Real estate investment can be a highly rewarding business plan with multiple avenues for profit, including development, appreciation and income through rent. However, starting off on the right foot and building a network is hard work — especially in the current state of the housing market.
These 10 tips will help entrepreneurs launch their real estate investment businesses without any hiccups and set themselves up for long-term success.
1. Get a Real Estate License
First and foremost, every reputable real estate professional needs a real estate license. Although a license is not required to purchase residential or commercial properties, getting one has some impressive benefits. The courses to obtain a license provide valuable insights and experiences that business owners can use to their advantage.
Business owners will also have access to the multiple listing service (MLS), a private database of investment properties only available to licensed professionals.. Finally, getting a license opens up a wider range of business opportunities. Having a licensed broker in a leadership role enables real estate investment companies to take their business models in numerous directions.
2. Determine a Business Model
It’s critical for aspiring real estate professionals to clarify their business models early on. This industry has businesses of many shapes and sizes, including commercial investment, residential investment, property management, wholesaling and house flipping. Determine which investment method(s) will be the focal point of the business model.
After establishing a business model, many things suddenly become more clear. Companies can then narrow down the tools and resources required to support their business model. They can already start brainstorming marketing strategies and investment opportunities.
3. Calculate Start-Up Costs
Calculating start-up costs also becomes easier once the business model has been established. Real estate investment start-ups have few barriers to entry, so their start-up costs should be lower than emerging businesses in other industries. Many real estate investors can and have grown a successful business from home with just a laptop and strong internet connection.
However, every business still needs to cover some basic start-up costs even if it’s a one-person operation. These costs include setting up an official business entity, obtaining insurance, opening a checking account, choosing a software system and launching marketing campaigns.
4. Choose a Business Structure
The main part of setting up an official business entity is choosing a small business structure for tax and legal purposes. These are the main types of business structures:
- Sole proprietorships
- S Corporations
- Limited Liability Company (LLC)
Four of these structures require the owner to create a legally recognized business name, with sole proprietorships being the exception. All of the structures require an employer identification number (EIN) even if they don’t have any employees. Entrepreneurs should strongly consider consulting an attorney or accountant to help them choose the most appropriate structure.
5. Establish an Investment Budget
Now that the business model, structure and estimated costs are taken care of, it’s time to establish an investment budget. This budget should include big-picture projections and day-to-day spending. Real estate investment businesses will find it helpful to separate their budgets into three categories — investment costs, monthly expenses and monthly income.
Investment costs include buying, inspecting, renovating and closing properties. Monthly expenses include taxes, mortgage payments, utilities and preventative maintenance. Monthly income includes rental payments, property appreciation or any other revenue stream the business wants to pursue.
6. Create a Real Estate Pro Forma
For businesses that want to manage commercial or residential real estate, a pro forma is an absolute must-have. A pro forma is a financial statement that helps property owners forecast the net operating income and expenses from their rentals. It accounts for everything, including repair costs, HOA dues, property taxes, vacancy losses and special policies for tenants.
A pro forma is especially important given the current state of the economy. Real estate investments can quickly lead to lost income due to high interest rates, high housing prices and high rents. With inflation negatively affecting all parties involved, businesses must take all precautions with their financial forecasts.
7. Look Into Business Insurance
Speaking of taking precautions, start-ups should look into different types of business insurance. A real estate investment company might have to obtain multiple types of insurance, including these policies:
- Professional liability
- Cyber liability
- Workers compensation
- Landlord insurance
- Rent default insurance
- Business owners insurance
- Commercial auto insurance
- Home-based business insurance
Once again, business owners will find it helpful to consult an attorney, accountant or insurance agent to help them choose their insurance policies. Real estate investment is an industry with many legal complications. Professional assistance will clarify these complications.
8. Research Potential Investments
The previous seven steps lay the foundation for a successful real estate investment business. Now it’s time to start making money. Hop online and research potential investments in your local real estate market. The MLS is a great place to start, but investors should also use reputable real estate websites like Zillow, Trulia and Realtor.com. The more resources, the better.
9. Launch a Marketing Campaign
Once the research gets underway, businesses need to launch their first marketing campaign as soon as possible. Today’s digital world has numerous effective marketing tools, starting with social media. Facebook, Instagram and Twitter are rich with activity surrounding the real estate market. Identify a target audience and start producing content geared toward that demographic.
Don’t forget to use other marketing tools such as email newsletters and direct mail. These tools might be older than social media, but they allow businesses to directly reach their target audience more consistently. Every successful marketing campaign uses multiple channels to coordinate the business’s message.
10. Network With Other Professionals
Finally, every start-up must network with other professionals, regardless of the industry. All businesses need guidance from bigger and more experienced organizations at some point if they want to expand. All businesses also need allies within their industries to help them identify (or avoid) certain investment opportunities.
This final step takes us all the way back to step one. Getting a real estate license significantly helps real estate investors connect with other local professionals and build long-term relationships.
Real Estate is Full of Opportunity
There’s no denying that the real estate industry isn’t in great shape on a national scale. However, it’s still full of opportunity in local markets. Your area might be a hotbed for commercial or residential property investments. Aspiring investors can follow these ten steps to set up a solid business model, manage their expenses and maximize their income.