First, let me congratulate you on deciding to be your own boss. It is one of the hardest and scariest, yet most rewarding decisions a person can make. You are about to embark on an incredible lifetime journey filled with limitless possibilities. However, make sure you are properly prepared, otherwise the result can be devastating.
The primary purpose of this article is to serve as a detailed checklist for preparing, creating, and structuring your own real estate business. I will also explain the benefits of detailed planning and management, and the dangers of not doing so. First things first: what is the name of your new company? What type of business entity will you form? A sole proprietorship is the quickest and easiest; however, it may lack the necessary asset and liability protection that its business model guarantees. My personal favorite has always been the Limited Liability Company (LLC). It’s fast, cheap, and provides individual shelter.
Also, what state will you be registering to do business in? Are there any state and/or local license requirements? All of these questions should already be answered in your business plan. Some of you may be thinking, “I’m going to buy foreclosed property, rehab it, and sell it for a profit. What other explanation or planning do I need?” Well, if this is your way of thinking, stick with your full-time job. I recommend going online (Google it) and downloading a business plan template to help you with the development.
In addition to your business plan, it’s best to have projected financial statements, including a cash flow forecast, a projected income statement, and an anticipated balance sheet. There are numerous advantages to generating these statements. Clearly depicting your annual operating expenses allows you to recognize the number of real estate transactions you need to complete successfully to break even and/or turn a profit. Taking the time and effort to implement these tasks will help you overcome some of the major impediments to starting your real estate business.
The biggest recurring mistake I’ve seen hobby entrepreneurs make is quitting their full-time job before even completing their first real estate deal! Thin capitalization is one of the biggest oversights when starting a new business. If you decide to quit your full-time job, make sure you have enough cash cushion to cover your living expenses for twelve months. Ideally, you want to have a surplus in your bank account to finance your business (ie entity formation fees, licenses, marketing expenses).
Finally, will you be self-employed or a business owner? No, they are not the same! Being self-employed means that when you stop working, your business stops working. If you’re not marketing to leads or answering phones, then no one is. Being a business owner (hiring and keeping employees) allows for the freedom and independence that entice people to start their own businesses in the first place. Most hobbyists leave their full-time job in hopes of starting and maintaining their own business profitably, while golfing or hitting the beach four days a week. MISTAKEN! The transition from self-employment to business ownership is the most difficult hurdle to overcome. It took me almost a year interviewing hundreds of job applicants, working fourteen hour days, working all night, and sacrificing my personal and social life to successfully build and grow each of my businesses to the point where they could all function with “Car”. – Pilot. “Remember, a business is only as strong as its weakest link.
I hope that what I have shared with you has been of great value. These observations and opinions are my own and are derived from what I have learned and experienced over the last five years through educational literature, private business meetup groups, numerous actual networking events, and by far the most crucial media and valuable, trial and error. There is still so much to discuss and write about considering that this topic itself serves as the basis for three hundred page bibles! At a minimum, here are the basic foundations and framework for preparing to start your own real estate business, including obstacles to anticipate.