Archive for Real estate investors Portland

Business Structuring – Making Money? Now Cover Your Assets

WARNING: DO NOT READ ABOUT BUSINESS STRUCTURING UNLESS YOU HAVE COMPLETED AT LEAST TWO SUCCESSFUL TRANSACTIONS

Business Structuring at IBM/Tabulating Machine Co. organization chart

Business Structuring Follows Profit

I’m not trying to be mean with the warning. I just don’t want you to waste your precious time focusing on things in the wrong order. Try dialing a phone number where you dial the area code AFTER you’ve dialed the 7-digit local number and see what happens. Order counts. I’m mentioning this topic now because chances are, once you’ve started actively investing, you’re going to start hearing horror stories of loss due to lack of preparation in business structuring.

So, let’s take a look at a few ways to structure your business to protect your family and personal assets from legal and financial liability, and to minimize your tax burden. Please note that I’m not a licensed CPA or attorney. I’m just sharing some of the things I’ve become aware of in my time as an investor. When you’re ready to CYA, I strongly urge you to get qualified help from a good local lawyer, accountant, and financial planner who understand Portland laws and tax structures. Here they are.

Business Structuring Types

  • Sole proprietorship
  • Partnership
  • Limited Liability Company
  • S Corporation
  • C Corporation

Sole Proprietorship

This is the most common, and cheapest, form of business structuring. It allows you to use a legal business name, and that’s pretty much it. There is no financial or legal protection of any sort. If there’s a problem, it comes down on you, your savings, your home, your car, your boat, and any and every other personal and real asset you own. However, you can start writing off business expenses, including a home office.

Partnership

Two or more people come together and share in the risks and the rewards of the business. Many single-property projects that are called joint ventures are in fact partnerships built around a single property. This is one of the reasons why you will see numerous investors who are in completely separate joint ventures with other investors. Each property is inside its own partnership agreement or other corporate entity.

Limited Liability Company

Many people mistakenly refer to this as a “limited liability corporation” but in fact an LLC is more like a partnership than a corporation. LLCs have become very popular in recent years for real estate investors, as they are less expensive and often require less administration than corporations, but still provide excellent liability protection.

S Corporation

The S corp is the “Small” version of the C corporation. It’s simpler to administrate than a C corp, but harder than an LLC. Similarly, the financial tax benefits kick in at a higher revenue level than an LLC.

C Corporation

The Daddy of all business structures, the C corp has the highest administrative burden, but generally provides the greatest legal and financial protection. Of course, you need to be generating something like $100K a year before this even becomes an option for most investors.

The best way to determine the business structuring right for you is to ask yourself a few key questions and share the answers with your mentor, attorney, CPA, financial planner, and marketing team or consultant (believe it or not, how you set up your business can affect how well you get found in Google, and how you market your services). After you’ve gotten all their feedback, then you can weigh the information and make the best decision for you.

Here are a few questions to consider, in no particular order (remember to invite input from your professionals as well):

  • How good are you at maintaining records?
  • Will your properties ever be occupied by tenants?
  • Will you be joint venturing/partnering with other investors, and if so, how often?
  • Will you be working from home, or from an office?
  • Do you own your own home or any other significant personal or real assets?
  • How much will you make from investing this year?
  • Will you be using your own funds to invest, and if so, what financial vehicles are the cash in?
  • Are you looking to get found online by prospective sellers or buyers?
  • Will you be engaged in construction or remodeling, personally or through subcontractors?

Proper business structure is only one side of preparation. In my free video “Seven Biggest Mistakes in Portland Real Estate Investing” at HowToInvestInRealEstatePortland.com I also talk about the members you want to have on your real estate investing “dream team.” So make sure you’re making money in real estate first. Then get your business structuring in order, make sure you are surrounding yourself with the best teams to protect your assets and to take your business forward, and you will enjoy peace of mind as well as wealth of household. Take action and prosper.

Business Structuring – Making Money? Now Cover Your Assets

Gurus – A Loaded Gamble

Gurus - A Loaded Gamble

Gurus - A Loaded Gamble

How much have you spent on training with “gurus,” real estate investing trainers traveling the national circuit? Hopefully less than $20K. Ideally less than $5K. I personally have invested over $100K in guru education and have discovered the advantages and very real disadvantages up close and personal. Let’s talk about the good, the bad, and the ugly of guru-centered real estate training.

The Good of Training with Gurus

A few of these guys and gals have decades of experience in the trenches, in the real world. They’ve done deals and fought their way up to super success, often from humble beginnings. They know how to win with real estate. When they teach, it’s from real experience.

And when you do something in the same way as them with the same kind of seller, you will often enjoy very similar success.

More importantly, if you listen between the lines, you can begin to interpret their beliefs, their philosophies, and the advantages and disadvantages they worked with. These are often the things they don’t spend much time talking about that you can learn the greatest lessons from.

For example, if one of those gurus tells you that doing a 120-unit deal is the same as a duplex, that may cause you to think one way. But what if you discover that that very guru didn’t do his first 120-unit deal until he had 20 years of solid experience in real estate? He had built connections with construction crews and administrative teams … and key decision-makers in the city’s land use and permitting departments … and financing. What if, after all this, he STILL had multiple partners on his first few larger deals? You might think another way. Probably a more empowered, realistic way. And the fact is, the gurus often say one thing, but their own experience is completely different. They’re not lying intentionally often. There’s another reason why they say things that seem incompatible with their own experience. Let me explain.

Say you’re out of shape and an Olympic power lifter tells you that picking up a 500 pound barbell and throwing it over your head is easy as long as you do it the right way. Chance are, you’d look at him and think, “Sure it’ll be easy, just as soon as I’ve got all your muscle.” And you will be empowered with a realistic perspective. But if you ignore his muscle and training and team of coaches and just try to pick up that barbell, you will not only be sorely disappointed, you will be sore, and quite possibly injured.

But you can’t see the guru’s “muscles” because they’re between his ears. He doesn’t even consciously see them anymore. He rarely comes on stage with his parents, friends, coaches, and crew. You almost never hear about the biting failures that taught him the lines that could not be crossed, and that motivated him to ever greater effort and success. These are truly great lessons. Not what the gurus do in real estate, but how they got there. How they think, what their support system is, the circumstances and market under which they developed their investing system. Understanding all of these will give you far greater clarity and realism in moving forward.

The Guru Bad

The guru will tell you that his system will work for you wherever you live, because everyone is the same. That’s true, isn’t it? You can drive around your own town and see homeless people, wealthy executives, seniors heading towards senior care homes, and teenagers looking for something to do. Don’t they all want the same things in life, and have the same priorities, and values?

Not even close.

Similarly, not every system works the same way everywhere. Folks in Lafayette, Georgia have very different values and culture than folks in Portland, Oregon, generally speaking. They’ve got different local and regional economies. Their primary employers are from different industries. Their average education and income and cost of living are different. Same goes for New York City, and Seattle, and Wichita, Kansas. They will not respond to the same offers as a group, in the same ways. If you think that the guru’s methods which were developed in a low-house-value area with relatively unsophisticated sellers is going to work as well in the big city with savvy, cosmopolitan types in multi-million dollar homes, you are destined for disappointment, failure, and loss.

The Ugly

Have you ever noticed how different people move through the world differently? There are shy people, and outgoing people. Intellectuals and dullards. Leaders and followers. Now think about every platform-walking guru you’ve heard of. Are you just like any of them? Do you approach people, property, or situations the same way? Do you have the same experience, or support systems? Do you believe the same things about the world or yourselves? Do you have the same friends?

It all makes a difference. And if they don’t tell you that, it’s either because they’re not honest with themselves, or they’re not honest with you.

There’s a very interesting book I might recommend to you called Outliers by Malcolm Gladwell. In it, he demonstrates very persuasively that people are not successful just because of hard work, courage, and perseverance, although of course those are necessary. Their destinies are intimately tied with who their parents and grandparents are, where they grew up, and what year, and even month they were born. This applies to professional hockey players as much as to software manufacturing billionaires as much as it does to world-class concert musicians and math wizards. It’s a good read and can open your mind in important ways.

One of the biggest myths these gurus will perpetrate – knowingly or unknowingly – is the idea that they did it alone. In reality, one of the most important elements in most successful people’s lives is the presence of a mentor, someone who believed in them and helped them every step of the way for some period of time, usually in the formative years of their professional development. That mentor taught them and encouraged them to leverage their strengths and take action, to celebrate wins and learn from failures … over and over again, until success was a habit.

For those of you going it alone, trying to take “the hero’s journey,” you will discover that the chances for success are small. I’ve learned techniques from gurus, but it was partnering with my mentors for years that made my efforts pay.

So, in summary: guru training is a sword that cuts both ways. Like everything else in life, it has its advantages and disadvantages. Being aware of and planning for both will pay you dividends in saved years of wasted effort and disappointment, and will make your trip less lonely and more enjoyable. Pair personal mentorship with gurus’ training that matches your personality and market and you will have a winning combination that will empower you to create income now, stability for your future, and a lifestyle that will be envied by your peers. Take action and prosper.

Gambling on Gurus – The Stakes Are High and the Dice Are Loaded