Real estate investment is a growing industry, and many people are curious how to start a real estate investment company and get a share of the unlimited possible returns offered. Unfortunately, many people who start such companies fail as quickly as they start due to a lack of attention to the legal factors at play. If you are considering starting a real estate investment company, a real estate lawyer from the Priori network may be able to help you get started on the right legal footing.
Understanding the Process of Starting a Real Estate Investment Company
Starting a real estate investment company can be a fairly simple process, since there are few regulatory requirements to begin. Investing in real estate does not require any particular entity, and some people even begin a real estate investment company simply in their own name as a sole proprietorship. Once you find financing and purchase your first property, you have the beginnings of a real estate investment company.
Of course, no matter how you incorporate, you will face some significant regulatory requirements as soon as you acquire your first property. You will need to pay taxes and insurance on the property, as well as ensure that the property is up to code. You must be careful to consider zoning issues, especially when purchasing commercial properties, since you will have to qualify tenants. Finally, you must be careful to check that you are complying with all state laws related to real estate investment.
Real Estate Investment Vs. Real Estate Trading
Real estate investment companies do two basic things: invest in real estate and trade in real estate. Essentially, real estate investment is a long-term investment wherein you purchase real estate with the intent of keeping properties to rent out, while real estate trading is a short-term investment, wherein you buy a property that needs fixing up and flip it for a higher price soon after. Real estate investment requires a higher initial investment (in order to acquire a more desirable property to rent) and takes longer to draw more than a residual profit. Real estate trading requires a lower initial investment and offers faster profit, but can be risky if the property doesn’t move as expected.
Whether real estate investment vs. real estate trading is better really depends on your market, expertise, and overall investment strategy. Both flipping houses and renting properties can be lucrative options, and both can create major losses, depending on how well you do. Ultimately, both strategies are common in real estate investment companies. You just will have to decide which strategy better suits your company’s needs.
Legal Issues to Consider
When starting a real estate investment company, there are a few key legal issues that you must deal with from day one.
Legal Business Entity
While very small real estate investment companies sometimes have no formal legal entity, it is important to protect your personal assets by incorporating once you begin to grow—and you’ll even better minimize your risk by incorporating earlier rater than later. The most common legal business entity for a real estate investment company is an LLC. An LLC provides you the flexibility to change the business as the market fluctuates and your needs change, and there are fewer regulatory and reporting requirements.
Investment Strategy
A clear investment strategy will affect what legal issues you will need to consider and even what type of business entity will best protect your interests. This of course includes deciding whether you plan to focus on investing in properties long-term or trading them quickly, but it also must include smaller considerations, such as whether you plan on purchasing single or multi-unit properties and commercial or retail spaces.
Real Estate Financing
Starting a real estate investment company often requires significant upfront investment—and it can be difficult to know the best way to get financing. It may be prudent to consider a range of financing options, including loans, partnership with other investors and even short-term financing.
Insurance
Most investment properties must have insurance—and the right kind. That’s why it is vital to insure properties correctly from the day the deed passes into your company’s control. Make sure to do your research and talk to an insurance agent or a real estate attorney to discuss the type of coverage you may need. It’s also important to limit your liability beyond what can be reasonably covered, by making it clear in tenant contracts what you can be held liable for and what is their own responsibility.
Working with a Realtor
When you’re starting out as a real estate investment business, you will be at a large disadvantage if you are not familiar with the real estate market where you will be operating. Unless you have a partner who is experienced in this industry, it may help to work with a realtor. A realtor can help you understand what properties are available and give you sound advice on what areas are growing in demand. They also can help with the contracts you will need in some states—although you may be better off using a qualified real estate lawyer when negotiating contracts for the purpose of investing.
In addition, a realtor can take on some of the tasks you may have less experience with, such as finding renters or helping you resell after flipping. A long-term relationship with a realtor you trust may be beneficial for your investment company, but it will depend on how you are investing—and how hands-on you plan to be during acquisition of properties.
What is flipping real estate?
Flipping real estate is a process by which investors purchase a property and resell it quickly for a profit. Usually, the idea is to make minimal changes that will make a property more attractive to buyers in order to make a marginal profit. Flipping is a popular term for residential redevelopment, as well. While profitable if successful, flipping does carry risk, as the profit margin can shrink fast when properties can’t be quickly offloaded, forcing you to hold onto the costly asset for longer than intended.
FAQ
Can I use a real estate investment company to invest in REITs?
Yes, but it requires a different skill set. REITs are bought and sold on exchanges and operate more like stocks than traditional real estate investments. If your real estate company is planning on investing in REITs, it may be helpful to talk to a real estate lawyer about the different risks involved.
Do I need to hire a property manager for my real estate company?
It depends. You can hire a professional to manage the properties or take care of maintenance, repairs, and emergencies yourself, but either way, someone will need to be responsible for such issues. You’ll have to analyze the costs and benefits of each option based on your unique circumstances.