Starting an apartment rental business


3

This is my first post on this forum (although I have been posting on a sister site - stackoverflow - for quite a while). I recently left the army and my brother and I are considering buying up a couple of apartment buildings in Michigan and then renting them out.

I was wondering if anyone here could point us in the right direction. We are college-educated and have access to the VA SBA loan if that makes any difference.

My main questions are:
1.) Do we even need to form a business or could we just purchase them under our own names and manage them?
2.) How do we handle things like taxes on the rental income?
3.) What steps do I need to take to start a business and get this type of company up and running?
4.) What questions should I be asking that I am not?

Thanks in advance for any help.

Getting Started Entrepreneurs Real Estate

asked Oct 22 '10 at 09:58
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Rob
128 points
  • Nope, no NEED to do it - but might be smart for liability issues. Any decent tax software or dime a dozen accountant can handle the taxes, etc on this scenario. I'd focus more on really doing analysis on the investment - the other stuff, while important is not really the big issue. – Tim J 8 years ago

5 Answers


1

Get an accountant & lawyer to setup your corp, taxes, insurance and liability.

Check the rental laws in Michigan!!! You may be shocked to find the lengthy process to get someone evicted. Can you afford to go 2-3 months on a unit occupied by someone overdue on the rent?

If you're not handy with maintenance, plumbing and light carpentry, this is going to cost you to hire for repairs. Find a really good home inspector who specializes in multi-units Landscaping and snow plowing will be needed up north as well.

Hope your goal is to provide quality housing. You may be able to focus on families in the military.

answered Oct 23 '10 at 05:38
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Jeff O
6,169 points
  • Yep - all good things to consider. Unfortunately - been there, done that – Tim J 8 years ago

1

The very best thing to do is locate real estate investors, landlords, and rehabbers/flippers in your area. If you have a local association with any kind of event, go and talk to people. My ex had many residential properties (single-families to six-plexes) and while it was profitable, he wanted out of it within a few years because of the sheer stress of being a landlord and the fact that it didn't scale so well (the more properties he got, the less he could do himself to save money). If you're buying large buildings and can afford a caretaker, that might make it less stressful but my ex was managing a lot of smaller properties that were spread around town and could not be maintained by one tenant.

Cashflow can be stressful if you have vacancies, late payers, or evictions, but it was really the renters that were the most difficult to deal with. If you are profitable enough to hire a manager or on-call service so landlording doesn't infringe on your evenings and weekends, that will help too. Maintenance also is a lot of work. It seems like it would be a once-in-a-while thing but there are a lot of renters who are calling monthly or more for all sorts of problems, plus the groundskeeping, graffiti/vandalism, cleaning up a demolished apartment after cops raided one of your tenants for drugs (with vents ripped out of the walls and the door broken down)... which reminds me that you may want to try to specialize in rentals in good areas. All of my ex's properties were in a high-crime urban area and it was not the kind of job a lot of people would want.

So from experience, my main advice is to make sure you want to go for it and have a realistic exit strategy if you hate it or start sinking. Then get yourself an accountant, a lawyer, a buyer's agent with experience working with investors/rentals, and an insurance agent. Once you have your go-to people, all the questions you have will be answered. If you feel like you can't afford any of those professionals, I guess my advice is you probably can't afford not to have them and still do well in investment properties.

I also don't agree with the comments that real estate is "very risky" relative to many other businesses. I agree with commenters who said you don't need to form a business entity when you fist start buying rentals (my ex incorporated later but I think financing was easier when he started investing as an individual than it would have been as a new company with no other income/assets or credit).

answered Oct 23 '10 at 06:16
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Kelly Rued
231 points
  • Best advice so far. – Tim J 8 years ago

0

Some general recommendations would be to find yourself a lawyer and accountant who knows your particular area - they will be able to advise you in regard to your particular situation a lot better than anyone else.

Second, you should consider some form of corporate structure for limiting your own liability, and protecting the interests of both yourself and your brother. Make sure you have some sort of formal arrangement documented when things are going well - it's when things go wrong that having such paperwork becomes really important.

Try to research your particular business as much as possible prior to making a purchase - there may be hidden costs that you won't find out about quickly, or scenarios that will become troubling to your business if you arent prepared.

Above all, recognize that no one knows everything, so don't be afraid to admit you don't know something - it will gain you respect and credibility with the people who watch you as you truly listen to those around you.

answered Oct 22 '10 at 14:08
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Elie
4,692 points
  • yep, exit strategies are very important. Also figure out issues like divorce proceedings etc - because that could crop up later. (the spouse might be entitled to assets if this is personally owned in a particular manner) – Tim J 8 years ago

0

1.) Do we even need to form a business or could we just purchase them under our own names and manage them?

You definitely want to form a business. Real estate is a very risky business, and you need to have liability protection in place. The alternative is to have hundreds of thousands, if not millions, of dollars in debt under your personal name (and your brother's). That's just asking for trouble! Not only that, but you will have a hard time finding investors and banks willing to invest/loan you money without a business structure. Forming a business structure also allows you to take advantage of business tax deductions that you as an individual do not have the right to.

2.) How do we handle things like taxes on the rental income?

You will need an accountant. How your income will be taxed depends on several factors, including your business and tax structure. At this point we can't answer this question because we don't know what your business structure will be. Once you make a decision on that come back and ask another question, or edit this one, with that information.

3.) What steps do I need to take to start a business and get this type of company up and running?

See this question for some advice on getting started.
answered Oct 22 '10 at 22:51
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Zuly Gonzalez
9,194 points
  • It is unlikely that the business entity would be able to own the property and get a loan unless they put down at least 25%. Note also that when dealing with rental real estate I don;t think there are significant tax advantages for owning in an entity. it is MORE unlikely that a bank would loan to a newly formed company. They'd rather have a person on the other end of the mortgage contract. In theory it is nice to have the mortgage in the entity name but more worrisome to me is the liability - when you are talking about aprtment buildings there is significant liability. – Tim J 8 years ago
  • There are actually disadvantages to holding property as a business (LLC presumably) as well. For one, if you need to evict a tenant, you have to hire a lawyer. People who are not lawyers cannot represent corporations in court, even for evictions (in the state of Michigan anyways). Also, the liability issue doesn't hold much water - unless you are absolutely impeccable about how you handle your business, a good lawyer can poke holes through your "corporate veil" and come after you personally. A good umbrella liability insurance policy will cover you just as well if not better. – Eric Petroelje 8 years ago

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I will recommed you read through some of the gazillion book written on this subject as well. Most of the people who hang out here in this forum are technology expert who might be able to give you some general advice based on their prior experience but some good books will definitely be able to provide you a much more detailed view. Good Luck

answered Oct 23 '10 at 04:19
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Neo Syne
75 points

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