The Business of Investing  by Travis Schultz

www.reibookkeeping.com

With all of the great courses on how to buy houses with little risk and no money, some of the ways to build big wealth at lightning speed with commercial investments, you can easily learn the "techniques of investing".  With all of this success and activity it is easy to forget to "mind the shop", or take care of the less interesting but just as important administrative part of your business.  And, make no mistake about it, it will be a business if you are going to be successful.  You will not find the kind of success that we all hear about, and some of us live, if you approach it as a hobby.

What follows here is a somewhat random bunch of tips and thought provokers for you to consider with your business.  The intent is to raise some questions and ideas that you need to discuss with your professional team.  You should consult a CPA and attorney specifically about your situation.  While there are many "rules of thumb" and generalities that do frequently apply, make sure you know exactly how they apply to you. 

What we call " Real Estate Investing" is really better called Real Estate Entrepreneurship.  Investing insinuates using your money to buy something with the intent of getting a return on your money (investment) after length of time (long term).  Your particular strategy may be to do just that, but if you intend to buy properties with no money down and resell them for a rather quick profit, you probably are more of a dealer.  Since there are certain tax implications to being a dealer or an investor, or even a developer, lets call it Real Estate Entrepreneurship. 

Why?

Why do you want to be a real estate entrepreneur?  If the answer is to make a lot of money real fast without much effort you should stop reading right here and go play the lottery.  Do not spend anymore time or money on RE courses if you think that will happen.  On occasion you will hear of someone hitting a big deal worth a bunch (like the lottery!), but that is not the norm, or even that common.  With a lot of hard work the business can be very financially rewarding, and can provide a lifestyle that is not easily obtained with other businesses.  It is said that RE has made more people more money quicker than any other source.  This is probably true, but not without hard work.

Goals

If you don't know where you are going, how are you going to get there?  What are your goals, 3 months, 6 months, 12 months 5years, 10 years?  Brian Tracy says that "clarity of goals" is one thing that all highly successful people have in common.

What type of deals will you do to meet your goals?  Do you have the resources (time and $$$) to do those deals?  Wholesaling takes only a small amount of cash, but requires a pretty big time investment.  Buying commercial property is just the opposite.  Residential rentals fall somewhere in the middle.  What works for you, and is it consistent with your goals?

Team Building

When you start talking with those who are finding success in RE, one thing that each of them will tell you is "You Have to Network."  You will need to know RE brokers, insurance brokers, mortgage brokers, bankers, appraisers, attorneys (business and closing agents), accountants, contractors and all the other people that have anything to do with a deal.  You don't want to wait until you need a professional to find them.  You will not have time to conduct the interview and develop the relationships necessary to find someone that understands you and your business. How can they take care of your needs properly if they don't know you and your business? Don't make the Yellow Pages your primary referral source; the only requirement to get in the Yellow Pages is the ability to write a check!

Build your team while you are getting your education.  The goal with the team is to have them identified.  DO NOT make price your first criteria in choosing a team member!  Real Estate can be very fast paced and time critical, I would argue that response and availability are the most important considerations for team member selection.  Obviously cost is important, but if you can afford a quality team member, can you afford the business?  Ultimately you get what you pay for.   If you pay a premium, expect premium service.  If you get a discount, expect something to suffer.  Nothing is free.

Entity Creation/Selection

This is often a hot topic, and like many other things comes with many opinions.  Many of those opinions are from people selling asset protection courses.  The key to entity selection is this: use something that makes sense for you.  If you like lots of paper work, extra tax returns, and spending more time on your business than in your business, use a complicated conglomeration of trusts, LLCs, C-Corps, and anything else you can get your hands on.  There are advantages to these complicated systems, for both taxes and asset protection.  The question is, do these advantages benefit you?  What is the best choice?  The simplest solution that fills the need is almost always a good answer.

What is the purpose of using an entity?  Plain and simple, it is to separate a business into it's own being.  The two motivations for this are favorable tax treatment, and asset protection.  For real estate there are two entities that can be used for most of what we do as RE entrepreneurs.  The LLC and the S-Corporation (can still be LLC).  There are a couple of key ideas to remember here.  An LLC is not recognized by the IRS, so in and of itself does not have any tax advantages or disadvantages.  No entity will protect you if you are negligent; the court system is not going to let you off that easily.  If you do something wrong you are always are at risk for being sued personally.  You need to consult with a business attorney and discuss your situation to determine the best asset protection strategy.  An LLC is a state level entity, so be sure you are following the rules for your state, they can be quite different.

Since the IRS does not recognize an LLC, you must tell the IRS how your business will be treated.  It general it could be a partnership, a sole proprietor, a sub-chapter S corporation, or C-Corporation.  Based on this you can have an LLC, but be taxed as an S corp.  This would be a very good entity selection if you have ordinary income, either through contract assignments, or quick turn rehab to retail type transactions.

Regardless of which type of entity you choose here are some things to do/consider.  Many of these are not required, but add to the legitimacy of the entity, which of course means better protection for you:

1.       File articles of organization with the state

2.       Create an operating agreement (usually not required, but adds legitimacy)

3.       Get a federal Tax Identification Number (EIN for business entities).  Go to www.irs.gov and find the online application (form SS4).  It can be filled out online and an EIN number will be generated immediately.  There is not charge for this; beware of sites that try get you to pay.

4.       Make the entity a legitimate individual.  Think of the entity as an individual in every way. You are not the entity and the entity is not you.  If you sign something, let people know you are signing for the entity, sign as Member, President...what ever your attorney advises is best for your structure.

5.        Don't use the entity for personal business.  Don't bill a plumbing job for your personal residence to the LLC.  If you do a plumbing job, it should be for a property the LLC owns. 

6.       Separate address.  A PO box is cheap, and do you really want your tenants to know where you live?

7.       DO NOT commingle funds, ever!!

                 a.      Use loans to the company with documentation and interest to fund deals from personal assets.

                 b.      If you are hungry while out looking at properties, make sure you have a documented reason that fits the IRS regulations for paying for a meal.  And then by all means deduct it!

                 c.      Maintain separate bank accounts and credit accounts

                 d.      If you use software to track finances, make sure everything is separate. Keep completely different files.  Do not use inter company accounts, or sub accounts or anything else within a single file to track more than one entity.

8.       Separate business records from personal records

                 a.      Separate filing system

                 b.      File things so that it is logical to find them later.  File property expenses by property, file overhead by vendor.  Keep all the information for a given property together.

9.       If you have multiple entities consider using an internal management company that you control to simplify your operations.  For example if you have Apartment Building A, LLC, Single Family Rentals, LLC, Strip Mall, LLC create another entity (possibly an "S-Corp") that will have a management agreement in place with each of those entities.  Use the new entity to conduct the business for the others, that way most transactions will be from one place, one bank account and one credit card.  The others all need to have checking accounts, but you can use the accounts from the managements company to run the business.  Then, periodically "pay" the management company from the individual accounts for each entity.  If the management company is an s-corp., this may be a way to eliminate some additional self-employment tax.

10.   Collect W9s and send 1099s when you are supposed to.

                 a.      A W9 is how you gather information for your accountant to send 1099's for you.  Have the person you are paying fill it out, before you pay them.

                 b.      In general, anyone providing a service gets a 1099, unless it is obvious that it is not a pass through entity such as a major corporation. You can be penalized for not sending 1099s as required. 

                 c.      You do not need to send a 1099 if you paid a person less than $600.

                 d.      You do not send a 1099 when you purchase merchandise.

                 e.      Send 1099s by the end of January, or you can be penalized.

11.   Employ the appropriate professionals to conduct the business of the company i.e. accountants, attorneys, and insurance professionals.  This is a difference between a hobby and a business.

12.   Be aware of your insurance needs; people like to sue people with assets/money.

                 a.      In general a personal umbrella will NOT cover you while you are conducting business.  Read your policy carefully, this is a common misconception.

                 b.      Require your tenants to carry liability on their "renters" policy with your entity named as an additional insured.

                 c.      Get a BOP if you can.

13.   Have a plan for capitalizing your business.  You can buy houses with no money down; you cannot run a business with no money!

14.   Everything has costs associated with it, even wholesaling properties.

15.   Document decisions in your company log.  Keep some minutes even though you dont have to.  This helps to solidify the corporate veil.

16.   Review your business, compare against your previous goals and set new ones.

17.   Have fun, build wealth, anddont forget to play with the kids!!

Travis Schultz    www.reibookkeeping.com

Visit Travis and learn.