A real estate business is a business entity that deals with the purchase, sale, management, or investment of real estate assets. According to The Balance, real estate is “property, land, buildings, air rights over land and underground rights under land.”
Over the past decade, middle-class families have run out of significant wealth as wages are falling and inflation is rising. Another unfortunate reality today is that less than five percent of people under the age of 65 have enough money to retire or are “financially sufficient” to be safe, according to the US Census Bureau. If you do not want to be part of those foggy stats, then it may be time to consider starting a real estate business to achieve your financial goals. The IRS recently reported that in the past 50 years, of all Americans who declared more than a million dollars on their income tax returns, 71 percent were involved in real estate.
Starting a real estate business will not be easy, but with the right preparation, it will be worth the work. Best of all, there are many resources on small business systems that can make the learning process easier and more efficient. Read through our guide below, after all, designed to help you succeed.
Is a Real Estate Business Profitable?
If you handle your property wisely then the simple answer to this question is absolute. The most common way that a real estate business can be profitable is through appreciation. Appreciation is the increase in the value of a property over time. Property can also be residential property, commercial property, and undeveloped land. The increase can be due to several reasons such as increasing demand with decreasing supply. Gaining profit in your real estate business comes through selling your property after an increase in value. Secondly, the real estate business benefits from generating income through regular payments or rent.
Real Estate Benefits through Appreciation
For residential properties, the biggest factor of appreciation is location. A developed neighborhood that adds better schools, new shopping centers, playgrounds, or anything that makes the area a more desirable place to live adds value to the home. Home improvements, whether interior or exterior, can also add significant amounts of value. In return, your real estate business can make a large amount of profit through house flipping or rehab. Commercial properties operate in a similar way to residential by gaining benefits through development in the location and improvement in the property.
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In the context of undeveloped land, profit also arises through development. As a city expands, land outside its boundary begins to become more desirable to those who wish to develop it. Once a developer starts building a house or commercial building, the value of the land increases even more.
Real Estate Gains through Income
Simply put, residential and commercial real estate generate income through rent. Tenants pay an agreed amount per month which can increase through inflation and demand. After deducting your costs, you claim the remaining portion as income. A smart move for your real estate business is to invest in a property in a desirable location that gives you the ability to easily secure tenants.
Depending on your rights on the land, raw land can also generate income as companies can make regular payments for new structures built on land or royalties for any discoveries. These include, but are not limited to, new access roads, pipelines, cell towers, pipelines, or pump jacks. It is common practice to rent raw land for agricultural purposes and some lands may contain valuable scrollable assets that can be collected from time to time.
Set Your Business Goal
Before you hit the ground running, take time to evaluate and prioritize your plans for the future. This means that thinking through your personal, professional, and financial goals – will impact how you start and build your real estate investment business. Begin by asking yourself where you are in five, ten, and fifteen years. Then, strategize more immediate steps to help you get here. The importance of this process cannot be overstated. Goals not only help investors stay focused but also help them take action.
One framework that I find particularly useful is the SMART Goal. It is specific, measurable, attainable, and relevant and time-bound. Essentially, it helps investors balance ambition and action steps in future planning. Smart goals work in both short-term and long-term frameworks, making them perfect for any starting point. For more information on setting smart goals, be sure to read our guide today.
Conduct in-depth research
A successful business plan always precedes in-depth industry research, which should identify a specific niche, market segment, and potential competitors. There are several exit strategies that your real estate business can focus on, although some focus more on beginners. Many first-time investors will opt for a wholesale sale, which allows them to learn the ropes before actually purchasing the property. However, rebalancing your goals or buying and holding strategies can also be a great option.
Your research should then focus on which market sector is most appropriate for your area of investment. Look at median home values and rental prices, research neighborhood amenities, and most importantly, don’t be afraid to look outside your current location. Online research, networking events, and even obtaining a mentor can help during this part of the process. Always remember, the more research you complete now, the more prepared you will be to start developing your business plan.
Manage your finances
There are many ways in which there is no money to get into real estate; however, this does not mean that you should avoid taking stock of your current financial situation. Chances are when you contact a lender they want information about your financial history. You need to have a look before contacting with questions. Request a copy of your credit report and review any existing accounts or investments you may have. One thing that I always tell investors at this stage is that no matter where you start financially there are ways to get started in real estate investing.
Depending on your investment strategy, there are some financing options that may be right for you. Real estate investors can start a traditional anywhere, like a mortgage from a financial institution or government loan. Or, they can opt for non-financial financing options such as private money lenders, business partnerships, and even crowdfunding. Right now you don’t have to follow a “method”, but you should be familiar with some options. That way when it is time for your business to get up and know where you need to go.
Plan your business
Once you have done enough research, you should already start formulating ideas in your mind that will help your business succeed in your market. Write a business plan that includes resources and tools for your leverage plan.
Top 5 Benefits of Starting a Real Estate Investment Business
The benefits that come with investing in real estate are almost endless. Not only do you have the ability to make a profitable profit on every deal, but also, real estate is proving to be a solid hedge against the stock market and inflation. Some other benefits that are guaranteed to come with starting a real estate business, but do not include:
• Tax benefits. If you make $ 100,000 a year on your nine to five job and I make $ 100,000 a year from my rental property, who gets to keep more after taxes? You guessed it, my rental property has been taxed very little because the government rewards the owners of the rental property. The government also offers lower tax rates on long-term gains, among other benefits such as depreciation and the exclusion of self-employment tax.
• Cash flow. Not only do real estate investors have the ability to derive substantial cash flow from stable wholesale or rehab deals, but they can also ensure themselves secure monthly cash flow with rental property deals. The best fact about the cash flow of a rental property is that after all your bills have been paid, the extra money is considered a passive income, you would have to collect a monthly paycheck while managing the rest of your investment business.
• Appreciation. When you are paying off the debt of whatever property you invest in, the value of that property is increasing or appreciating. While things like recession and market fluctuations are bound to happen, it is safe to say that over an extended period of time, the value of the real estate will increase. That being said, every property you buy today will be worth 30 years from now; however, with a fixed-rate mortgage, you will always pay the same dollar amount.
• Control. Probably the biggest benefit of starting a real estate business is the control and pride you take in being the owner of something you create. Your fate is not connected to Wall Street or the office of the CEO of your company, it is only yours. Real estate investment puts you and your financial future on the driver’s seat alone.
• Security. Of course, any type of investment will always be associated with some type of risk. However, building a real estate portfolio over time means that you are securing your future. Unfortunately, many individuals today do not have a specific plan for how they will secure their retirement. Real estate investing is not only some say the fastest way to get out of debt, but is an undeniable method of creating multiple streams of income for you that will continue well into your retirement years, and in the future as well it can be passed.
