Learning how to start a real estate investment company, while critical to forming a business, has become synonymous with an inherent degree of trepidation. Not surprisingly, few are well-versed in the field of business structuring, and even fewer are less than comfortable taking the appropriate steps to protect themselves. It is not uncommon for investors such as yourself to have little to no experience establishing a legal business entity.
However, it is important to note that the most prominent real estate investors of our time were once in your shoes. Nobody inherently understands the infrastructure of legal entities and business structures without some form of training or education on the subject. Nonetheless, learning how to start a real estate investment company is extremely important.
If you are otherwise unfamiliar with the ins and outs of structuring a real estate investment company, don’t worry; you are not alone. A lot of people are oblivious to the concept of a legal entity, but starting a real estate investment LLC needs to be taken seriously. That said, if you are ready to reap the benefits of investing in real estate, I encourage you to keep reading.
A real estate investment company is exactly what it sounds like: a business whose sole purpose is to invest in physical real estate assets. In their simplest form, real estate investment companies will buy, sell, and manage real estate assets with the intentions of making more money than the initial investment. In doing so, most real estate investment companies turn to three primary exit strategies: rehabbing and flipping, wholesaling, and long-term rental properties. Most companies will specialize in one of these particular exit strategies, but there’s no reason they can’t practice all of them. A well-rounded real estate investment company will know how to conduct each exit strategy to simultaneously increase their optionality and odds of success.
However, in their most complex form, real estate investment companies are legal entities specifically designed to hold physical real estate assets. Otherwise known as holding companies, most legal entities operating as real estate investment companies take the form of a limited liability company (LLC). Individual owners may separate their assets from personal holdings by designating a real estate investment company as an LLC. The resulting shelter protects business owners from personal liability wile maximizing tax benefits.
Starting a real estate investing company is a big endeavor, but one that many people are happy they initiated. That said, becoming a successful real estate investor doesn’t need to be as scary as many people make it out to be. Starting a company is as easy as following a few simple steps with the right foundation. Some of the most important things you should do, however, include the following:
Secure A Dependable Source Of Funding: Funding is nothing short of necessary for a real estate investor to get things off the ground. Therefore, it’s important to secure funding before the business even gets started. By lining up a dependable source of funding before looking at a single property, investors will save a lot of time and headaches.
Build A Complimentary Team: At the very least, have an idea of who to work with. Not only that, but be selective in who you work with. That said, you’ll want to build a complementary team; one that is able to do things you can’t. That way, all of your corners will be covered.
Study The Local Market: Get familiar with the local market before you even start investing. If for nothing else, it’s true what they say: knowledge really is power. The more you know about a market, the better off you’ll be.
Establish The Most Efficient Points Of Contact: Set up every point of contact before you start investing. That means you’ll need a phone number, email, voicemail service, and any other point of contact that makes it easier for leads to contact you.
Determine Why You Are Investing: This is a big one. You need to know why you are investing before you even start investing. Setting such a foundation will act as a guide for you and your business. Knowing why you want to invites will direct you in times of turbulence and success.
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Starting a real estate investment company is no simple task; there are plenty of steps that will eventually prove integral to the success or failure of one’s business that need to be accounted for. If for nothing else, the foundation laid prior to setting up a real estate investment company is critical to its future success. That said, there’s one thing you should do before you start a real estate investment company: establish a real estate investment company structure. It is the real estate business structure, after all, that will serve to protect the majority of your assets moving forward. To that end, real estate LLC structure is a complicated subject; there are a lot of complex issues it deals in. As a result, it’s in your best interest to ask as many questions as you can. So before you think about starting a real estate investment business, address the questions listed below.
Fortunately, it’s not your job as a real estate investor to know how to structure a real estate investing company; there are businesses whose sole purpose is to help entrepreneurs such as yourself navigate the process. It is, however, your responsibility to mind due diligence. While you may not need to know every single aspect of this complicated process, it is in your best interest to do your research. Judging by the fact that you have made it this far, I would say you are on the right track.
Below you will find a few of the most common questions aspiring entrepreneurs have regarding how to start a real estate investment company. Please take a minute to familiarize yourself with a few basic concepts and then I will proceed to fill you in on the fundamental business structure real estate investors tend to favor.
Investing in real estate, at least on a successful level, has more to do with running a business than investing in individual properties. Do not, for one second, assume your real estate investing efforts are anything less than a viable business operation. Having said that, the very nature of a business attracts lawsuits. The involvement of capital, especially on the level you are likely to be working with, will always attract scrupulous individuals. It is, therefore, in your best interest as a business owner to protect yourself from said risks.
Legal entities have the power to protect business owners’ personal assets from what happens within the confines of the business structure. In other words, your personal assets (barring a few exceptions) will not be at risk in the event litigation against your company is initiated.
Outside of protection, however, legal entities can offer business owners several benefits; some of which include:
Tax benefits and expenses
The right business structure can make it easier to attract capitol
Legal entities establish credibility within the industry
Not surprisingly, different states have become synonymous with different laws. Everything from the amount of paperwork that needs to be filed in order to establish a legal entity to the time it takes said entity to activate can vary dramatically between state boarders. Business structures created in the state of California, for example, can take anywhere in the neighborhood of a month to be activated. On the other hand, Nevada can witness business entities established in as little as 24 hours.
Again, each state will have advantages and disadvantages; you just need to know which will suit your needs the best. However, Nevada is widely considered one of the best states for business owners to form their legal entity before they take it back to their state of origin. In fact, roughly 80% of the business entities formed in Nevada are for out of state entrepreneurs.
Real estate investors, in particular, are especially keen on the idea of forming a business entity in Nevada for one reason more so than any other: personal protection. The state of Nevada has gone to extremes to protect the personal assets of business owners.
Far too many real estate investors start their businesses without having formed a legal entity; for one reason or another they neglect to structure their business before investing. Instead of taking the appropriate steps to protect themselves, they become susceptible to any number of risks. I can’t stress enough how dangerous it is to start investing without the protection of a legal business entity; do not do it!
I don’t advise investing in real estate before you set up a legal business structure. While the path of least resistance to your first deal may be appealing, I can assure you it is not worth placing yourself in the way of unnecessary risk.
A real estate partnership is yet another way for real estate entrepreneurs to arrange themselves into a single business entity. However, unlike a limited liability company (LLC), a partnership requires more than one person. As its name suggests, a partnership is essentially an agreement between two or more people that outlines the subject company’s ownership. Partnerships will determine the financial and structural workings of the entity. Consequently, the partnership will determine a number of important things: Distributing profits and losses, handling management and voting, and several guidelines for tax elections and partnership dissolution. Some advantages of electing to adopt a real estate partnership structure include:
Easy to set up and establish
All members will help manage the business
Complimentary partners can make a business stronger than ever
I want to be perfectly clear; there is no “one size fits all” legal entity that can meet the needs of every investor. The capacity in which a legal business structure may benefit an individual investor is determined by the needs of said investor, and nobody else. Every investor is different, and will require a different business structure that suits their particular needs. Again, mind due diligence and determine which structure will benefit your company the most.
Having said that, most real estate investors tend to establish a Limited Liability Company (LLC) at the onset of their career. Though not the only option afforded to real estate investors, LLCs tend to accommodate entrepreneurs in the real estate industry more so than other legal entities.
According to Legalzoom:
“A limited liability company is a separate and distinct legal entity. This means that an LLC can obtain a tax identification number, open a bank account and do business, all under its own name. The primary advantage of an LLC is that its owners, known as members, have “limited liability,” meaning that, under most circumstances, they are not personally liable for the debts and liabilities of the LLC.”
Here are a few of the reasons real state investors prefer LLCs to other legal entities:
They provide more protection than liability insurance
They limit personal liability
If you are interested in learning how to start a real estate investment company, I want to encourage you do do a little research of your own. While LLCs are certainly advantageous to the average real estate investor, they are by no means the only option. Consider which legal business entities are best for your current position, and go from there.