Real estate is a passive source of income, right?
What if I told you, that's not always true?
While real estate investing can be very passive, we need to differentiate between the "investing" side and the "business" side.
And, in real estate, you can have both a business and investments and do them at the same time.
In this article, we are going to talk about how to start and run a real estate investing business, but first...
What Is The Difference Between an Investment and a Business in Real Estate?
Before we get any further, let's just clear up the difference between investing and running a real estate business.
Investing - Defined
Expend money with the expectation of achieving a profit or material result by putting it into financial schemes, shares, or property, or by using it to develop a commercial venture.
In essence, investing is simply the act of putting your money to productive use to generate future returns.
A business, on the other hand, is built around a system or process that creates a product or service. Even if you're the ultimate (and only) consumer of that product or service, it's still a business.
So, a real estate investment would be buying property, putting it under management, and collecting income over a period of time. You may reallocate funds, make adjustments to management, and do other strategic changes to it, just as you would with any investment.
What is a Real Estate Investing Business?
A friend of mine recently started doing real estate syndications on a full-time basis. He was constantly out there building relationships, underwriting potential deals, growing his investor list, putting property under agreement, then managing those projects.
It took me a while to realize it, but he was actually running a business and not actually investing.
His business was to invest and get returns (for himself but also for other people). His compensation was tied to the results on the project, not to how much money he invested.
That's the key - most of those activities are required to make good returns, but they are also part of the business of investing. Your real estate investing business may not deal with a lot of outside investors like his does, but the idea is the same.
So, in general a real estate investing business can consist of one (or several) of the following:
While there are definitely other aspects to real estate, these are definitely the 4 key pieces.
We're going to dig into starting a business in each of these areas, but first we need to cover something really important.
Why Do Businesses Fail?
It's really interesting to see these business failure rates and it also covers why businesses close down.
It really is interesting to read because it is 'conventional wisdom' that 80 or 90% startup businesses "fail."The original study is detailed in "
The original study is detailed in "Entrepreneurship and the U.S. Economy" on the BLS website. Unfortunately, it only goes through 2010, but after searching around on the web for a bit, these numbers appear to be very steady since the 1980's so we can hope they are still accurate today.
Here are a few common factors that cause businesses to fail and shut down
Under-Capitalizing a New Business
This is the most avoidable reason businesses fail but also quite common.
If you sink everything you have into starting the business, you will have nothing left to run it!
You need to do a solid cash flow analysis and determine your break-even point and how long it will take you to get to break even.
Most businesses start out in a cash-flow-negative situation. That means they spend more each month than they take in.
While this is fairly normal, if you don't have the cash reserves available to cover those expenses, it's only a matter of time before you have to close up shop!
Avoid this by keeping a good amount of cash in the bank to cover your operational costs while your business grows. Even once you've grown and have a good positive cash flow, still keep plenty in reserve to cover and sudden changes or unexpected expenses.
Forgetting About Your Online Presence
The problem about online reviews is that people are more likely to talk about a bad experience than about a good experience. This was very apparent to me one time when my wife and I decided to invite a friend out on a double date.
We chose our favorite high-end restaurant in our city and talked it up. The day of the dinner, I looked up directions on Google Maps and saw the Google Maps and saw the 2-star overall review! I began to second guess myself and I actually questioned if it was any good.
Perhaps my taste in restaurants was poor?
We went anyhow and it was amazing like I expected, but a non-regular may have chosen another restaurant instead. How much business does this place lose simply by ignoring its online Yelp and Google reviews?
Focus on building a solid real estate investor website, online reviews (if applicable) and build a great online presence. If you have enough great articles and a solid website, you will dominate all search results about your company, allowing you to control the message.
Blinded by Your Great Idea
You've got the best idea and it's going to change the entire industry! Right?
You think your idea is great, but others may not share your enthusiasm.
The best thing to do is to check the marketplace and see if anyone else is already doing what you plan on doing. While people may get discouraged when someone is already doing the same thing, it's actually a good thing!
If no one is doing it, maybe it's because there is no demand for your product. If there is competition, you just need to be better than them and you'll get the sales.
Additionally, you can ask potential customers/clients if they think the product or service is something they think is valuable.
The key is to vet your idea before you actually sink good cash into your startup idea.
There are really two ways price can kill your business.
First, a major company may have economies of scale which allows them to sell their product at a lower price than you can even buy the product .
It's really hard to be a furniture store when there is a massive furniture store up the street selling the exact same furniture for 30% less than you can acquire it for.
Another related reason is that you may be too focused on price and not focused on creating a valuable product your customers want.
The majority of consumers are willing to pay a premium price for something they perceive as premium. Competing solely on price may be a race to the bottom, but competing on quality allows you to set any reasonable price you need.
Starting Your Real Estate Investing Business
The first thing you need to do is figure out your real estate niche. It could be something as simple as low-cost single family homes or something as unique as ocean-front mobile home parks.
You can be successful in any niche in real estate, you just can't be successful in EVERY niche.
Whatever it is, learn it and stick to it. The biggest mistake is when people try to work in every niche, then they find themselves not very good at any of them!
So, figure out ONE, or maybe two niches and become an expert at them!
Now it's time to figure out the next step.
How to Find Real Estate Deals in Your Niche
There are a ton of ways to find deals!
The most obvious is to use a public listing service. This is The MLS for residential properties or LoopNet for commercial properties (or CoStar for much larger properties).
Other than those, there are a couple other ways.
Building a Real Estate Investor Website
To start, I'm going to build a real estate wholesaling website with Investor Carrot. With those, you can either sell the leads, wholesale the deals, or keep them for yourself.
You don't really need much money to do this, other than the subscription cost to OnCarrot.
You will need to do a lot of work yourself, but you can definitely do it and keep costs low!
The big costs are writing and link building.
For $4,000, you can buy a lot of content. This will be perfect, because you need some good content to rank well in Google.
Using a service like textbrokers, you can get decent articles written for not a lot. A decent 1,000 word article is going to cost you around $45.
Not all of your articles will be that long, so let's just say you can get 100 articles written for $40 or so on average. Writing that myself here on Ideal REI, it took me close to 12 months to get that many articles, and most of them were not 1,000 words long.
So, it's a great amount of content to drop on a site to help it rank well.
I'd hire a VA to do outreach to other sites to try to build some links. Generally, you can find a VA on a site such as upwork.com for very little, even just a few bucks an hour.
You will need to give them very specific instructions in order to get them to work well, but it isn't too hard to show them how to find relevant websites and give them a script to send for emails.
Link building is important because it will help those new articles rank well on Google.
It costs about $40 per month for Investor Carrot, then you'll want an email list service, and maybe a few other pieces of technology to help you manage your leads, any offers, etc.
So, $1,000 is a fair amount for an entire year for this startup business.
Direct mail is really expensive and time consuming, but there are a lot of services out there that you can use to print and mail your letters for you.
If you do a quick google search for the term "yellow letters" you'll find a lot of services that cater to you. Simply choose your templates, fill in your info, and submit.
Your other option is to buy a mailing list and stuff the envelopes yourself.
Regardless of what route you go, direct mail definitely does work and a lot of great deals can be found through it.
Financing Real Estate Deals
Financing real estate is far more than just getting loans from a bank or institution. In fact, it is one of the most critical pieces to real estate!
Real estate investing businesses that flourish do it because they have access to funds to get deals done! This could be debt, but also equity.
The most obvious way to get money is to go to every bank and ask for loans or lines of credit. This may be difficult to attain for a young business, but it's very doable for established businesses.
Another option is to raise debt or capital privately from people you have relationships with.
Building an Investor Database
Raising capital is a highly regulated activity and you should do a bit of diligence and engage with an attorney before taking money. But, in general, you can raise capital from friends and family a lot easier than from strangers.
So, you need to go become "friends" with people and add them to a database! Then stay in touch with them.
The key is to show them your growth in real estate, so when the time comes to invest they are primed and ready!
Debt vs Equity
When you are purchasing a property, there are two types of capital that will come together on it. Debt, and equity.
For sure, the debt investor are the biggest investor in the deal. Often, they will fund 70-80% of any investment, and are key to closing any deal.
But, they also have the safest position and take a lien against the property.
Equity is generally the minority investor. They have the most risk but also have the most potential upside should the deal go well.
Once you build up a large enough investor database, you'll be able to raise both equity and debt capital to close your deals.
Managing Your Assets
Property management and project management are totally different, but I'm putting these two together because they are similar (even though they are totally different).
While project management is the oversight of some individual project, property management is ongoing and never ending.
But, I want you to think about something slightly different - think about asset management. This is the overall oversight of the investment.
So, you could manage the property directly, but managing the property manager is also a job. Managing the construction supervisor is a job as well.
We call this asset management.
Even though it is less onerous than either project or property management, it's still work.
So, approach the asset management as its own business as well.