A Point of Decision

Hello! David J here again bringing you more of the steps on my journey toward financial independence.

Now that we've discussed some of the first building blocks to put in place in your business, we've probably already passed the point where we need to decide what our business will do, what business we'll actually be in - specifically.

Still, it's worth another look just to make sure we've set the right direction and chosen a good path.

I'll still stay within the concept of using real property to build income and net worth. So, let's see what kinds of choices we may have within that domain.

One choice might be to generate cash by doing deals. This might be wholesaling, short saling or just about any "flip" strategy. One approach to that choice might be to do a few wholesale or short sale flips to build up some cash, then take on a rehab or two while still doing flips.

That specific strategy is for generating cash and, since we don't necessarily hang on to the properties long enough to incur any major liability, we don't necessarily need to establish a business structure or entity. Flipping as a sole proprietor may be sufficient.

Again, let me interject here that I am -NOT- an attorney, accountant, etc. and do not offer any legal, financial or investment advice. I merely offer suggestions of topics to discuss with your professional people. It is up to -YOU- to select and develop your own strategies.

That said, let us continue...

Generating cash requires constant activity. You do a deal, you generate cash. Lather, rinse, repeat, ... but when you stop doing deals your cash stops coming in.

Generating cash FLOW is another matter and rather a different strategy. Instead of flipping properties, you're actually taking physical possession of them and holding them for the cash flow they generate.

As a wholesaler or short saler, you're flipping properties and deals and not actually taking physical possession of the subject property before you pass it - or the contract on it - on to the next buyer. You can probably do very well using only transactional funding and needing little to no cash or credit of your own.

As a holder of property your financial needs change a good bit. Instead of transactional funding, you may need equity or joint venture partners to provide the funding you may not be able to come up with to acquire and hold the property. Thus, you may be sharing the monthly cash income with your co-investors and partners.

Some of the webinars currently going around talk about "commercial" multi-family properties, meaning multi-unit properties of 6 units or more. One point made there is that many of those deals can be done with owner carry-back; that is, the current owner carries a note on the property in lieu of a cash down payment. So, as the buyer, you - or your business entity - may only need to come up with enough cash to cover closing costs, inspections, fees, and other miscellaneous charges involved in the actual closing. So, it's possible to acquire cash flow without shelling out big money up front.

When holding properties for cash flow, new questions of liability arise - questions that do not come up in the course of flips.

Here again, I'll caution that what follows here are suggestions. I do not and can not give legal, financial, or other advice myself as I am not a licensed professional in those areas.

To limit your liabilities, discuss with your legal and other professionals possible strategies to protect your properties from claims against each other. You want to devise a strategy such that one property being the subject of a claim of liability does not negatively impact the others you may control, directly or indirectly.

Since that strategy typically includes one or more business entities, it makes sense to use the credit building strategy for each one of them, as discussed in the previous post, "The First Thing".

To summarize the decision points, then, these are the choices:

Sole Proprietor

The sole proprietor is essentially you "doing business as" yourself or another name. You bear all the liabilities, the business's credit is your personal credit, and the business's finances are your personal finances. Sole proprietor may be good for a business which, for example, generates cash as we discussed earlier. No assets are held for any appreciable time; thus, only a little liability is typically encountered.

Business Entity - LLC, Corporation, etc.

The business entity is essentially a virtual legal "person", separate from its owner. The company's liabilities can be separated from the owner. The company's finances and credit stand alone, and do not reflect the credit or finances of the owner, nor do they effect the credit or finances of the owner. Thus, someone with terrible credit can set up an entity and establish very good credit for it while still rebuilding their own credit at a different pace.

The choice we make depends on the goals and function of our business.

We'll talk again soon!

Take care - be well!

Much Success!