When you are starting a business from scratch you have to do whatever you can to make things happen, and oftentimes that means getting extra capital to fund your operations before you have reliable revenue streams. You might think that taking on a mortgage to invest in real estate is not a plan that fits in with that struggle, but reconsider.
Here are some reasons why it makes sense for dynamic entrepreneurs at the start of their push to include a rental property as part of their new business effort.
Unlike the struggle to find funding for a new business with few assets, landlording is a business that funds itself. Even for young people without stellar credit, a mortgage can generally be obtained, since the loan is backed by the property itself. And while family members may not feel too good about funding your new startup idea, helping with a mortgage typically gets a better reception.
And landlording IS a business and one that requires management as such (even aside from its tax classification as either an investment or a business). It’s not going to give you a source of income in the beginning, but you’ll be building equity with each month’s mortgage payment. And with a tenant to cover that payment for you, you just have to run the business smartly to build your portfolio even as you may struggle with everything else.
Being a landlord teaches skills for many business situations
In the early stages of your entrepreneurial journey, you often have to take on additional jobs in order to pay the bills while you’re building your business from the ground up. Home repairs and the tools to perform them are skills that will be in demand for long into the future, and that you can perform sporadically and self-employed, without having to find a job.
Learning the elements of being an investor is also a set of thinking that entrepreneurs often don’t embrace in the beginning – usually, they’re looking for investors. But to understand how an asset cash-flow, and to spot the potential of something and be able to bring it to profit, are really familiar concepts already to the entrepreneur, so the leap is not great. And during the process of struggling to build a new business, the thought in the back of your mind that you’re building wealth daily adds powerful confidence.
An investment property works for one owner or many
If you have partners in your startup, they may also want a stake in your rental property, and the same goes for any investor you may be talking to for funding. Sharing the management and maintenance tasks among partners is a good way to limit the impact on one individual. And there’s strength in numbers, which may allow you to look at a larger property, such as maybe a fourplex, which you can still get first-time homebuyer preferential treatment for, and which may even prove useful to live in.
You’ll want to create a business entity for your startup company, and this can include your investment property, or you may choose a separate entity – you’ll certainly want some business structure for it. For passive investors and working partners alike, the LLC is a favored business structure to choose. It’s simple enough to form an LLC in California or any state online. And the Operating Agreement has enormous flexibility to specify exactly who gets and does what – all crucial thinking anyway in your startup design.
You still need to rely on advice from the experts
You will almost certainly need professional advice at the beginning of both your startup venture and your investment property. From accounting and taxes to liability and regulations, there are numerous things to learn in any new business. The best advice is to become an educated consumer, so that even while you pay for a consultation you know the questions to ask and how to recognize good answers.
If you have a good lawyer and accountant, you may also want to find a good property manager, in the beginning, to help you navigate safely through the numerous pitfalls that the unwary can make in the landlording business. Unlike the other professionals, a property manager is someone you can both learn from and eventually replace with yourself if you choose.
And in all the fields, there are countless resources available on the internet and in books that can get you started on mastering the most important knowledge sets you will need to thrive as a landlord, including real estate taxes, rehabbing properties, creating watertight lease agreements, and tenant screening.
Tenant screening will be crucial for your success
If your rental property is going to work for you as a business you must have good tenants, there’s no other way. Bad tenants can not only cost you income but damage your investment property. Initial tenant screening is crucial when interviewing prospects, and this includes credit checks, criminal background checks, income verification, references, and interviews with previous landlords.
Some of the pitfalls of landlording occur in the screening process – it’s easy to violate federal and state laws against discrimination, and it’s equally possible to be scammed into these violations. Learn from your property manager.
And remember that when you have good tenants, keeping them is art too, that you can learn from the multiple sources of advice available. Entrepreneurship involves the creation of new wealth through your own efforts. Landlording is no different.
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