|Rich Best has spent 28 years in the financial services industry, as an advisor, a managing partner, directors of training and marketing, and now as a consultant to the industry. Rich has written extensively on a broad range of personal finance topics and is published on several top financial sites. Recent books include The American Family Survival Bible and Annuity Facts Revealed: What You MUST Know Before You Invest.|
Business Owners as Real Estate Investors
You ask most successful business owners what they consider to be the best way to invest their money and they will likely tell you their business. It’s what they know and they understand the risks. It’s not uncommon for successful business owners to own zero assets outside of their business because that’s where they feel they’ll earn their best return on investment. However, at some point, even business owners recognize the dangerous risk of putting all their eggs in one basket and will seek some diversification. Interestingly, the investment of choice for many business owners is real estate.
Business owners prefer direct investments in real estate because, like their business, they control the investment. It’s tangible, manageable, and they understand the risks. But, there are several things business owners need to consider if they are thinking about becoming a landlord.
Get Ready to Be a Landlord
Managing a property doesn’t have to be a full-time job, however, it can consume time that many business owners don’t have. Holding a rental property for ten to 20 years will require a fairly steady stream of maintenance and improvements, not to mention dealing with tenant turnover. Your investment cost estimates should include an allocation of expenses for this.
Be Patient and Selective in Your Search
With an unsettled housing market, finding the right properties is going to be more difficult. Finding a diamond in the rough is going to require patience, research and, perhaps some good connections. Foreclosures remain a source of investment properties; however, you can expect distressed properties to require a lot of work.
Networking with friends in the real estate business can keep you in the know as to what properties may be coming to the market. Joining investor or property owner groups can also uncover some opportunities. Once you identify a property you’ll need to do your research thoroughly, but quickly.
Get Financially Fit
Gaining the leverage you need to make a good investment requires that you get your financial house in order. It doesn’t make sense to even begin your search until you have cleaned up your credit report and lowered your credit card balances. Lenders are taking a stricter stance on financing investment property due to the high rate of defaults over the last decade. Also, their best terms are going to be reserved for investors who make larger cash down payments.
Although the right investment should be able to pay for itself, it would be important to have an extra line of credit to cover income gaps and to pay for major repairs. It is recommended that you have the other pieces of your financial puzzle in place, such as your insurance plans, your retirement plan, and the means, outside of the rental income, to fund them.
Make the Right Deal
This is where thorough research pays. Making a real estate investment entails several financial and tax issues that, if not considered in your calculations can hurt your chances for profit. Certainly, you want to make sure that you pay the right price. In a soft market, you should be in a better position to negotiate a “buyers” price. The key is that your outlay, including mortgage, property taxes, maintenance, and repairs, is covered by the rent payments. While there are some tax deductions in managing an investment property, you don’t want to count on them to lower your net cost.
Know Your Liabilities
When you own a property that is leased to tenants and/or is visited by the public, you open yourself to a whole set of liabilities that are not covered under standard liability insurance coverages. Injuries that occur as a result of your ownership or operation of the property and are deemed to occur due to your negligence can only be covered through Owners, Landlords, and Tenants Liability Insurance (OLT). OLT coverage was, at one time, a separate form of coverage, but it is now provided under a Commercial
General Liability policy
The coverage is limited to liabilities incurred as a result of negligence applied to the property itself and while limiting coverage for any occurrence outside of the property. It doesn’t cover injuries that occur out of the use of automobiles or watercraft. The coverage also includes the costs incurred in any civil action that may be brought against the owner.
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