Legacy Wealth Holdings

Should Traditional Business Owners Try Real Estate Investing?

If you are a traditional business owner looking to passively invest or get involved in real estate, this post is for you.

Not too long ago, I was on a discussion panel for a mastermind group that I’m part of, and there are a lot of traditional business owners in that group. Most of these guys are in e-commerce or they have brick and mortar stores of some sort, and they all have washboard abs and are traveling the world and doing a bunch of fun stuff, making a bunch of money.

One of the topics that keeps coming up in conversations with them is: “how do I invest in real estate? I have all this money. I’m sitting on some cash now, and I’m looking to deploy it.”

I think it’s really important to convey a few different points

First of all, real estate is a new business.

Okay. I know. Just because we live in a house or live in an apartment or you drive by apartments, drive by a house, as you watch HGTV, it’s very easy for people to think that real estate is easy.

Passive income and residual income are those keywords that people think about when they think about real estate. They think that since it’s passive, it’s very easy to do real estate investing.

That’s like if you went I went out and grabbed a beer at a bar and we looked around, said “You know what? We should open a bar.” It’s a little bit different, drinking a beer at a bar versus running and operating a bar.

Real estate’s the exact same thing. It’s a little bit different living in a property versus owning a lot of rental property. 

If you want to get into real estate, realize, you’re going to have to go and start a new business. You’ll need a new LLC, need to start building out staff, have overhead, have liabilities, take out loans.

And if you don’t give it the time and attention you give to your traditional business, you’re going to get your legs taken out.

Guys like me go and buy problems. Most of the apartment buildings that I buy are from smart, multimillionaire entrepreneurs who made money in some other business, some other capacity, and they had so much money they needed to deploy it somewhere, so they deployed it into real estate.

But you know what?

They didn’t give it the time that they needed to start a new business. They didn’t have a joint venture partner. They didn’t know how to interview management companies. They didn’t know how to underwrite the deal. They didn’t know how to underwrite the area. They didn’t know how to handle due diligence.

And they ended up getting their ass handed to them.

They realized, “Man, this real estate deal is sinking, and if I take my eye off the ball in my traditional business and spend my time in real estate, then my traditional business is going to sink too. Let me just jump back into my traditional business, give that my full time and attention.” And they let the real estate fall apart.

Then somebody like me who knows what they’re doing comes in, makes an offer in order to solve a problem.

And they’re like, “Just get it off my plate. I’ll give it to you for pennies on the dollar.”

I don’t want that to happen to you.

So it’s really, really important, first and foremost, that you realize that real estate is a new business venture. If you’re not jumping in with both feet, it’s very hard to dabble in real estate and really make the money that you’re looking to make. 

The same goes for Airbnb.

Airbnb is cool. Airbnb is sexy. Airbnb is sleek. There are tv shows about Airbnb.

It’s easy to get romanticized on Airbnb and short term rentals because those are some luxury, beautiful, fun properties.

The reality is most Airbnbs don’t make a ton of money.

You have to pay high property taxes, insurance is higher, and you have to watch out for certain government regulations that don’t allow you to have an Airbnb in certain areas.

There are a lot of moving parts! You have new people coming in multiple times a week, so you need to make sure you have cleaning crews and maintenance crews and somebody on call 24/7. You’re essentially in the hospitality industry. 

So I know it looks glamorous and sexy when you’re not in it, but once you’re in it, you realize you’re essentially running a hotel. You need to be ready or have a team built out to be on call 24 hours a day, seven days a week.

Could you use a management company? Answer is yes.

But again, it’s a new business, right? So unless you’re going to jump in with both feet and really scale it, it’s hard to make money in Airbnb.

But you still have options!

Here are a couple of ways to get involved in real estate and still be able to deploy some money into it without having the risk and the liability that entrepreneurs we just talked about would typically fall into.

AIRBNB AS A SECOND HOME

It makes sense to jump into Airbnb if you’re buying a second home.

Say you’ve always wanted a beach house or a second home in the mountains or out in the desert somewhere or down in Mexico or down in the Caribbean or something along those lines, but you don’t know how to pay for it.

Well, you can turn that liability that would typically take money out of your pocket and turn it into an asset that pays for itself. And I think that’s a great way to get into real estate. 

If you’re looking to buy a second home or a third home, you’re not going to be able to use it all the time. But let’s say you live in the Midwest and you want to buy a beach house in the Carolinas.

You can go find a property, partner with a management company, and typically during the high season – which is the summer and over the holidays, whenever kids are not in school and people are vacationing – that’s when you get the highest amount of rent.

If you have a little bit of freedom in your schedule where you can use it in the off season, which is essentially the other eight months out of the year, the majority of your carrying costs, holding costs, and expenses in owning that rental property will be paid for over that four-month time frame of the summer holidays, holiday weekends, spring break, and things along those lines.

That’s a great way to get into real estate and have an Airbnb or really diversify your portfolio.

Here’s what I would highly, highly, highly suggest, though: the wealthiest entrepreneurs that I know stay in their lane. They focus on what they do best, which is making money in their traditional brick-and-mortar or e-commerce business, and then they find a great operator who is a full time real estate professional with systems, teams, processes built out, and they partner with that person.

Depending on the size of the check you can write, you could create a partnership that has very advantageous (and maybe preferential) terms rather than investing on a one-off kind of a deal.

So that’s something to think about. You can invest your money two different ways and back it by real estate.

INVEST AS A DEBT

To invest as a debt, you can find somebody who flips houses and say, “Hey, will you pay me 12% a year on my money?”

You would be backed by a first lien position, which means you are the bank.

So you get a promissory note and you get added as an additional insured on the insurance policy, and there’s typically a title policy as well. So you have protection against all those things. You lend them $100,000, they go and flip the house, they sell it for $150,000. You would get all $100,000 back plus 12% annually on your money.

That’s a great way to make a good fixed return, especially with all the chaos going on in the stock market right now and with crypto and all these other different businesses. Real estate is still very predictable.

INVEST IN A SYNDICATION

The other option is to invest in a syndication as an equity partner.

You can lend somebody money on that deal and say, “Hey, listen, instead of giving me a fixed return, I want  20% of the profits,” or whatever that looks like.

In that scenario, you don’t have any predictable cash flow. So you have a higher upside, but also a higher downside.

HYBRID OPTION

The other option is kind of a hybrid of those two things. That’s what we do.

We say, “Hey, we’ll pay a 6% or 8% return on your investment, predictable cash flow on an annualized basis, AND we’ll give you a little piece of equity in these big apartment buildings that we’re buying.”

That way you have the benefits of principal pay down, property appreciation, tax depreciation, tax free refinance proceeds, cash flow on an ongoing basis, on top of the predictable return on your debt, on your investment.

So if you want to get involved in real estate, those are a couple different options. If you’re a traditional business owner, traditional entrepreneur, stay in your lane!

Go and just make more money, invest with a great operator, somebody who has a track record, who has a team, who has systems, who knows what they’re doing.

And you can easily find these people in your own local community if you’re looking to invest in your backyard.

A lot of operators around the country have investors from all over the place. I think we have investors from all 50 states. 

So if you guys want to invest in our deals, I’ll connect you with my team. Happy to do that. But if you want to find somebody locally as well, go to your local real estate investors association and sit there.

In most communities, it’s ten or 20 bucks to go to a meeting. You walk in and raise your hand saying, “Hey, I have money, I’m looking for great operators to invest my cash with,” and then have conversations with those different operators.

But make sure that they know what they’re doing, that they have systems in place, and that they have a good track record. Ask for references. Make sure you talk to other people about them and ask, “Hey, do they pay on time? What happened when shit hit the fan?”

Because shit always hits the fan.

But did they communicate it? And what did that look like and how do they work? Are they the kind of person who’s going to work third shift at Taco Bell to make sure you get your money back? Do they have that kind of character? Did they convey that to you? 

And if so, that’s a great person that you want to work with. If not, probably let them go. But there are a lot of great operators out there. I know a ton in pretty much every single different state, so just hit us up. Maybe our mastermind is the right place for you. Check it out at https://legacywealthholdings.com/coaching/legacy-family-mastermind/.

If you’re an entrepreneur and you’re looking to deploy money into real estate, I would be very careful not to jump in unless you’re ready to go all in on it. If  you’re ready to build a new business, then it can make a lot of sense. But if you are a traditional entrepreneur and you’re just looking to deploy money and you think you can go and buy a property yourself and passively invest in it, I wouldn’t do that unless you could jump all in with both feet.

I want to make sure that you guys maintain your wealth. That’s what real estate is all about. Not just growing it, but maintaining it, having something that gives you a lot of security and backing by prime real estate, something tangible, and multiplying your wealth in that regard. So, appreciate you guys. Be your best.

We made a video on this! Watch it on the Legacy Wealth YouTube channel here: https://www.youtube.com/watch?v=h9VpmoqbSic