CHAPTER
15

Building Your Business

In This Chapter

You’ve made it this far, so you should be feeling confident and prepared to succeed as a landlord. But do you want to take being a landlord to the next level? Do you want more properties? Do you want to make investment real estate your full-time job?

If real estate is your passion and you have an entrepreneurial spirit to own a business, this chapter could help you turn that dream into a reality.

Owning Your Own Business

Do you want to own your own rental property business? Owning a business takes a lot of hard work and is very different from investing in real estate. Most people don’t appreciate how much time they must dedicate to getting a business off the ground and profitable. Are you ready for the extra push it will take?

The Small Business Administration (SBA) suggests you ask yourself these questions before embarking on entrepreneurship:

Do you have the physical and emotional stamina to run a business? Business ownership can be exciting, but it’s also a lot of work. Can you face six or seven 12-hour workdays every week?

How do you plan and organize? Research indicates that poor planning is responsible for most business failures. Good organization of financials, inventory, schedules, and production can help you avoid many pitfalls.

Is your drive strong enough? Running a business can wear you down emotionally. Some business owners quickly burn out from having to carry all the responsibility for the success of their business themselves. Strong motivation helps you survive slowdowns and burnout.

REAL ESTATE ESSENTIAL

The first few years of starting a business can be hard on family life. It’s important for family members to know what to expect and for you to be able to trust that they’ll support you during this time. You might experience financial difficulties until the business becomes profitable, which could take a while, and you might have to adjust to a lower standard of living or put family assets at risk in the short term.

If you answered “yes” to these questions, you might be ready to give entrepreneurship a try. The next question is, do you go solo, bring in a partner, or purchase a franchise?

Going Solo

Do you like the idea of being solely in charge of the business? If so, you might want to be a sole proprietor. In this case, you own the unincorporated business by yourself.

There are pros and cons to a solo gig. One of the pros is the tax advantages, such as the ability to deduct your business losses. However, going it alone leaves you completely liable for any debts you may incur or lawsuits that may be filed, even against your employees. For instance, if an employee completes a maintenance job that damages another unit, the owner of the damaged unit could sue you for damages and come after your personal assets.

Working with a Partner

If you won’t want to own the business by yourself, you could share the fun, work, and pay by going into partnership with someone else. A partner can reduce some of the stress of starting a new business. Each of you can take certain responsibilities, for example, and cover each other on days off.

You can also partner with someone who has access to financial resources or may be skilled in an area you’re not. If you have marketing experience, you could team up with someone who has accounting experience.

If you go into business with someone, document all the details of responsibility between the two of you. Don’t just go into it because it sounds fun. Complete a background and credit check on any potential partner, just like you would a potential tenant. Also, spend some time with your potential partner talking about goals and visions for the new company before signing on the dotted line. Be sure you’re both moving in the same direction.

Buying a Franchise

If you don’t want to start your business from scratch, purchasing an already established franchise system might be a better option for you.

DEFINITION

A franchise is an already established business that allows you to use its brand and name recognition and also provides support and training on a proven business model.

When you own a franchise, you’re still the boss of your franchise, but you have a proven system and a team of support you can turn to for help with advertising, marketing, training, personal training, and finances.

Real Estate Brokerages

If your business is just going to be about your own real estate rental properties, you don’t need a real estate license. However, if your plan includes taking care of rental properties you own as well as those someone else owns, then the rules and laws change significantly.

If you plan to manage property that doesn’t belong to you, you need to be a licensed real estate agent and may even need to own a real estate brokerage to be in compliance with your state’s real estate laws. Most states require you to have a real estate license for at least 2 years before you can have your own real estate brokerage. (In Texas you must be a real estate agent for 10 years prior to having your own brokerage!) Before you quit your day job, understand how your state’s real estate laws affect your plan.

Even if you don’t plan to start your real estate property management business now, getting your real estate license is a good idea if your goal is to be an active real estate investor. To get your real estate license, you need to take real estate classes and then a real estate exam. When you pass your state exam, you need to find an established real estate broker you can work with for the required time before you start your own brokerage.

If you choose to start your own brokerage firm, you need to take additional real estate classes and a longer, more extensive state real estate exam.

Choosing a Target Market

Even before you start your business, determine who your audience is. If, for example, you’ve created a property management niche for yourself, like specializing in managing corporate housing, who are your customers? Are you going to target urban property owners, business districts, or university or hospital areas? You don’t want to invest in a business that doesn’t serve a need or make money.

Let’s say you decide to create a property management business that caters only to senior housing, but no properties are zoned as senior housing in the geographic area you plan to serve. In this case, you need to find out who you want your customers to be and if there is a need for your services in that area. Then you can target your business accordingly.

Other possible focuses could be student housing, housing focused on health-care professionals, mobile home parks, single-family homes, multiunit apartment buildings, vacation rentals, or commercial real estate.

Creating Your Business Plan

Every business should have a plan. A solid business plan can help you manage your rental property business better and is essential if you need financing from a lender or partner.

DEFINITION

A business plan is a strategy that precisely defines your business, identifies your goals, and illustrates your income potential. Its basic components include a balance sheet, an income statement, and a cash flow projection. A well-thought-out business plan helps you allocate resources properly, handle unforeseen complications, and make the right decisions.

Gwen Moran, co-author of The Complete Idiot’s Guide to Business Plans Plus, says your plan should answer five key questions:

Let’s look at each of these questions in a bit more detail.

What Is Your Business?

Your business plan should reflect a solid understanding of current market conditions and how your product or service is better than what’s already out there.

Industry analysis is essential, whether you’re operating within a particular geographic region or a specific industry. Do your homework by reading trade journals and tapping into research from key industry associations, including the local Small Business Development Center or a nearby chapter of the Service Corps of Retired Executives.

Who Is Working Your Business?

Having the right people working on and in your business is essential. Include in your business plan the bios and key talents for each partner, if you have partners, along with all employees, professional advisers, and consultants you intend to employ.

It’s important to have proper staffing projections so you can better understand the investments you need to make in appropriate personnel.

Why Is Your Business Better?

Your business should always have a unique selling proposition. Customers and clients need a reason to choose to work with you and your rental property business rather than someone else’s. Are you the upscale property manager who provides the best service in the area, for example?

Knowing your place in the market is essential to helping you evaluate everything from your competition to your profit margins. Lenders and investors will want to see that you understand where your business fits into the competitive landscape, too.

Where Will You Find Customers?

Customers are essential to a business’s success. You need a sufficient supply of customers to survive. In your business plan, define your key potential customers as clearly as possible. Who are your primary and secondary markets, or who else can you serve? How many of them are there? How will you find them and reach them to market and sell?

If you can’t answer these questions, you don’t have a viable business.

How Much Money Will Your Business Need?

From investing in properties, to making upgrades and repairs, to simply buying office equipment, running a property management business can take on many forms and have many expenses. You need to have a good handle on how much money is essential for starting, running, and growing your business. Work with your financial adviser or accountant to prepare proper financial benchmarks.

Once you’ve completed your business plan, don’t just leave it on the shelf. A successful business owner reviews and revises his or her business plan on a quarterly basis.

RENTAL REMINDER

You need an employee identification number (EIN) or a federal tax identification number to identify your business. If you’re starting as a sole proprietor, you can use your Social Security number at first. However, many sole proprietors still elect to use an EIN because it reduces the chances of identity theft, and banks often require one to open a business account.

Know Your Competition

Before you start your own business, you should know something about your competition. Who are they? How long have they been in business? What services do they offer? Take time to research the other property management companies in the area. Talk to the tenants, too.

Considering commercial real estate management? Visit office buildings and talk to the tenants. Are they happy with the building management? What do they like and dislike about the management company? What services would they want that they don’t currently have?

Armed with this information, you can think about how your company will stand out from your competition.

Establishing a Client Base

Of course, a property management company needs properties to manage, but where do you find them? If you’ve already established yourself in rental properties, start spreading the word. Let your contacts know what you’re doing so they can refer business to you.

If you’re just starting out, you’re going to have to prove yourself. Be ready to answer tough questions, especially, “Why should we trust you with our property?” Answer this question honestly and professionally. Focus on your strengths. Do you have a marketing background that helps you bring in the tenants? Are you experienced in building maintenance? Have you been a condo association president? Let them know about your personal rental property experience.

It would be a good idea to have a few professional references from past tenants, vendors, or businesspeople you have worked with as well.

Financing Options

Some businesses can be started on a shoestring budget. If you’re planning on managing a small property someone else owns, for example, your business requires less start-up capital (money) than if you’re planning on buying a large apartment building.

Regardless of your budget, where is your money coming from to start your business? Here are some financing options available to you:

Fund it yourself: You can use your personal savings. This is called self-funding.

Borrow it: Borrowing money from a bank, family member, creditor, or other entity is another option for getting your business off the ground.

Use equity capital: Equity capital is money raised by a business in exchange for a share of ownership in the company. In other words, they pay you cash and they get a stake in your business through stock.

Contact the SBA: The SBA provides a number of financial assistance programs for small businesses. Visit sba.gov to evaluate your eligibility.

REAL ESTATE ESSENTIAL

Remember, the first few years of getting a business off the ground can be trying, both emotionally and financially. If you’re seeing a profit right away, don’t jump to spending it right away. Instead, work efficiently for at least an entire calendar cycle to ensure the stability of your business before you spend extra cash on anything but essentials.

Necessary Licenses

As mentioned earlier, you might need a real estate broker’s license to manage or sell other people’s real estate. You also might need business licenses for your location.

Your state or local governments have a division of local licenses or a department of economic development that can tell you exactly what you need to know about business licenses.

Don’t forget about tax licenses. If you plan on purchasing anything, even as small as a lightbulb, and reselling it at an increased rate through your business, you need a sales tax license.

In addition, you might need a lodging tax license if you’re renting properties for shorter terms that require you to process a lodging tax on the rental amount.

Insuring Your Business

Business insurances are just like home and car insurance. They protect you just in case your business is sued or something happens to your property.

Here are some types of business insurance you might need:

Property insurance: This insures against loss or damage to your office or property.

Casualty insurance: This covers loss in case of an accident.

Liability insurance: This insures you if you’re sued for negligence.

Workers’ compensation: This protects your employees should they get hurt on the job.

Health insurance: This provides health care for you and your employees.

Life and disability insurance: This protects the business in case of the untimely death of you or a partner.

You may need additional policies, such as commercial auto insurance and business interruption (or continuity) insurance. Business interruption insurance covers your loss of income if your business suffers a disaster while it’s closed because of a disaster or is in the process of being rebuilt after it. This policy covers the profits you would have made if you’d been open.

WATCH OUT

When you’re a manager of someone else’s property, it’s a good idea for them to name your company as an additional insured on their policy. (This can be done at no additional cost.) This protects you from liability without you having to get additional insurance on the properties you just manage and don’t own. You can stipulate this as a requirement in your property management agreement.

Setting Up and Running Your Office

If you’re like many new property management business owners, oftentimes you’re the bookkeeper, office manager, leasing staff, mail clerk, receptionist, property inspector, cleaner, and broker, all in one. If you’re lucky, you might have a parent, a sibling, or a college buddy helping you out when you need an extra hand. It can seem overwhelming, but remember that you’re also the president and CEO, and you can tell yourself what to do.

Being in business for yourself means you need to run your operation smoothly and consistently. As it grows, so will your need for better organization and efficiency. If you’re just starting out, your business might just be you, your laptop, and your kitchen table. However, as you acquire more rental properties, you’ll acquire more and more work, more and more details to organize and track, more money coming in from your tenants paying rent, and money going out as you pay your bills. Investing in the right tools and people grows your business and maximizes your investment.

Before you start, you’ll need supplies. Visit your local office supply store and buy the essentials, such as a stapler, pens, file folders, and a desk to put them all on. You’ll need a computer, too.

For tax purposes, you don’t need to have separate personal and professional computers, desks, or other equipment just yet. It’s fine to keep it simple and use what you have in the beginning. What matters in the end is how you do your taxes and what you can deduct as a business expense. Before you get too busy running your business, take time to meet with both your tax accountant and your financial planner to ensure that how you run your business will make you as successful as possible and maximize your profitability.

Your next big investment after a computer should be a key-cutting machine, which could cost you around $1,000. If cutting unit keys isn’t done properly, it can be a huge waste of your time. If you don’t buy a key machine, you’ll waste valuable time running around and waiting to get keys cut and hoping the person doing it knows how to do it right. Buy the key machine now, as well as a locked storage case to house all your property keys.

RENTAL REMINDER

Never get caught without a key. Create a second secure key storage box where you can lock away the original master key for all your properties.

Today everyone has a cellphone, but you don’t want to use your personal phone for business. Set up a separate digital business phone number instead. As long has you have an internet connection, you never need to pay for a phone line. In addition, some other great features are available on digital phone lines. For example, you can set up the system to email you a digital recording of any message you receive.

You don’t need a fax machine, but you do need a printer that can also scan and photocopy. Any document that may have been traditionally sent via fax can be easily scanned into a PDF format and either emailed or faxed.

Note that not all printers are the same, and one cost you’ll incur is the toner. Shop around and compare the cost of replacement toners to determine what printer you want to buy. Some stores, such as Staples, offer a credit if you return your toner cartridges to the store. It’s an incentive to keep recycling them.

Pick up a paper shredder, too. You’ll need it to safely shred unwanted documents containing personal and financial information.

If you’re managing more than one property, it’s easy for details to get lost unless you back them up on a computer system. Several types of management and landlord software programs are available that enable you to track data and documents, rent, bills, and property data. A good property management software program includes these items plus a check ledger, multiple accounts, and account report capabilities. See Appendix B for some of the more popular programs.

Software can cost from a few dollars a month to thousands, so research multiple products and compare features that would be best for you.

Stay Updated

It’s important to stay connected with the real estate industry to ensure you’re up-to-date on changing laws, rules, and trends in residential property management.

Publications

One easy way to stay current is to subscribe to—and read—real estate trade publications. If you don’t want a physical, paper subscription, you can opt for digital versions.

We recommend you subscribe to publications such as Professional Real Estate Investors Magazine and Multi-Housing News. Check out The Cooperator, too.

RENTAL REMINDER

You also can set up alerts in your web browser to stay on top of news. An alert is a name, term, or phrase you can ask your browser to watch for and send you an email anytime that term is used on a website, on a blog, or in a news item. If you set up an alert for “changes in San Francisco rent control laws,” for example, and your local newspaper writes about it, you’ll find out without having to read every newspaper and blog.

Trade Organizations and Associations

Another great way to get focused industry information is to look into joining national and local trade organizations, such as Building Owners and Managers Association (BOMA), the Institute of Real Estate Management (IREM), the National Association of Residential Property Managers (NARPM), and the National Property Management Association (NPMA). If you have a real estate license, also consider membership in your local real estate board and National Association of Realtors.

As you develop as a landlord, and maybe even as a full-time property manager, these organizations support you with vendors, continuing education opportunities, best practices, lobbying, and even topic-specific white papers.

BOMA and NARPM hold local chapter meetings for members. Property managers, service providers, and vendors attend. The IREM offers online, home-study, and classroom courses on hundreds of real estate–specific topics. The NPMA offers local courses, too.

Also check your state and local trade associations. In New York, for example, the New York Association of Realty Manager offers courses specific not just to the industry, but also to New York City. Trade organizations provide networking and leadership opportunities for you through committees and boards, educational courses, and discounts on goods and services offered through the organization or affiliates.

Chambers of Commerce

A great way to learn more about business and develop a larger community support system is through your local Chamber of Commerce or business development organizations.

A Chamber of Commerce advocates for local businesses and even offers conferences, educational classes and workshops, and social opportunities for you to connect with other members. You can improve your business skills, meet other associates, and promote and market your business.

Continuing Education and Conferences

Looking for conferences in your area? Check with the trade organizations you belong to, your local Chamber of Commerce, or websites such as AllConferences.com. Numerous additional degrees and certification programs are available to you.

Don’t attend a conference without having an idea of what you want out of it, though. Some people attend conferences to get away from the day-to-day routine of work, develop new business strategies, or socialize with peers or potential customers. Other conferences are more specific about meeting vendors, learning new skills, and networking.

The Least You Need to Know