How to start a real estate investment company

First, you must decide what types of real estate investments you’ll be making. The most popular—and profitable—options include:

• Rental properties (buy-and-hold): This option involves purchasing homes or apartments to rent out to tenants, helping you to build a steady stream of income and equity. This can be a long-term strategy and offers tax advantages like deductions for mortgage interest and depreciation.
• Lease options: With this strategy, you give your tenants the option, but not the obligation, to purchase the property they’re renting from you at a specific price within a certain timeline. The tenant pays a one-time, non-refundable fee to secure their option to buy, providing you with immediate cash, in addition to monthly rent payments.
• Commercial real estate: This investment involves buying office buildings to rent out to small businesses, such as retail stores, fitness studios, and wellness clinics. This option can provide longer-term leases and a more consistent income stream, although commercial real estate can be vulnerable to market fluctuations.
• House flipping: With this common investment strategy, you purchase an undervalued property, renovate it, and quickly sell it for a profit. This strategy requires market knowledge and renovation expertise and carries a higher risk.
• Real Estate Investment Groups (REIGs): This option involves several partners pooling their capital so that they can invest more broadly. REIGs invest in property financing, flipping properties, or leasing properties for rental income.
• Real estate development: This strategy focuses on building new residential, commercial, or mixed-use properties to generate passive income or sell for a profit. It can be a very high-risk, high-reward option with a lot of control and responsibility over your investments.

The amount of money needed to invest in real estate varies widely, depending on the property types you invest in.

For example, a lease option requires lower upfront costs, giving you ownership of a property without requiring the large down payment of a conventional purchase. On the flip side, real estate development comes with significant upfront costs, from land acquisition and permits to construction and marketing.

When deciding what you’re going to invest in, you need to understand:

• Additional expenses, such as closing costs, property inspections, and ongoing maintenance needs
• Your financial situation, including your net worth, debt-to-income ratio, and risk tolerance
• A property’s price, the amount you have for a down payment, and the amount you’ll qualify for from a lender

A business plan not only gives you a roadmap for building your real estate investment company, but it’s also crucial to secure financing. Presenting a polished business plan will show lenders your business has potential for profitability, and you have the skills and commitment to make the business succeed.

A quality business plan should include:

• An executive summary, giving an overview of your business, mission, and long-term vision
• Analysis of your target market and your company’s competitive advantages
• Your investment strategy for buying, renting, and selling properties
• Income and expense forecasts, profit projections, and a detailed account of your financing needs

When starting a real estate investment company, it’s important to protect your personal finances. Forming a limited liability company (LLC) is a popular choice for real estate investors for many reasons, such as:

• Providing a legal separation between personal and business assets, protecting an investor’s personal home, savings, or other possessions if a lawsuit arises from the property.
• Offering tax benefits, such as pass-through taxation, which means the LLC doesn’t pay income taxes, as the profits and losses pass through to the investor’s personal tax returns.
• Giving investors a more flexible structure than a corporation, making it easy to add partners or transfer shares of ownership without having to change property deeds.

Once you’ve chosen your business structure, you need to obtain your Employer Identification Number (EIN) from the IRS for tax purposes. An EIN is also required by most banks to open a business bank account, which is highly recommended to keep your personal and business finances separate.

You’ll also need to comply with all local zoning laws and obtain any required permits, such as construction permits for house flipping.

Having a circle of real estate industry pros opens you up to more clients, investment opportunities, valuable advice, and trusted connections. Plus, it’ll give you more credibility in the real estate community.

As you grow your business, there are many ways to build your professional network, including:

• Attend seminars, conferences, and other industry networking events
• Leverage online tools, such as LinkedIn and investor forums
• Join real estate professional associations, such as a local Real Estate Investors Association (REIA)
• Extend your network to a wider range of people, including mortgage brokers, attorneys, and property managers

Developing genuine relationships—not just transactional ones—with others in your professional orbit can also lead to more streamlined processes. For example, getting to know a lender can lead to quicker financing approvals and better terms.

Although real estate investors can spend millions of dollars on their properties, there are many investment strategies for those with limited capital. For example, here are three ways you can invest in real estate with just $5,000:

• Buy shares in a real estate investment trust (REIT) to gain exposure to the real estate market with a low-risk investment.
• Invest in real estate crowdfunding, where online platforms pool money from many investors for specific real estate investments.
• Partner with an experienced investor or contractor, putting your $5,000 towards specific expenses in exchange for a share of the profits.

Securing outside financing can boost your purchasing power, leading to a larger return on investment. Plus, it’ll allow you to keep your own cash in hand for emergencies and take advantage of many tax benefits.

Here are some of the most popular business loans:

• Survey recent property comps in your target area to determine a property’s current market value and develop a competitive offer.
• Tap into your network of real estate agents, property managers, and contractors to identify potential listings.
• Use online realtor tools such as Zillow and MLS to search for listings and foreclosures.

• Determine a property’s potential expenses, including repairs, renovations, maintenance, and management, to ensure the income exceeds this amount.
• Use the 7% rule to confirm whether rental properties will generate at least 7% of the purchase price in gross annual rent payments.
• Ensure you have the cash flow and proper financing to purchase the investment property.

• Be sure to weigh all the potential financial, professional, and liability risks that come with the investment.
• Thoroughly vet the property and neighborhood to avoid costly mistakes.

As a real estate investor, general liability insurance is a crucial coverage for common third-party risks, such as tenant injuries or property damage. This policy pays for medical bills, attorney fees, and other lawsuit-related expenses from claims of:

• Third-party bodily injuries, for example, if a tenant, their guest, a delivery person, or a contractor is hurt on your investment property due to an icy stoop, slippery floor, or other unsafe condition caused by your negligence.
• Third-party property damage, such as if your tenant or another third party’s property is damaged from a leaky pipe, faulty lock, or other issue caused by your negligence.
• Advertising injuries, including accusations of libel, slander, or copyright infringement over a social media ad campaign for your property.

With social engineering attacks getting smarter and happening more often, cyber insurance will protect you from the devastating costs of a malicious ransomware attack or a data breach of your clients’ information.

Cyber insurance will help pay for:

• Data breach response costs, including notifying affected customers and providing them with credit monitoring services
• Cyber extortion payments, hiring IT consultants to recover data, and other recovery expenses
• Lawsuit costs, such as legal fees, settlements, or court-ordered judgments

When it comes time to scale your real estate investment company, there are several key strategies you can implement, including:

• Lean on technology to automate tasks such as rent payment tracking, tenant applications, and property management requests.
• Consider reinvesting profits into new properties or upgrades, using the BRRRR method (buy, rehab, rent, refinance, repeat) to pull equity from existing properties to fund new opportunities.
• Grow a reliable team of employees to handle day-to-day operations, such as managing rental properties and overseeing renovations on a property you’re flipping.
• Negotiate lower long-term insurance premiums by staying compliant, following policy requirements, and conducting insurance audits to make sure you’re properly covered.
• Talk to a CPA about protecting your assets as your investment portfolio grows, including when you should create additional LLCs.