By Patrick Francey
Over the past several years, when real estate investors hear Don R Campbell make the statement, Treat your real estate investing like a business the questions that generally follow are, What does that mean?, and How do I do that? and Why is that important?
There are many ways to do the same thing; however, the following tips and insights will serve you to build a successful and profitable real estate portfolio.
Remember, taking the first steps towards treating your real estate investing like a business, often begins with a simple shift in your mindset.
Definition of an Investor: An investor is an individual who commits money to investment products, which may include real estate, with the expectation of financial gain.
Notice, by this definition, an investor only commits money. Ask yourself: Are you really just a real estate investor? Are you only investing your money in real estate, or are you planning on investing much more than money, such as your time, energy, efforts, and relationship resources?
If your answer is much more, then read on!
1. Gain Perspective
Take a moment to look deeper into whats behind the curtain. Even with a single buy and hold investment property, you can clearly see it is a small business. Need perspective? Consider the following facts:
You have purchased a property, which is your asset
A lender holds a mortgage on the property which you have an obligation to pay
You are selling the use of the property space for a fee called rental income/revenue
You have a client or clients, who are your tenants
You have necessary expenses for the property, including such things as maintenance, advertising, renovations, appliance repairs, property management, etc.
You have very real and necessary business operating expenses such as your phones, vehicle, office supplies, a bookkeeper, etc.
The Canada Revenue Agency (CRA) wants to know the details of this asset/business. You are required to submit annual year end information for tax purposes.
Your intention of investing in the property is to create financial gain through positive cash flow, and equity appreciation. This is called a profit.
When you expand on this idea by adding more revenue properties, or even other real estate investment strategies, it quickly becomes apparent, this is definitely a Business!
2. Begin by Developing a Mindset for your Business Success
Your beliefs drive your decisions ? Your decisions drive your behaviours ? Your behaviours become your practices ? Your practices create your success!
Your Beliefs Drive Your Decisions
You are not just a real estate investor, you are in the business of investing in real estate. In business, YOU are responsible and accountable for:
- The decisions you make (or dont make)
- The actions you take (or dont take)
- Creating profitable results
Your Decisions Drive Your Behaviors
To treat your real estate investing like a business, begin by clearly deciding you are investing in… not speculating in real estate. To build a profitable portfolio and business of investing in real estate, it is essential that you understand and apply the supporting economic fundamentals. These fundamentals impact the real estate market, and affect your decision-making process.
Your Behaviours Become Your Practices – Take the time it takes so it takes less time.
The process for building your business is just that – a process, and it takes time. It means formulating a plan to achieve your intended outcome.
As you take action to purchase your first, or your next property, youll need to add to your businesss foundation to support you in either taking next steps, or providing support for the steps you have taken.
3. Avoid Investing In Real Estate CHAOS
Build your foundation to support where your business is going, not where your business is at today.
Whether your goal is to own three doors, seventeen doors or three hundred doors, it is necessary to build a foundation to support your vision. Follow the proven systems and steps for creating your success. Here are some key considerations.
Begin With The End In Mind!
Create a picture (vision) in your mind for your business. By knowing where youre going you can begin to define and build the foundation to support your business. You will need your foundation to provide stability and longevity, be sustainable and have the capacity to support your vision.
Start here, by asking and answering these very key questions:
- What is your vision for your business of investing in real estate?
- What is your plan to achieve that vision?
- Will you be purchasing buy and hold positive cash flow properties? Maybe you want to purchase multi-family properties, or renovate and flip? Could your strategy be buying foreclosures? There are many strategies; what is yours?
- How many properties do you intend to purchase?
- Based on the economic fundamentals that you will be considering, what province, city, or even neighborhood will you invest in?
- Where is the money coming from?
4. Build Your Team – Leverage the ROI of your time by leveraging the strengths of others
The success of your business will greatly depend on the quality of the team of professionals you bring together to support you. Aside from a real estate agent, there are three professionals you will need to find and begin to work with and each MUST have a background in handling the needs of investment real estate. Inexperienced oversights, misinformation, and setup errors made early on (or anytime) can prove to be very costly down the road, causing unnecessary chaos. Always get at least three referrals.
Mortgage broker or banker
Start by getting referrals and finding a mortgage broker who is experienced in finding mortgage financing for you as a real estate investor. This is not a job for just any mortgage broker. Only work with a qualified and dependable mortgage brokers who understand the needs of real estate investors. If they are investors themselves its even better as they understand the long term impact of making the right decisions for financing early on.
An experienced real estate lawyer can save you thousands of dollars in costs. You must have one to buy or sell your real estate. Find a good lawyer by getting referrals from veteran investors.
Guidance from a veteran real estate accountant from the beginning will save you time and money down the road. Share your vision and let him or her help you set up your business of investing in real estate the right way. You will likely have a few questions over the course of the year so having an accountant on your team makes sense. And, if you have taken action, you will need one for your year-end. Remember to budget for your accountant to complete a year-end for you, taking into account the possible tax implications associated with having a profitable business.
Entering into joint venture agreements add another dimension to your bookkeeping and accounting needs.
Build Your Team… Dont Hire Specialists, Invest In Them
Perhaps not in the beginning, but at some point in time, you will need the services of some, or all of the following specialists. Pro-actively networking to meet specialists on the list below and beginning to create rapport early on BEFORE you need them means youll be several steps ahead when the time inevitably comes. Building a team is done by creating strong relationships with people and businesses you can trust and rely on to do the right thing. Investing in specialists is not only about the financial costs; investing time in getting to know people, supporting their success and trading information, pays huge dividends down the road
- Property Manager
- Business Coach
- Property Appraiser
- Property Inspection Company
5. Decide . Whats Important Now (W.I.N.) – Personal performance Coach Steffany Hanlen once defined this meaningful acronym for the word WIN, and of course we all like to win!
Avoid the distractions that take you away from your plan and away from what supports you in achieving your vision or goals. By defining and staying focused on your plan, your actions will be focused on W.I.N. (whats important now)!
6. Manage Your Cash… Always know where your cash is… and where your cash is going.
Consider all the costs of buying real estate. During your ACRE program weekend you will have learned about the money it takes and the real math behind purchasing cash flowing revenue property which includes, but is not limited to:
- the down payment for the property purchase
- cash for a reserve fund
- the legal costs
- possible renovations
- pre move-in maintenance
- marketing costs to find great tenants
- property management
- miscellaneous closing costs
Be aware of the indirect costs related to being in the business of investing in real estate. For most people, this list of costs is not a significant financial consideration; it may even be absorbed in an existing business. For others, it will be a consideration.
- Phone – Its likely you already have a cell phone and or land line, but does your budget allow for an increase in usage?
- Vehicle costs – Chances are good that you will be driving more to find and look at the properties you put in your funnel. Consider the increase in fuel costs and wear and tear on your vehicle.
- Office supplies – From printer toner to a new filing cabinet and file folders, how much is hard to say, but there is a good chance that you will be spending more than you are now.
- Computer hardware – Computers, printers, scanners… what will you need?
- Computer software – From the fundamental need of Word and Excel to Publisher or accounting software, there may be costs for you to consider.
- Accounting – At some point you will likely need an accountant to provide guidance for how best to set up your books for your specific needs. You will need an accountant to complete the year end functions.
- Bookkeeping – Unless youre planning a career in bookkeeping, this is a task best completed by an experienced bookkeeper. The real cost for this role is actually minimal when compared against the hidden costs of the missed opportunities, overwhelm, frustration, inaccurate files, less time with family, and more, when you do it yourself.
Remember, you build your foundation for where your business is going, not where it is today. Learning to work with a bookkeeper to create systems, policies and procedures is significantly easier when you just have a couple of doors. As you expand your portfolio, you and your bookkeeper grow together. Transitioning from doing your own books to having a bookkeeper after the fact is stressful and a tremendous amount of work… and ultimately you will wonder why you just didnt do it sooner!
- Time – Yes, there is definitely a cost to your time. It is why staying focused, having a plan, and avoiding the distractions which stop you from taking action are hugely important considerations. Use your time to take action, which moves you forward. Consider the ROI of what you spend time doing.
- Attracting Joint Venture Partners – Putting your fantastic JV presentation together in a nice binder with glossy paper and great color, buying the odd lunch, travelling to meet a prospective JV partner, calling them on your cell phone, spending time creating rapport and relationship…yes, there is a cost to this, too.
- Bank Charges – Yes, you will incur additional bank charges. Work with the bank representative to choose the right account for your business.
7. Take Care of the Administration… Its Business, not Personal
Do NOT mix your personal bank account with your real estate investment account.
Begin by opening a separate bank account for each real estate portfolio. That means, even if you are buying your first investment property, open a separate bank account. All costs associated with that property (or even several properties) are drawn from this real estate account. All revenue will be deposited in this account. Portfolios can be defined and separated for different reasons. For starters, lets assume you have a portfolio that is in just your name or your companys name.
From that account, there will be withdrawals and revenue or loan deposits
- Rent (in)
- Mortgage Payments
- Maintenance expenses
- Renovation costs
- Building insurance
- Applicable operating and business expenses
- Property management fees
Get a real estate business-only credit card.
Just like your bank account, mixing your personal expenses with your business expenses creates confusion and additional work for you or your bookkeeper. Having a separate credit card is an efficient and very effective way of maintaining clear audit trails for the CRA, should an audit occur. Veteran REIN members and business owners save hours of time, energy, and stress by making this one very simple change as quickly as possible. Everyone involved knows that a charge on this card is always business related.
Of course, you MUST remember to keep your receipts and allocate the expense… or there is a good chance you will have to pay the tax man.
- Get a card with a good points program
- This card is paid from the real estate business bank account
- Proportionate share of costs are charged to the appropriate property (a function of bookkeeping)
Buy a business-only computer.
Avoid using the FAMILY computer. Dont risk the accidental deletion of files by a family member. If you cant afford one now, buy one as soon as the budget allows for it.
To create your future of investing in real estate, you need to have an idea of where you are going, and at least a basic outline for a plan as to how you will get there. The preceding tips and insights are just a start. They are meant to give you a preliminary context for treating your real estate investing like a business.
Conclusion: Some Key Things We Have Learned About Planning
- Keep It Simple for Success
- Have a plan and move forward through times of uncertainty and fear
- Partner with people with complementary strengths
- Know that CHAOS always shows up in business
- Work your plan and dont compare yourself to others
- Grow slow and steady
- Know where your money is, and know where your money is going
Patrick Francey is the CEO of REIN. As a serial entrepreneur, he owns many businesses and has been a real estate investor for nearly 20 years. The majority of his holdings are located in Edmonton and Grande Prairie.