The “last” step in the Real Estate Investing 6 Success Steps is positioning yourself so that you can grow your business. Even though this is listed as the last step, it is really like the beginning because it feeds back into step 2, Finding Real Estate Investment Deals.
In other words, the process of growing your business is a continual cycle – on each iteration, your business gets bigger, better, and more profitable.
Some of the things to think about: -
- protecting your profits
- protecting your assets
- reinvesting your profits
- bigger and better marketing
- business expansion
Don’t Work In Your Business… Work On It
As you know well know the old cliché there are two unavoidable things in life: death and taxes. Taxes are a big part of real estate and eventually you will have to divert your attention to this area.
Generally, any money made above and beyond your initial investment in real estate will generally be subject to taxes.
Let’s say you purchased a property for $250,000, rehab it and sell it after a year for $275,000. You would pay short term capital gains tax on your $25,000 profit, if you don’t reinvest it.
There is a way around this, though. If you really want the property at least partially out of your hands, you can rent it out and only pay the usual property taxes.
Holding Title To Real Estate And Taxes
As your portfolio grows it will be important to save on taxes and protect your assets, both business and personal.
As you accumulate more and more properties, it is important to hold ownership in some business entity that is separate from yourself. This will protect your assets and yourself from frivolous lawsuits. Also, certain types of business structures also have significant tax benefits.
There are various ownership structures available to you. Please bear in mind that the following is only a general guide and, before making any decision, you should seek professional advice.
It is vital that your income is not adversely affected and that your assets continue to grow, so you must be careful about which type of ownership you choose.
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Sole Proprietorship. This is easy to arrange as you don’t have to file any papers and it is not registered with the state. You can go right into real estate investing as a business and the law will deem you and your business as one entity.
You simply report your business income and losses on your personal tax return. You are, however, responsible for your business and any debts or court judgments related to it. There is no distinction between yourself and the Sole Proprietorship.
This is not a bad way to start off, but as your business grows, this type of ownership is the least desirable.
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Land Trusts. If you make an agreement to maintain ownership of real property to assist another person (a beneficiary), it is called a land trust. This is done for a variety of reasons, including avoidance of probate or to maintain privacy of ownership.
While anyone can find out your bank balance or learn what stocks you invest in, with a land trust they cannot determine your real estate holding because your name isn’t listed in public records.Land trusts provide anonymity. This is a good thing, and a land trust can be invaluable to some people.
There are many benefits and also some disadvantages – we want to hold nothing back so that you can make informed decisions. This will discussed in further detail in a special report… “Growing your Business”.
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Business Entities. Following are outlines of some business entities that can be setup for the purposes of tax benefits and asset protection. Once again, before making any decision, you should seek professional advice.
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Corporations. A corporation, while more complicated and costly, can benefit you in a number of ways. First of all, a corporation protects you and your assets when it comes to business debts or court judgments related to your property. Unlike sole proprietorship, a corporation is a separate entity from you, with its own legal responsibilities and taxes. You will only pay personal taxes on money you take out of the corporation for such things as salaries.
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Limited Liability Company (LLC). Another legal form of business in the United States is the limited liability company, also known as an LLC. This type of business offers limited liability to the company’s owners, and it may be appropriate for small businesses with just a couple of owners.
Most LLCs also have an “operating agreement” decided upon by the company’s primary members. This is a contract that the members agree to stating how the company will be managed and operated, as well as how income will be distributed.
It offers good asset protection and tax benefits – please be sure to check with your adviser though as the laws are slightly different in each state.
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Limited Partnership (LP). A limited partnership is similar to a general partnership, but instead of general partners (GPs) there are limited partners (LPs). A limited partner can legally manage and share in company profits based on their investment in the company. They can also enter into contracts with third parties on behalf of the company.
LPs are responsible for filing documents with the state when a partnership is arranged or changes to it are made. They must also disclose their specific status when making deals with outside parties, so people negotiating with them know they have limited liability.
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You may not be too concerned with whether you have a sole proprietorship, partnership or corporation when your business starts out. However, it will become more important as you begin to turn a profit.
The above is a general overview of different business structures. They primary reasons for using business entities are asset protection and tax benefits – always get the appropriate legal and professional advice when setting up business entities.
Growing Your Business Infrastructure
As your property portfolio increases and your business gets larger, you will want to evaluate how well your daily, weekly, monthly, and other periodic processes are working. You should start by identifying and defining them thoroughly, and then start systematizing and/or delegating them. You will want to start with all the things you do on a daily basis. Think about which tasks can be delegated. Which tasks can be automated?
No large, successful business is operated by a single person. There is a team of professionals, either employed or contracted, to get things done in a timely manner on a day-to-day basis.
You’ll want to increase your marketing budgets so that you can complete more profitable deals. Also you’ll want to invest in more productivity and management tools.
There is a comprehensive list of management items that need to be carefully evaluated as your business starts to grow.
Remember that financial freedom is about money and also about time. Quality time for the people and things you love to do!
