3 Things Newbies DON’T Need to Complicate Their Startups With (& 4 They Do)

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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.

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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.

Related: Newbies: You NEED to Overcome Your Fear of Asking Questions (& Looking Dumb). Here’s Why.

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.

overwhelmed

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?

A Website

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

A Plan

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.

Related: Newbies: These 3 Simple Steps Will Prepare You For Your First Deal

A Team

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.

team

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.

Some Capital

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!

About Author

Kevin Perk

Kevin Perk is co-founder of Kevron Properties, LLC with his wife Terron and has been involved in real estate investing for 10 years. Kevin invests in and manages rental properties in Memphis, TN and is a past president and vice-president of the local REIA group, the Memphis Investors Group.

28 Comments

  1. Vincent Aiello

    Succinct and on-target, nice work Kevin. I’ve been at this on and off for over a decade (albeit part time) and I am happy to report I still do not have a website or property management software–I could not agree with you more. Plans and teams can be developed as you go and should not be impediments to hitting the ground running.

    I wish we could make this article mandatory reading for all newbies.

    Thanks,
    Vincent

  2. Ann Bellamy

    It’s not always true that a new investor can wait to set up their LLC. If they are borrowing hard money, most HMLs that I know require that the borrower take title in an entity. It shouldn’t be a big deal, however, especially if it’s a single member LLC. It can often be done online at the Secretary of State’s website, and the operating agreement can be drafted inexpensively by their attorney, it shouldn’t cost more than a few hundred dollars.

  3. Lauren C.

    Great post Kevin. I’m looking to buy my first property within the next year and this really reminded me to focus on what’s important and what is necessary.

    Right now I’m focusing on analyzing properties. Pretty much I want to be able to decide if a property fits within my parameters quickly when I’m ready to take the big step so I practice analyzing properties now even though I’m not ready to buy.

    Thanks!

    • Kevin Perk

      Lauren,

      Sounds like you are on the right track.

      Watch also what other investors in your area buy and what they do with them. You can learn a lot from being a “lurker” and just watching.

      Good luck and thanks for commenting,

      Kevin

  4. Kevin Yeats

    I disagree with your first point. Corporate structure is an important protection of personal wealth in the event of a suit. One injured worker or subcontactor or one unhappy tenant/buyer and a suit happy lawyer will tap into the PERSONAL wealth of any real estate investor. That could include any investment properties not held by the LLC or other corporate entity. This is a topic best discussed with a qualified attorney.

  5. Rick Grubbs

    An LLC creates a whole new layer of bureaucracy you just don’t need in the beginning. You can buy a $2M liability policy for a fraction of the headache of entity creation and maintenance. I have 43 units and still no LLC, just good liability coverage. If your risk tolerance is so low you can’t live with that you might want to consider something other than RE for your investments.

    You may also notice that many of the people who advocate for forming a corporation are those who gain financially from entity formation.

    • I agree with you, Rick. A corporation just means it is more difficult for a lawyer to get your assets, not impossible. A lawyer can and will come after the assets in your corporation if they see a big paycheck at the end. I feel more secure with a large liability umbrella policy. Also, the best “policy” is to keep a lien on every property all the time. If you have a line of credit secured by each paid-off property, then it shows up as a lien at the courthouse. This keeps lawyers at bay better than garlic keeps vampires away! They want a paycheck, not a mortgaged property.

      There are lawyers in our area who search the property records for properties with no mortgage and cross reference with the addresses of children who test positive for lead paint. They then will file a lawsuit on behalf of the parents of these children. Surely, this must be the fault of the evil landlord, not the tenant who let their child chew on the windowsills until they got through the two layers of latex paint to the lead-based paint that was original to the house.

      You cannot afford to let the lawyers know that a property has no mortgage. They have big student loans and need your money to pay them off!

      • Jordan B.

        One thought about the LLC, it does cost a few hundred to create and you will still have to personally guarantee the loan, but if you wait until you have 50 properties to create one to protect your assets you will have to deed every property into that LLC. That’s $150 a pop. So now that $350 LLC is worth $7500. Just a thought from a conversation I had with my friend who is an attorney. Great article!!!

  6. Bradley Cordell

    I hear lots of experienced investors telling newbies not to worry with LLC’s…. It’s likely that the masses of people saying this are probably right. The question then becomes, how much real estate do you need to have before you start to worry with LLC’s (and the like). I’m also curious about newbie real estate investors that already have a nice nest egg built up. If you are new to real estate but you have already built some wealth with other investments, would the advice of not worrying about LLC’s still apply?

    • Cliff Harrison

      The additional question (in addition to number and value of properties held) is about your personal assets and how attractive of a lawsuit target are you? If you have relatively high liquid net worth it’s attractive to come after with lawsuits, and the entity provides additional protection for it.

    • Bryan Otteson

      It’s all about your personal risk tolerance. Some say you never need an entity, or anything but rental property insurance. Some say umbrella policies rule the world. Beyond that, your LLC. Beyond that, individual LLCs per property. Beyond that, trusts owned by LLCs owned by … you get the point.
      There are many ways to layer your protections, and each comes with its own costs and pros/cons. Look into the options and choose which ones fit the risk profile you are okay with, whether that is your first property or 30th.

    • Kevin Perk

      Bradley,

      Depends.

      Perhaps some clarity on my point of view.

      If you are new and just starting out by buying one, two or three properties and do not have substantial assets elsewhere then don’t complicate things with an LLC.

      As your nest egg grows you can then form an LLC and go from there. At one point do you from an LLC? I don’t know. But I think each individual investor will know when the time is right for them.

      Now if you are a bit more sophisticated than the average newbie when it comes to investments and you already have substantial wealth elsewhere than it may make sense to create a separate LLC basket to put some eggs in.

      Don’t get me wrong, I am all for LLC;s but I just do not think they are necessary for everyone right from the start.

      Thanks for reading and commenting,

      Kevin

  7. Andrew Payne

    Thank you to everyone for their commentary. I must admit, as a new investor without a single property at the moment, that I have already formed an LLC with the SoS. Now I’m questioning whether I should even continue fleshing the LLC out, especially with the financing difficulty of an LLC early on.

    Maybe I’m missing something, but one of the key drivers for my interest in an LLC is to allow multiple parties (family/friends/etc.) who are interested in real estate investing to do so by investing their money with my LLC and being assigned a portion of ownership of the LLC. This wouldn’t include short-term hard money lenders necessarily, but would be a way to get additional capital up front from those interested in the long term investment potential of buy and hold rentals. Thoughts? Anyone else doing anything similar without using a corporate entity to assign ownership?

    • Kevin Perk

      Andrew,

      If you have already formed it, might as well keep it and use it.

      As to your other point. Why not let them loan to the LLC based on the property and give the lender a deed of trust with first position, second position, etc? That is a much cleaner method.

      Be careful about pooling money. You can run afoul of many an SEC law there and you are really complicating things. Please ask someone more knowledgeable than me about this.

      Thanks for reading and commenting,

      Kevin

  8. I have 4 rental properties in two states and been thinking about starting an LLC. The question is, do I actually transfer the ownership by a sale to the LLC? I mean- how can an LLC offer any meaningful protection if it “manages” but doesn’t own the property. I have mortgages on some- how do I handle the existing bank. I really don’t want to redo the mortgage – I have a very good rate on one, and within 1 year of paying off another.

  9. I think that a good way to start establishing a team early on, or something that is similar, is to keep using the same resources for your tasks. If someone does business with you several times, they’ll start to remember you and I feel like this is a good thing.

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