When you’re just getting into the business of real estate, there are some key things you need to know to protect yourself and set up for success. Here, we’ll walk through important basics that every new investor should be aware of.
Keep Contracts Under Your LLC
First and foremost, never put anything in your personal name when dealing in real estate. Always use your LLC for contracts to shield your personal assets. The only time you might stray from this rule is when you’re bird dogging—finding deals for others to profit off of.
Even then, you’re still protected since they are the ones signing contracts with sellers or consumers, not you. Remember, when you’re signing a contract, sign with your name followed by “member” to show you’re acting on behalf of your LLC.
Avoid Commingling Funds
A crucial point for LLC management is keeping your business and personal funds separate. Don’t use LLC funds for personal expenses like buying a six-pack of beer. Mixing these funds can break the legal protection of your LLC, allowing creditors access to your personal assets—this is called “piercing the corporate veil.”
There are other intricacies involved in setting up and managing an LLC, so check out more detailed guides on LLC creation and management to ensure you’re doing everything by the book.
Embrace the Investor Mindset
As you start, it’s essential to frame yourself as an investor. Don’t pigeonhole yourself as just a wholesaler, a fix-and-flipper, a landlord, or an owner-financer. These roles might limit your ability to capitalize on various deals. Being open to a broad spectrum of strategies will let you tailor offers to meet sellers’ needs and optimize your own financial gain.
Build Your Arsenal: The Bat Belt
Think of yourself as Batman—with a utility belt filled with different tools and strategies. When you sit down with a seller, having multiple strategies means you can navigate unique situations effectively. This flexibility leads to higher conversion rates. For example, some deals might be better suited for owner financing or flipping based on current financial needs and market conditions.
Know Your Acronyms
In the real estate investing world, you’ll encounter a lot of jargon and acronyms. Here are a few critical ones:
- ARV (After Repair Value): This refers to the projected value of a property after all repairs are completed. Always base your purchase price on the ARV, aiming to buy at 70-75% of this value, including rehab and acquisition costs.
- LTV (Loan to Value): This is the ratio of the loan amount to the appraised value of the property. For instance, if a property has an ARV of $100,000 and you borrowed $75,000 to buy and fix it, you have a 75% LTV.
- Basis: This term refers to the total investment in a property. It includes acquisition costs, rehab expenses, and any other costs involved. Your cash basis is the actual cash you’ve put into the deal.
Think in Percentages
You might hear people say they bought a deal at 75 cents on the dollar. This means they purchased the property for 75% of its ARV. Buying at a discount absorbs additional costs like holding and closing expenses that you might encounter.
Understanding these basic principles and terms will help you start stronger in your real estate investing journey.
Wrap-up
Stepping into the world of real estate investing can be both exciting and daunting. By keeping contracts under your LLC, avoiding the commingling of funds, embracing a versatile investor mindset, and understanding key terms and acronyms, you lay a solid foundation for success.
Equip yourself with the right knowledge and strategies to navigate the complexities of the market, and you’ll be well on your way to building a prosperous real estate portfolio. Remember, continuous learning and adaptability are your best allies in this dynamic industry.
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