Many self-acclaimed real estate gurus state that everyone should quit their jobs and immediately jump into full time real estate investing. They often claim incredible results from students with little experience. We would like to caution that life-changing decisions are not usually simple and that full time investing is not for everyone. Let’s discuss some pros and cons of full-time versus part-time investing.The Full-Time InvestorEntering into the real estate profession on a full-time basis offers several advantages over a part-time commitment. Being successful requires you to develop knowledge in many aspects of real estate, and more time focused on real estate leads to greater knowledge. The more your learn, the more you earn, since you do not need to rely on as many professional services or partners for help. You also learn to recognize a deal (or a dud) faster, which gives you more time to do more business or spend with your family.As a full-time investor, you work your own hours. When we say “full-time,” that may mean as little as twenty hours per week if you are good at finding deals. The rest of your time can be spent pursuing other vocations or hobbies. Or, if you are so inspired, you can work forty or more hours and use the extra cash flow to buy rental properties or diversify your holdings in the stock market. The point is that you need to satisfy your cash flow needs before you can start “investing” your money.One final point you should consider is whether you want to be “self-employed.” If you have always worked for someone else, being your own boss sounds very attractive. In some, respects, this isn’t quite the truth. Being your own boss means being an accountant, bookkeeper, stock clerk, receptionist and office manager all-in-one. You have to do deal with tax returns, payroll, office supplies, customer service, bills and all the other hassles that come with a business. You don’t have friends to chat with at the water cooler. You don’t have paid health insurance, a company car and a 401(k). You take your problems home with you every night. Sound like fun? It is, once you learn how to master your time and run your business. Being the master of your own life and career is well worth the other hassles of dealing with your own business.The Part-Time InvestorThe part-time investor holds a “regular job.” This may be by choice or for the time being until his real estate ventures are bringing in enough cash to quit his job. If it is the latter reason, don’t quit your job because the real estate “guru” told you so. Quit your job when it is not worth the income that it brings you. In other words, if you are making more money per hour flipping properties on the side, you are at the point that where your regular job is costing you money. Only then, is it time to quit!One of the advantages of starting out part-time is that you can maintain cash flow while learning the business. It may take weeks or possibly months to find your first deal. That same deal may take several months to turn around, especially if you decide to fix it and sell it retail. Think twice before telling your boss you’re leaving; you will have plenty of time to make the career switch once you have real estate experience. You may, on the other hand, like your occupation. If so, continue to work at it, and invest in real estate on the side.The best case scenario, if you are married, is to have one spouse work a regular job. The other spouse work the real estate business for creating wealth, retirement income and a nice college fund for the children. Of course, in today’s market, you could be laid off due to unforeseen circumstances. If you earn additional income flipping houses and invest the proceeds into rental properties, you will be covered if your main income is lost. This is especially the case for married women that often forego a career and raise a family, only to find themselves divorced with no means of making a living. We don’t want to sound cynical about marriage, but with a fifty-percent divorce rate in America, it never hurts to have a system for making money.Someone with a full time job tends to have little free time to focus on real estate. A part-timer should learn most of the same skills as a full timer. Thus, the key disadvantage to flipping properties on a part-time basis is that it takes sacrifice to learn the business. Something has to give; television, lazy weekends, meaningless hobbies and even some family activities must be compromised. As with any education, time spent learning about real estate will bring its own rewards, especially if the people in your life understand your goals and your plan to achieve those goals. If you are married, make sure your spouse reads this material with you and participates in the fun process of making money.Treat Real Estate as a BusinessPeople are lured to real estate because of the quick buck that it promises. Don’t hold your breath, you won’t get rich quick. An “overnight sensation” usually takes about five years. More than ninety percent of the people who take a real estate seminar quit after three months. Real estate investing should be treated with the seriousness of a career. It takes months, even years for a business to cultivate customers and have a life of its own. You need to treat it like any other business.
Real estate businesses — especially those involving investments — represent a substantial amount of risk. There are a lot of “what ifs” in real estate investment, including: What if someone gets hurt on my property? What happens if I fall behind on the mortgage for one property but stay current on the others? What are the tax obligations if I take out a mortgage under my own name?The primary reason to set up a business entity like an LLC or corporation is to protect your personal assets against a lawsuit. Incorporating your real estate business offers several other advantages, however.Personal Liability
If you operate your business in your own name, you will be financially liable if someone files a lawsuit against your business, or if you face expenses you can’t pay. When you incorporate, your personal assets will be protected if the business runs into trouble.Rather than obtaining a mortgage for a property under your own name, you can get a loan under the name of your business from the bank. This offers even further protection as the LLC or corporation will own the property — not you — especially if you form an LLC or corporation for each property you purchase for rental purposes.For even greater protection, you can take the further step of holding each property in its own corporation or LLC. This further limits liability to the specific investment. If someone sues you for an injury on Property A, the liability ends with that LLC and it will not involve companies that hold Property B, C and D.Business Deductions
As a sole proprietor, you can deduct many business expenses associated with your real estate company, including mortgage fees and interest, building materials, maintenance and more. There are many operating expenses you cannot deduct, however, unless you form an LLC or incorporate. This includes employee salaries and many types of insurance you will need. When you turn your real estate business into a corporation, you can deduct 100% of these business expenses from your profits before allocating income to yourself and any other owners.Professionalism
If you sell or rent properties, the people who do business with you will want to know they are dealing with a legitimate company. As silly as it may sound, the word “incorporated” or “LLC” in your name makes your company appear more reputable and attracts higher-quality customers.You Can Sell Your Business
Once your business is profitable, you have the option to sell it if you like, but only if incorporate. If you operate as a sole proprietorship, you are the business. If you plan to ever sell your company, you must set up a separate entity that can be transferred or sold and continue to do business.Income Splitting
If you operate your business as a sole proprietor, you will be taxed on all profits, even if you choose to reinvest them into the business. If you incorporate, the company is now a separate taxpayer that pays a lower tax rate. You can choose to take a small salary and leave the rest of your profits in the company to lower your income tax rate.Multiple investors, such as investment clubs, should also consider forming an LLC or incorporating. If you do not incorporate or create an LLC, all investors in the project are considered partners, which means all will be liable for the actions of the others. If you form a limited liability company, you will have greater flexibility in management, too, as the operating agreement can grant and limit obligations, powers and rights for each owner.The Bottom Line
Real estate is a tricky business. Why increase your risk any more than you need to? Consult with a corporate service company and an attorney to determine if forming a business entity is the right decision for you.