What are the key fundamentals of a real estate business?
It is important not to define your business based on the number of transactions you do a year. Regardless if you are closing one deal a month or none at all, you will need to put your real estate business in the driver seat. In the beginning, it’s easy to view your real estate career choice as a hobby, especially if you maintain a full time job or the volume is not at a high level. Remember that your real estate business will only become as successful as the work you put into it. Treating it as a hobby and something you do on the side will not equate to success, or even getting your business of the ground.
3 Cornerstones Of A Real Estate Business
Legal Structure
The first step in running a real estate business is getting the legal and accounting sides taken care of. This means figuring out how you want to close and what legal entity you want to use. Most investors will set up an LLC to protect themselves, but you should definitely speak to an accountant to figure out what the best option is for you. It is also important to set up a separate business bank account for all of your transactions and deals. There will be certain business expenses that you can write off, but more importantly, you want to know where your money is going every month. By keeping a separate account, you can track all of your expenses find ways to save more money than you may have thought.
Business Plan
The next step is to come up with a set of guidelines and parameters for every new deal you consider. Known as a real estate business plan, this plan of attack will assist investors in not only understanding and highlighting their goals, but outlining the path to achieve them. Part time investors often struggle with what to do when a new deal comes their way. They scramble around to find information on the property and the area. You can avoid this by making rules for yourself. For instance, you will only look at properties in a specific area, price range or style. The more experienced you get, the further you can expand your criteria. However, if you don’t have the time to mind due diligence, it is best to stick with a smaller investing area. Once you find a property, you should have a due diligence checklist that pertains to your real estate business, which must be followed on every deal. Everything from the immediate area to property taxes must be evaluated and to your liking. Making a list will help streamline your evaluation and leave you with better properties. The alternative is making offers on deals that you don’t know much about.
A hobby is something you enjoy doing in your spare time. while starting a real estate business is something that requires a greater amount of attention. Like any hobby, you should have a goal for what you want out of it. If you collect baseball cards, are you looking to build a collection to pass on to your grandkids or will you sell if there is a profit? If you knit sweaters, are you doing it give them to your kids or are you looking to build a sweater line? With real estate investing, you should have some idea of what you want out of the business before you get started. There is nothing wrong with having a goal of one rehab every year. Whatever your goals are, you need to make sure they fit with the other commitments you have in your work and life. Investing is often much more time intensive than you may imagine. If you don’t see the results that you are looking for, your hobby will start to be a distraction.
Due Diligence
It is much more difficult to try to retain some business structure after you have already closed a few deals. Starting from your very first deal, you should have everything in place for when and if you start to get busier. Most people cannot make a living with their hobby, but a real estate business is much different. If you have a passion for the business and start to see some success, you can slowly make the transition to a full time investor. This is why it is important that you lay the foundation for a business, including conducting your due diligence, while it’s still considered a hobby for you.
However you view your business, you should commit as much time to it as possible. In terms of due diligence, this means spending the time to market, advertise, network and constantly grow your business. If you don’t have leads to work and deals coming in, your hobby will quickly turn stale. You should take a business approach with everything you do in real estate. You never know when that one deal you close or one contact you meet can completely change your path. You may find that you enjoy one niche over another or someone is impressed with how you work and has more deals for you to handle.
Having a hobby is a great way to keep sane and pass the time doing something you love. Investing into a real estate business can open the door to a world of possibilities, including passive income and retirement funding.
