Investing in real estate can provide great returns, but managing your finances has the potential to be a big headache if not done correctly.
Whether you consider real estate investing your full-time job, you’re a new investor, or it is side hustle, treating it like a real business is essential to financial success.
Real estate investors can take certain steps to make managing their finances as pain-free as possible.
Create your own business
Perhaps you are using real estate investing to pay for your child’s college tuition or to ensure a comfortable retirement. To you, this isn’t a business, it’s an investment.
However, the best capitalize on the full advantages of your real estate investment you should create your own business. Creating a limited liability company (LLC) sets up a legal structure to protect your personal funds and gives you business benefits.
LLC’s offer flexibility during tax season and are not taxed directly. Any property in the LLC won’t be taxed. Instead, the profits are passed through to its members. While it does cost money to create an LLC, they do offer benefits for real estate investors that can help you save money in the long run.
Bank accounts
The best way to manage any finances related to your real estate investments is to keep it separate from your personal accounts. If you have created your LLC already (as you need this to qualify for a business account), head to the bank and ask to open a business account.
Not only do separate personal and business banking accounts help keep you organized, but it can also protect you. Depending on where you’re doing it business, it can be illegal to mix a tenant’s security deposit with your personal money. Keeping your funds separate also protects your personal funds if a tenant sues you.
Besides protection, keeping your funds separate has the added benefit of helping you take advantage of real estate investing tax benefits.
Depending on where you choose to open your business bank account, different services may be available. First, think about what you need to do with this account, such as distributing payroll or how many monthly payments you’ll have. You’ll also want to ask about any fees associated with opening and maintaining the account.
Find a broker
As you begin your search for a good real estate investment property, first find a good broker. This isn’t the same process as renting a two-bedroom apartment. A real estate broker will have an understanding of the market and help advise you during the investment process.
Find a broker that specializes in the type of asset you want to buy. The broker will have access to listings, market insights, and statistics, such as operating costs, taxes, and potential sale value. A broker can also advise you on the best purchase price and be your advisor in the negotiations stage.
Understanding financing
Before you invest in a property, educate yourself on real estate financing and the type of loans available to you. This is the process of an investor securing outside funds to make the deal happen.
You may have thought you need the cash on hand to make a real estate investment down payment. However, this is not true. There are different ways to fund or finance your deal, each of which can impact your profits on the deal. So understanding the different types are key to your success.
Start by researching these financing options for your real estate deal:
- Cash financing: If you do have enough cash on hand, from either personal wealth or your network, to purchase the property, this option helps you own the property without a mortgage.
- Hard money lenders: A hard money loan is a good option for investors who don’t have the best credit score, but still need a short term loan.
- Private money lenders: Creating a private loan means investors use their network to secure a loan from a private lender and pay it back at a rate that is typically less than a bank would offer, so beware of private lenders who offer a higher interest rate.
- Self-directed IRA accounts: While your IRA is typically used for retirement, you can use some of the cash in there to make an investment in the hope of growing your retirement in the long run.
- Seller financing: Somes the buyer and seller can come to a finance agreement that benefits both parties.
Use technology
Technology can help keep you and your books organized. But it can also help you manage your investment and even help fund your investment. Technology even offers digital mortgages, offering investors a way to invest without a conventional mortgage that homebuyer typically uses.
On the organization side, you can use Google Drive to manage your files. To take it a step further, utilize a free service such as Stessa to help you organize and store your real estate documents, run monthly reports, track your properties’ performances and more.
Technology can also facilitate crowdfunding or crowd financing, which is no longer just for paying medical bills. Sites such as Fund That Flip offers real estate investors the chance to have a line of credit up to $5 million and pool together financing to allow investors to flip homes and improve neighborhoods.
Centralize accounts
While it is a good idea to split your business and personal accounts, don’t splinter off your business accounts. Keeping your accounts centralized will help you stay organize and track what’s happening with your investment. You’ll use your account to pay everything from your closing costs to payroll, and it should all be centralized.
If you have more than one person working with you to manage your real estate investment portfolio, make sure there’s one person or one group paying all your vendors and taking care of all monthly payments. This will eliminate any duplicate work.
Be ready for tax season
As a real estate investor, you’ll need to report any income or losses you have on your properties when you do your taxes. To fully take the best advantage of tax benefits and avoid a large bill, having the proper documents ready and knowing when to file your tax returns is key.
Truly being ready to file your tax returns is slightly more complicated, but can become easy with the right planning and organization. For example, if you have to travel to your investment property, keep track of all travel expenses and save your receipts in an accessible folder. These expenses have the potential to be written off. If you use your real estate investment as a rental property, you’ll also need to report the rent you receive from the tenant. You’ll also need to be able to show the cash flow you have from your rental property.
Understanding private lending
Private lending can be a great resource to fund your real estate investment. To take advantage of this type of loan, start by ensuring you understand it. There are some common mistakes investors make that you’ll want to avoid, such as not having the deal terms properly documented or miscalculating the interest rates or amount needed.
While it may seem cumbersome to understand all of the nuances of the different types of loans or lending you can get, spending the time to discover new technology, and putting effort into staying organized, smart real estate investors realize it will pay off in dividends in the long run.
