I became a real estate investor soon after graduating college when I partnered with a family member to start a real estate investment company and buy a duplex in Long Beach, California. Since then, I’ve grown my multi-million dollar real estate business, and I now personally own several properties.
Early in my career, money was still tight. But I knew building a real estate company would diversify my streams of income and allow my money to work for me. It can be tough to make the jump into the real estate business world when you’re still building your financial foundation or lack industry knowledge. But if investors like me can do it, you can do it too.
In this article, I’ll walk you through what you need to know to start a company and invest in real estate. Keep reading to get the insights you need to take the first steps and make your business goals a reality.
Investing in Real Estate vs. Starting a Real Estate Business
A lot of people who want to get into real estate ask me if they should start a real estate business or simply invest in an investment property. The truth is, most of the time, rental property owners are running a business—they just don’t know it.
In 1962, the United States Court of Appeals ruled that “owning rental property qualifies as a business if you do it to earn a profit and work at it regularly and continuously.”
Because many rental property owners don’t think of themselves as business owners, they don’t use strategic business thinking to make financial and operational decisions. They miss out on tax savings and growth opportunities while also putting themselves at risk of legal complications because they don’t have the right mindset.
Benefits of Owning a Real Estate Business
- Tax savings: Business owners can reduce their taxable income by deducting the costs of doing business. As a real estate investor, you can deduct expenses like the cost of maintenance and repairs, advertising your properties, property management expenses, and other money you spend keeping your business afloat.
- Passive income: Starting a real estate business takes time and effort, but once your business is up and running, it can become as passive as you’d like it to be. If you hire a property manager, you can start bringing in cash without putting in tons of extra time. As your business grows, that passive income could grow enough to replace your 9 to 5.
- Appreciation: Real estate is a hard asset that grows in value over time. As your property appreciates, you’ll be able to leverage its value to continue growing your business.
- Be your own boss: As the owner of your business, you get to make the final call on decisions about each investment and how to best achieve a good ROI. Tons of real estate investors are able to grow their businesses large enough to quit their full-time jobs, which means if you play your cards right, you never have to work for a boss again.
- Legal Protection: When you form an LLC or corporation, your personal assets are protected against any potential lawsuits or liabilities. Real estate is a highly regulated industry, so it’s common for investors to encounter legal issues. It’s important to make your business status official and choose the right structure so you don’t end up personally responsible when an issue comes up.
Types of Real Estate Investment Businesses
Residential Rental Company
Residential rental businesses invest in real estate properties to rent to either short or long-term tenants. These businesses earn money through cash flow from rental income and appreciation of the home over time.
Commercial Real Estate Company
Commercial real estate businesses rent to tenants who use the property as office space, retail space, industrial space, or any other business purpose. The commercial real estate market responds differently to economic conditions than residential real estate, so some real estate investment businesses create commercial and residential branches.
Real estate wholesalers find discount properties, obtain a contract to purchase that property, and sell the contract to an end buyer. They act as a middleman during real estate transactions but do not own the property. A wholesaling business earns money by charging a fee to the end buyer.
A real estate investment group (REIG) purchases residential and commercial properties and builds a portfolio of diversified investments. REIGs are made up of individuals who act as partial owners and pool their funds to make larger real estate investments.
Real Estate Development Business
Real estate developers purchase land or buildings to renovate or construct new properties. House flippers are considered a type of real estate developer, but they typically emphasize the quick purchase, renovation, and sale of the property. Other types of developers might work on development projects for years at a time before selling for a profit.
How to Start a Real Estate Investment Company
1. Identify Your Business Goals and Your Strategy
Before you go into any venture, you have to know why you’re doing it. Make it clear what you hope to accomplish, and how you’ll get there. Start by writing a business plan, so you’ll have a clear roadmap as you move forward with your business.
A business plan should include:
- Mission statement: A mission statement is an explanation of the company’s goals, purpose, and beliefs.
- Business Structure: Decide whether you will form a sole proprietorship, partnership, LLC, or corporation.
- Market analysis: Research trends in your area that will affect your business. Also, think about the competition in your area. If there are numerous investors quickly buying potential rental properties, this could impact your business. Here’s a list of some questions to ask yourself while analyzing the market:
- Are rents predicted to rise or fall?
- Is the population growing?
- Is it difficult to compete with other offers when buying a property?
- Are there more vacancies in your area than tenants looking for places to rent?
- Implementation strategy: This section of your business plan should go over your strategy for earning a profit when your business is up and running. Will you rent to short-term or long-term guests? Will you buy and hold properties or sell quickly for a profit? Whichever strategy you use to turn a profit, outline any potential obstacles and how you plan to overcome them.
- Financial statements: Your business plan should list your current financial standing and how much you anticipate you will need to keep your real estate business operational. Whether you intend to work with a traditional mortgage lender, angel investors, or private lenders, state how you plan to obtain the funds you’ll need.
2. Form Your Business Entity
Before you can secure financing, you’ll need to establish yourself as a legal business. This will allow you to borrow money in your business’ name rather than your personal name. While some real estate investors operate their businesses without formally setting up a business entity, I don’t recommend that strategy. With the right business structure, you’ll have greater legal protection and tax advantages.
Choose your business structure carefully. Here are the options:
Sole Proprietorship or Partnership
In a sole proprietorship or partnership, there is no legal distinction between the business owner and the business. While this business structure is nearly effortless to set up, I rarely recommend it for real estate investors because it offers no financial or legal protection for your personal assets. If you choose this business structure, you’ll avoid business income tax, but you’ll be subject to self-employment tax.
When first beginning as a real estate investor, I typically recommend structuring your business as a real estate LLC. The LLC structure is easier to set up than a corporation and offers greater protection to your personal assets than a sole proprietorship or partnership. You’ll still pay a self-employment tax as an LLC owner, but there are multiple tax deductions you can take to lower your taxable income.
Owners of large real estate businesses can benefit from structuring their companies as corporations. There are higher fees for setting up a corporation, but you’ll no longer be subject to a self-employment tax. Often, business owners initially set up a sole proprietorship, partnership, or LLC and later restructure as a corporation when the business grows.
Once you’ve chosen a structure, you’ll need to:
- Register your business with the government and IRS.
- Apply for an Employer Identification Number (EIN) through the IRS.
- Choose a registered agent, which can be yourself, a member of your company, a lawyer, or a registered agent service. Research the top registered agent services to find a good fit.
3. Get Your Finances in Order
With your business structure in place, you’re ready to secure funding for your real estate investment business. Reach out to multiple lenders to discuss your investment plans. Research from Freddie Mac found that borrowers who get quotes from five different lenders save an average of $2,914 over the life of the loan.
As interest rates have reached 40-year highs in 2022, it’s more important than ever for the profitability of your business to find a good lender. Look into financing options outside of traditional mortgage lenders. Reach out to private lenders with a description of your business plan. Don’t settle until you’ve found the best option.
If you’re not sure how to find investors, attend networking events or reach out to others in the real estate industry to ask if they know any investors interested in a new deal. You’ll have the most success finding investors if you have a really solid business plan. If you struggle to find investors at first, consider going back to the drawing board with your business plan to make it more appealing.
4. Implement Your Strategy
You’ve taken care of all the practical things, so now it’s time to start earning money. Search for the right property for your first real estate investment. By now, you’ve likely done your research to learn the characteristics of a profitable investment. Be patient while looking for properties that meet your criteria, and be ready to act quickly when you’ve found one.
Depending on the strategy you’ve chosen for your business, the next steps might include fixing up a property, marketing a rental to tenants, or connecting with buyers for a wholesale transaction.
If your business plan is a good one, you’ll start earning money and building capital for your next transaction. Remember to stick to the goals and strategies outlined in your business plan.
5. Nurture Relationships With Others in the Industry
As you work to grow your business, the best way to find good tenants, contractors, investors, buyers, and sellers is to build your network. Attend networking events and conferences and have an active online presence. Be willing to help out others by offering advice, mentorship, or introductions to your connections.
When you meet new people, follow up and work to maintain your relationships. While nurturing your network takes some effort, you never know who will send you a good deal later on. For your business to succeed, you’ll need the best rates from contractors, invitations to participate in the best investments, and high-quality mentors to turn to for advice.
- The first step in starting a real estate business is writing a clear and concise business plan where you identify your company goals and strategies for achieving them.
- Choose the right business structure to maximize tax benefits and protect your personal assets from liabilities accrued by the company.
- Discuss financing options with multiple lenders, including traditional mortgage lenders, private lenders, and investment groups to ensure you’re getting the best rates.
- The best way to grow your business once it’s established is to build and nurture your network within the real estate industry.
Start Building Wealth With Real Estate
American billionaire and hedge fund manager John Paulson says real estate investing is simple, stating: “If you don’t own a home, buy one. If you own a home, buy another one. If you own two homes, buy a third.”
Thousands of investors have followed Paulson’s advice and built wealth through real estate investing. Real estate entrepreneurs consistently see reliable returns in both good economic conditions and bad.
If you’re ready to follow Paulson’s advice, enter one of the most reliable investment industries, and build your real estate business, learn what to look for in your first investment property with “What to Know When Buying Your First Investment Property.”