Joshua Dorkin caught the real estate bug about eight years ago, when his brother suggested he buy a few condominium units for investment purposes.
A real estate novice at the time, the tycoon wannabe — then in his twenties — hired a property manager to handle all tenant and maintenance issues.
Unfortunately, Dorkin said, “I didn’t get the service I needed.” He later learned that the property manager had defrauded some other real estate owners.
Soon, Dorkin found himself facing financial difficulty with few places to turn for relevant information and advice.
The experience inspired him to found BiggerPockets.com, an online community for budding real estate investors that now has 100,000 members.
Despite the fact that Dorkin now offers the kind of advice he once needed as an owner, he has sold all of his property holdings except for a primary residence (he now lives in Denver, Colo.) and devoted himself primarily to helping other novice real estate investors.
“I got out,” he said. “I learned that I can’t manage my business and my real estate portfolio at the same time.”
For many people, becoming a real estate investor happens almost by accident. It might start with a vacation home that turns into a seasonal rental, or simply with some extra cash and an idea that investing in real estate seems fun or sexy.
But as some markets begin to recover, many casual real estate investors are looking to add to their portfolios and take things to the next level.
According to a national survey recently commissioned by BiggerPockets.com and Memphis Invest, investors represented some 25.3 percent of all home sales by May 2012; and 3 percent of American adults (around 7 million people) regard themselves as real estate investors and plan to make a purchase in the next twelve months.
So when is it time to get serious and hire some professionals to help you build your real estate empire?
Who, What, Why?
The answer partly depends on your intentions. Will you be managing the properties in addition to a full-time job or will managing your real-estate portfolio be a new career?
If it’s a sideline, you’ll probably need to hire a property manager, who typically charges 7 to 10 percent of the total rent.
“Nobody will take care of your properties as well as you will,” said Dorkin. “But a lot of people don’t understand that business: How do you handle expectations, repairs evictions? And how lenient should you be with tenants?”
Most real estate buyers rely on a realtor to find appropriate properties and to negotiate terms. But if you’re considering owning more than a couple properties, it’s important to add a few more trusted members to your real estate team early on.
Hiring a good lawyer is high on that list. A seasoned real estate attorney will review everything from purchase agreements to leases, as well as help investors new to the process fashion a strategy for getting to the next level.
“There are many agents who will discourage people from hiring a real estate attorney, because they’re worried the attorney might screw up the deal,” said Joshua Marks, a Philadelphia-area attorney who advises real estate investors looking to buy or sell multiple homes.
“People trust that they can read the documents themselves, but a lot of people get trapped and don’t think of a lot of things before they buy," Marks added.
It’s also wise to hire a certified public accountant with strong real estate experience as early in the process as possible to help structure your growing business for tax purposes. It’s important, for example, to establish whether you purchased a property to live in and decided to rent it out later.
“Some people get in this mindset that they’ve got this rental income and decide not to report it,” said Charles Perkins, a CPA based in the Seattle suburb of Burien, Wash., specializing in real estate transactions. “But there are a lot of expenses associated with maintaining a rental property such as depreciation, insurance and repairs that can add up to more than rent and serve as a tax shelter.”
Once an investor acquires more than six or seven properties, a few more financial considerations emerge.
Asset protection is key. Perkins said setting up multiple limited liability partnerships, LLCs, is a good way to segment your properties to protect the rest if one becomes the object of legal action.
Also, an umbrella insurance policy will typically only cover up to four or five properties, so an insurance professional becomes vital.
Thirdly, lenders are rarely willing to finance six or seven homes owned by one individual, which either means putting down more cash or looking into commercial lenders, which usually require a minimum 25-percent down payment on an adjustable rate loan with a 20- or 25-year term.
Another insider tip is to become friendly with a reliable title company, particularly if you’re looking at distressed or foreclosed properties.
“You can check with the title company to see if there are liens on a property before you consider buying it,” said Marks, the attorney. “If you do it often enough, some title companies will waive their fee or credit the fee to closing.”
But the most important piece of advice for investors considering expanding their personal real estate holdings is to take a hard look at their own skill set.
“My attitude was ‘I’m a smart guy, I can figure this out,’” said Dorkin. “The problem with that attitude is so many things can go wrong. Owning property is managing a business.”