5 Important Aspect Of Business Every Investor Should Understand
By JD Esajian on October 9, 2017
It takes a lot to be a good real estate investor. It is important to understand that as an investor you are essentially running a business. Like any other business there are a unique set of items you should know, and understand. Knowledge of your local market is important but not enough to run a business. You need to stay on top of your budget, know local tax laws and be able to manage a team. On the surface these may not have anything to do with real estate but they have everything to do with running a business. How strong you are in running your business directly determines your bottom line. As you grow in real estate it is important you understand these five aspects of running a business.
- Budget. Your budget should influence everything your business does. Closing deals and making money is great but if your expenses are too high it doesn’t make a difference. Like any other business it is essential that you are top of your expenses. It is possible that you have several expenses that you have no idea what they are for. Even worse, you blindly pay credit cards or other bills without taking a minute to review the rate and fee. On the other side you need to squeeze as much income as you can out of every deal. This doesn’t mean you should be cheap or ruthless but you should understand the importance of earning even a few thousand extra dollars per deal. If you do this on a half dozen deals over the course of the year you are looking at a significant amount of money. Running a lean business and watching your money may cause you to make some sacrifices but it is all part of investing in real estate.
- Taxes. Prior to investing in real estate and running a business, you most likely didn’t give much thought to tax laws and codes. However, now that you are in the business you should know just how important taxes can be. They can help turn a rental property with average cash flow into one that you consider hanging on to. With the write offs for interest, depreciation and repairs it can impact your bottom line by thousands of dollars. You also need to know how taxes influence your actions after a transaction. With a 1031 exchange you only have a limited window to reinvest your profits prior to being taxed. This can directly impact a decision to pursue a borderline property. You also need to understand how, when and why you will pay personal income taxes. Obviously, the way you get paid per deal is different than a traditional W2 employee. Without understanding the tax implications, you could be looking at a very large tax bill come tax time. If you ask any business owner they will tell you that taxes play a much larger role than they anticipated.
- Return on investment. Every real estate investor should be familiar with the concept of ROI. In its simplest form you look for ways in your business to earn a return on your time or money. The most common way ROI is applied in real estate is with rental properties. There are many rental property formulas and calculations that you should understand. Without understanding of these formulas, you will get caught up with a property that looks good on paper but ends up being a dog. Perhaps a more important return on investment in business is time. How efficient you are at delegating certain tasks will allow you to spend time in other areas of your business that can produce a much greater return. You probably have the necessary skills or education to do almost everything in your business but it doesn’t always make the most sense to. Even if you have to pay someone to take on certain projects it is the best thing you can do for the health of your business. With every decision you make you need to think about the return on your investment.
- Leverage. One of the things that makes real estate a popular investing option is the use of leverage. With leverage you can put say 15% down payment and take 100% ownership. Leverage also works in many other aspects of the business. Instead of handling every area of a marketing campaign it may make more sense to hire someone. Your nominal payment to them can allow you to earn many times more in the long run. You can also leverage your existing relationships to help grow your business. A lead generated from a relationship has a much greater chance of turning into an actual deal. The same works the other way as well. If there is a deal you can’t do you should pass it along to your network. You may not directly earn from it but you will leverage the lead into something greater in the future.
- Management. A real estate investor is in the center of every deal. There are several people that you are directly responsible for and answer to you. Your real estate agent, accountant, mortgage broker, contractor and property manager all need you to complete a given transaction. How well you manage them impacts their motivation which reflects on their job performance. Poor work can often make all the difference in finding a good tenant or completing a rehab project.
If you invest in real estate you need to accept the business ramifications. Closing deals does not tell the whole story of your business. There are several other factors that influence just how strong your business is.