It’s often challenging to think of your real estate investing hustle as a business, especially if you still work a full-time day job and only own one or two assets. Unfortunately, conflating your real estate investments with your personal finances is often disastrous. This simple, easily avoidable mistake could make it exceptionally challenging to track your investment income and expenses, maximize available lines of credit and optimize your tax burden.
Even if you have yet to actually make your first purchase, it’s time to start thinking of your real estate investments as a business totally separate from your personal life and finances. Divorcing yourself from your investments early on and maintaining clear distinctions between your accounts allows you to make the most of your real estate assets.
Even more importantly, different types of assets and transactions may benefit from different types of business accounts and lines of credit. It’s important to maintain flexibility whenever you’re structuring or restructuring your investment finances. Both creativity and flexibility are often what separates successful investors. Maintain both when pursuing your next transaction.
Establishing an investment business
Rather than acting as an individual engaging in real estate investing, establish a real estate investment business for yourself. While you may think this is unnecessary given the volume of assets you’re planning on acquiring, it’s nonetheless a necessary step to take prior to purchasing your first piece of real estate.
Take a look at some of the things you’ll need to do to set up an investment business separate from your personal life and finances:
· Create a business email and phone number: This is one of the first things you should do to separate your personal life from your investment business. Having separate communication channels makes it easier to keep correspondence records and help you present yourself more professionally to lenders and tenants.
· Incorporate: Before purchasing a property, incorporate your investment business. You may want to purchase the property in your name, rather than in the name of your business, but it’s important to have an incorporated business on-file when renting out to tenants and communicating with contractors.
· Establish office hours: Even if it’s just a few hours a week, set up clearly defined office hours for your investment business. You shouldn’t be “on-call,” all the time – that defeats the purpose of becoming a real estate investor! Instead, delineate a segment of your week as dedicated to your investing business.
Opening a business banking account
Once you’ve established your real estate investment hustle as a bona fide business, it’s time to open a business banking account.
Choose the business account you open carefully. You’re likely going to have to pay some fees to open and maintain the account, but they should be negligible. Beware accounts with intense stipulations, usually meant for larger businesses. Ongoing monthly service charges could eat into your bottom line when viewing the account from an annual perspective. Here are the steps to follow to open your first business banking account:
· Choose the right account type: There are a number of business account types you can choose from. You’ll likely want to open a free business checking account, first, as well as a business savings account.
· Select the right bank: Make sure you’re working with a bank that meets your needs. While national banks may offer more convenience, locally-owned and -operated institutions could provide better value.
· Analyze all costs: Chances are, even free checking or savings accounts include some costs. Make sure you’re cognizant of all costs and benefits associated with your prospective business banking account.
· Gather documents and deposit funds: You’ll need to gather your incorporate documents, identification and personal financial statements to open your business account. Next, deposit funds. Then, you’re ready to start business banking.
Types of business lines of credit
One of the primary benefits associated with opening a business banking account is the ability to access banking and lending products unavailable to consumers—namely, business lines of credit.
There are several different lines of credit you may want to consider exploring. Each of these credit types could benefit your investment business, but it’s important to use them carefully. Failure to pay attention to your business’ credit score and the amount of available credit you’re using up could land you and your investment business in serious financial straits. Here are the four most important types of business lines of credit:
· Business credit card: Nearly every business owner has a business credit card. These often offer competitive benefits and can be used to cover small expenses, as well as pay contractors or buy supplies from vendors.
· Real estate lines of credit: It’s possible to use equity built up in existing real estate assets owned by your business to secure more lines of credit, allowing you to acquire or remodel other assets.
· Unsecured business line of credit: If you don’t have any assets to put up as collateral, but you need a loan in a hurry, consider taking out an unsecured business line of credit. Beware, through: These loans often include aggressive payback structures and interest rates.
· Secured business line of credit: Perhaps the safest business line of credit is a line secured against collateral your company already owns. This could be real estate, a vehicle or another asset the financial institution deems valuable enough to issue a loan against.
Establishing separate financial accounts for your real estate investment business, and learning how to structure those accounts, is far from easy. Even the savviest investors often struggle to identify the best types of accounts and lending products to facilitate their investment strategies.
The most important thing is to maintain a healthy separation between your investment business and your personal finances. Always perform due diligence before opening any business accounts or lines of credit, and make sure you know the pros and cons for how they’ll fuel your investment opportunities in the future.