First, allow me to say congratulations on deciding to be your own boss. It is one of the toughest and scariest, yet rewarding decisions an individual can make. You are about to venture on an incredible, life-long journey filled with limitless possibilities. However, make sure you are properly prepared, or else the outcome may be devastating.
The main 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 advantages of detailed planning and management, and the pitfalls for failure to do so. First things first: what’s 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 warranted by your business model. My personal favorite has always been the Limited Liability Company (LLC). It’s quick, inexpensive, and provides individual shelter.
In addition, in which state will you register to do business? Are there any state and/or local licensing requirements? All of these questions should already be answered in your business plan. Some of you may be thinking, “I am going to buy foreclosed properties, rehab them, and sell them for a profit. What further explanation or planning do I need?” Well, if this is your mindset, stick to your full-time job. I recommend going online (Google it) and downloading a business plan template to assist you with development.
In addition to your business plan, you better have projected financial statements, including a cash flow forecast, projected income statement, and anticipated balance sheet. There are numerous advantages of generating these statements. Clearly depicting your yearly operating expenses allows you to recognize the number of real estate transactions you need to successfully complete in order to break even and/or realize a profit. Taking the time and effort to implement these tasks will help you overcome some of the major impediments when starting your real estate business.
The biggest recurring mistake I’ve seen amateur entrepreneurs make is quitting their full-time job even before completing their very first real estate deal! Undercapitalization is one of the biggest oversights when starting a new business. If you do decide to quit your full-time job, make sure you have enough of a monetary cushion to cover your living expenses for twelve months. Ideally, you want to have a surplus in your bank account in order to fund your business (i.e. – entity formation fees, licensing, marketing expenses).
Finally, will you be self-employed or a business owner? No, they are not the same thing! Being self-employed means when you stop working, your business stops working. If you are not marketing for leads or answering phones, then no one is. Being a business owner (hiring and maintaining employees) allows the freedom and independence that entice people to start their own businesses in the first place. Most amateurs quit their full-time job expecting to start and sustain their own business profitably, while playing golf or going to the beach four days a week. WRONG! The transition from self-employment to business ownership is the hardest obstacle to overcome. It took me almost a year of interviewing hundreds of job applicants, working fourteen hour days, pulling all-nighters, and sacrificing my personal and social life to successfully build and develop each of my businesses to the point where they could all run on “Auto-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 stem from what I have learned and experienced over the last five years by way of educational literature, private entrepreneurship meet-up groups, numerous real networking events, and, by far the most crucial and valuable means, trial and error. Still there is so much to discuss and write considering that this topic, in itself, serves as the basis for three hundred page bibles! At the very least, herein lies the grounds and basic framework for preparing to start your own real estate business including obstacles to anticipate.