But I would think it could be close to 95% investment...guessing since I'm not there yet.

I figure I'll be in "business" until I get to roughly 75 units. Once there, I hope to have my own full time manager to handle day to day stuff. Then I can just review their work periodically to make sure all is well. I can't wait lol. The day to day management is not my favorite. :)

What I don't know yet is how well I can handle 30-60 units. I have 12 now and that's fine, but imagine my time will become consumed once I'm in that 50 unit range. But by then, I should be able to quit my day job, so that will hopefully be ok. Now I'm just rambling......

David Dachtera · Answer

@Maurice Bunn,

Real estate is a business. Properly managed, it should be a profitable investment.

A property is an investment. Buy it the right way for the right reasons it should be profitable, if you've done your homework well.

Just another perspective ...

Llewelyn A. · Answer

Let's ask the question about a Stock, take IBM, for instance.

Q: Is IBM Stock that you purchase a business or an Investment?

A: Well, since you do not participate in anything that IBM does, you don't generate income for IBM, you don't pay expenses or hire employees for IBM. Therefore, your Purchase of IBM is an Investment.

Now let's walk it back to Rental Real Estate.

Q: Is Rental Real Estate that you Purchase a Business or an Investment?

A: I find tenants, pay expenses, hire contractors. THEREFORE, It is a Business.

Now let's expand that a little bit more.

Q: I bought shares i a REIT.

A: Same as a the Answer for IBM. Except this is a Real Estate Investment Trust.

Q: A partner and I decided to buy Rental Real Estate together. We Incorporated. I do not participate in any of the decision making but he is the Active Manager.

A: You bought an Investment. Your Partner bought a Business.

This list of Q and A can go on and on. But I think you get it.

If you participate in any business activities, it's a business. Otherwise, it's an investment.

Note that a Business has elements of an Investment. There are times when it runs itself. It also appreciates with increasing Income.

I would say that most Rental Real Estate is a hybrid.

The More you do business activities, the more it's a business and the less it's like an Investment. The less you do business activities, the less it's like a business and the more it's like an Investment.

What I try to tell people who call themselves Real Estate INVESTORS is to beware that you may actually be buying a Business, or, as I like to put it, a FULL TIME JOB, not an Investment.

I buy properties in Class A neighborhoods in NYC. This to me is much more of an Investment that a war zone neighborhood where you will be doing a lot of participation.

But that's just my opinion.

Is Real Estate a business or an Investment?

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