It is safe to say that most of us would not consider investing in the stock market the same thing as running a business. You buy your stocks, watch the daily reports, and decide when the most appropriate time is to sell. That’s about it. Real estate investing is a lot different. It is a lot more like running a business than straight investing.
Note that there are multiple ways to invest in real estate. If you invest in a real estate fund, what you are doing is similar to investing in stocks. You are trusting fund managers to make real estate investments and manage them on your behalf. But outside of the fund option, real estate investments require a lot more involvement.
Buying Commercial Real Estate
Though some real estate investors maintain diverse portfolios consisting of both commercial and residential property, most focus on one or the other. Commercial real estate includes things like office buildings, retail centers, and warehouses. Multi-family residential units are considered commercial real estate as well.
All these properties require management. And because real estate investing is considered a long-term proposition, an investor could spend many years managing a single property before selling it. Property management is a business in and of itself.
Buying Residential Real Estate
There are those property investors who prefer residential real estate. Some buy up houses in vacation destinations for the purposes of renting them to tourists. Others build residential portfolios based on long-term leases. Still others fix and flip. Once again, all three models require property management to some extent.
Property management is just one aspect of real estate investing that makes it more like a business. Another aspect is funding. In nearly every case, investors do not pay for new properties with their own cash. They need to maintain cash flow for other things. So they turn to the hard money lenders, like Salt Lake City’s Actium Partners, whenever they want to obtain a new property.
In many cases, a hard money loan is replaced by a small business loan later on. So Actium might approve a six-month loan to obtain an office building. The investor turns around and applies for a traditional loan, using the strength of its rental income to qualify. The proceeds from that loan pay off the hard money loan.
Managing Tax Liabilities
When you are investing in stocks, taxes are pretty straightforward. There are certain strategies investors can employ to limit their tax liabilities in any given year. But again, there is not much to it. Investing in real estate is an entirely different ballgame.
Real estate investments may generate income based on how they are used. An office building generates rental income for its owner. When the owner decides to sell the property, capital gains enter the equation. Now there is another tax liability to worry about.
The truth of the matter is that there are more tax liability issues involved when you invest in real estate. Keeping track of it all can be a full-time job by itself.
A Lot More Involvement
In case you haven’t figured it out, real estate investment requires a lot more involvement than buying stocks or putting your money into bonds. Securities investors can direct their brokers about what and when to buy, but there is very little management above and beyond that.
Investing in real estate is more like running a business because there is a lot more involvement required. Real estate investments need to be actively managed. For all intents and purposes, you are running a small business when you invest in real estate.