With real estate remaining one of the most lucrative investment asset classes, more and more investors are looking into starting their own real estate investment companies. However, the path to success in real estate investing is filled with potential pitfalls. By understanding the legal structure, startup costs, business model, and ways to raise capital, investors can set their new real estate companies up for profitability and growth.
Choosing the Right Legal Structure is Critical for Real Estate Investment Companies
The legal structure you choose for your real estate investment company will have major implications for liability protection, taxation, and raising capital. The most common structures used are sole proprietorships, partnerships, limited liability companies (LLCs), and corporations. Sole proprietorships offer the least protection but are easy to set up. Partnerships allow for pooling capital but partners are exposed to liability. A LLC limits liability while allowing pass-through taxation. Corporations provide the greatest protection and allow you to raise capital by issuing stock, but come with more complex regulations.
Startup Costs and Expenses Need to Be Accounted for in the Business Plan
Beyond determining the ideal legal entity, entrepreneurs need to thoroughly evaluate the startup costs, overhead, and operating expenses involved in launching their real estate investment company. Costs may include office space, equipment, legal fees, accounting support, software, data services, travel, marketing, and more. Many of these will be fixed ongoing expenses, while others will be variable costs tied directly to acquisition and management of properties. Conservative financial projections are key to ensuring adequate capitalization early on.
Choosing the Right Business Model and Strategy is Paramount
From flipping houses to long-term commercial property rentals, real estate investment companies have a variety of business models to choose from. Narrowing the focus by property type, holding period, geographic location, and target returns is important. Passive models like REIT investing provide diversification but limit potential returns. Active management brings greater profit opportunity through value-add improvements and opportunistic acquisitions and sales.
Raising Capital is Essential for Scaling the Real Estate Investment Business
To execute their business plans, real estate investment companies need capital. Bootstrapping with personal savings works initially, but raising outside capital is usually necessary for growth. Investors can tap into private funding sources like bank lending, private equity investment, and hard money loans. Additional options include crowdfunding and securitized debt like commercial mortgage backed securities. Having a solid business plan and track record helps attract investors to fund additional acquisitions.
By choosing an optimal legal entity, budgeting intelligently, devising a focused yet agile real estate investment strategy, and lining up capital sources, investors can succeed in launching their own real estate investment companies and building wealth through property investment.