Starting a real estate investing business can be exciting and intimidating at the same time. There’s plenty to learn, and getting the basics right is key to setting yourself up for success. If you’re new to real estate investing or “Subject To” (Sub To) deals, understanding fundamental concepts such as legal protections, business structure, and investment strategies can help avoid costly mistakes.
This guide will walk you through essential business tips every real estate investing beginner should know. Whether it’s structuring deals, signing contracts correctly, or staying flexible with strategies, this post has you covered.
Protect Yourself: Never Put Anything Under Your Personal Name
One of the first rules of business in real estate investing is to protect yourself legally. When signing contracts or entering agreements, never use your personal name. Instead, conduct all business through an LLC (Limited Liability Company). Why? Because operating under your personal name exposes your personal assets to lawsuits or claims.
When signing contracts, even something as minor as forgetting to include “Member” after your name could leave you vulnerable. For example, sign as “Your Name, Member” to signify you’re acting on behalf of your LLC and not yourself personally. This small step enhances your legal protection and ensures the “corporate veil” of your LLC remains intact.
Risks of Using Your Personal Name or Improper LLC Practices
If you fail to separate your affairs from your LLC, you risk “piercing the corporate veil.” This occurs when courts allow claimants to bypass your LLC and target your personal finances. Common mistakes that lead to this include:
- Signing contracts without specifying you’re an LLC member.
- Using LLC funds for personal expenses (commingling funds).
Avoiding these pitfalls is essential to building a legally sound business.
Keeping Funds Separate: What You Must Know
Operating an LLC means treating it as a distinct entity. All income and expenses tied to your business should stay in business accounts. A common mistake is “commingling funds,” which happens when you mix personal and LLC money. This could be something as small as buying groceries or a six-pack of beer using LLC funds.
Commingling funds threatens your legal protection and could result in your LLC being ignored in court. Keep separate bank accounts for personal and business use, and don’t touch LLC funds for personal purchases.
Think Like an Investor, Not a Specialist
New real estate investors often focus too narrowly on a single strategy—wholesaling, flipping, or renting. But restricting yourself to one approach may leave opportunities on the table. Instead, embrace your role as an investor. Be open to multiple strategies and evaluate each deal based on what works best in that situation.
It’s like having a toolbox. You wouldn’t use a hammer for every job. The same logic applies to real estate investing—use the right strategy based on the seller’s needs, the market, and your financial goals. Sometimes that means owner financing. Other times, fixing and flipping makes more sense. Your flexibility directly increases your ability to close deals.
The Importance of a “Bat Belt” of Strategies
Imagine Batman facing a challenge with only one tool. Sounds limiting, right? As an investor, you need a similar “bat belt” filled with multiple tools (strategies). This versatility allows you to tailor offers and maximize profitability.
For example, when sitting with a seller, listen closely to their needs. Based on what you hear, eliminate strategies that don’t fit. What remains is a customized solution for the seller and a profitable deal for you. This approach significantly boosts conversion rates. Many successful investors close deals that others can’t because they offer creative solutions, not cookie-cutter approaches.
Focus on Key Real Estate Metrics and Acronyms
Real estate comes with its own language, full of acronyms and metrics. Familiarize yourself with the most important ones to analyze deals effectively.
ARV: After Repair Value
ARV refers to the value of a property after it’s been fully repaired. It’s critical for determining a property’s profitability. For example, if a property’s ARV is $100,000, you base your offer on what the property will be worth, not its current condition.
The 70-75% Rule
A common formula for evaluating deals is buying at 70-75% of ARV, minus repair costs. Let’s break that down:
- ARV: $100,000
- Repairs: $20,000
- Maximum Offer: 70% of $100,000 minus $20,000 = $50,000.
This margin ensures enough room for profit after covering holding costs, closing costs, and unexpected expenses.
LTV: Loan-to-Value
LTV is the ratio of a loan amount to the property’s value. For a $75,000 loan on a property worth $100,000, the LTV is 75%. This is a key factor lenders evaluate when financing deals.
Basis: Total Costs in the Property
“Basis” refers to the total cost invested in a deal. This includes purchase price, repairs, and any upfront payments like past-due loans. Knowing your total basis ensures you don’t sell at a loss. For instance:
- Purchase Price: $75,000
- Repairs: $5,000
- Loan Catch-Up: $5,000
Total Basis: $85,000.
If you only look at the loan amount and sell the property for $80,000, you lose $5,000 because your total basis was overlooked.
Building Profit Margins into Your Offers
Profitability hinges on how well you calculate margins. The 70-75% rule isn’t just about buying low; it’s about accounting for expenses that sneak up later. These can include closing costs, holding costs, property taxes, and utilities.
Rushing into deals with thin margins can lead to hard lessons. Always build breathing room into your offers to absorb the unexpected. Proper preparation helps ensure your deals turn a profit.
Referrals: A Goldmine for Deals
Networking plays a huge role in success. Over 80% of deals closed by some experienced investors come through referrals. Wholesalers, fix-and-flippers, or less experienced investors may pass on deals they can’t handle. By positioning yourself as someone with a broad range of strategies, you’ll often be the go-to person for deals others pass up.
Real Estate Is a Learning Curve
Becoming a successful real estate investor takes time. Mistakes will happen, but every misstep teaches a valuable lesson. By focusing on foundational principles—legal protection, flexibility, financial analysis—you’ll set yourself on the path to long-term success.
If you’d like to dive deeper into topics such as Subject To deals, LLC creation, and other strategies, check out Propelio Academy, where you’ll find hundreds of hours of free, step-by-step content designed with investors in mind. Learning never stops, and every piece of knowledge gets you closer to becoming a master in the field.
Start building your tool belt today!
