You do not need to obtain a license to invest in real estate. Real estate agents who negotiate the buying and selling of property need licenses, but there are no state or federal licensing requirements for people who invest. However, if you decide to turn your real estate investing into an actual business, then you do need to register the business entity with the state.
Types of Investing
Real estate investors typically try to buy houses at below market prices at cash auctions or from sellers primarily concerned with making a quick sale. Some investors turn the houses they buy into rental properties and use the monthly rent payments as supplemental income. Other real estate investors renovate homes and attempt to "flip" houses, or sell homes for profit within a a few months of the initial purchase. You can also invest in commercial property as either a flipper or by renting out commercial units.
You must must pay taxes on money you receive as income from rental properties that you own and you have to pay capital gains tax on the profits you receive from flipping real estate. Depending on your federal tax bracket and tax laws in your state, you might have a lower overall tax burden if you establish a business entity to handle your real estate transactions. You can deduct expenses such as home repairs and maintenance from both taxable personal income and taxable business income, so consider the overall implications of both options before making a decision. Some states require you to obtain a business license, whereas in other states you simply pay a fee to register your business.
When you attempt to obtain financing to buy an investment property as an individual, the lender examines your credit score as well as your debt-to-income ratio. That ratio consists of your debt payments as a percentage of your gross income. If you create a business entity to buy the real estate, you must apply for a business loan in which case lenders examine your personal credit score and DTI as well as the businesses cash flow and income level. Typically, banks only lend to businesses that have been in existence for two years and, consequently, most real estate investors initially rely on personal loans to fund their activities.
Investing in real estate involves many expenses ranging from closing costs and legal fees to liability insurance to protect you in the event that any of your renters get injured on your property. You can invest in real estate without the same level of personal involvement or risk by buying a mutual fund that contains real estate holdings. Additionally, you could buy into a Real Estate Investment Trust. These are investments that contain residential and commercial real estate parcels and mortgages. However, as with most investments REITs and mutual funds do expose you to market risks and there are no principal guarantees.
- Bankrate: "Five Tips For Financing Investment Property"; Jennifer Acosta Scott; December 2009
- Bankrate: "Great Time to Invest in Rental Property"; Tamara E Holems; January 2010
- Bankrate: "Ask the Tax Adviser"; George Saenz; January 2002
- Federal Reserve Bank of St. Louis. "Average Sales Price of Houses Sold for the United States." Accessed April 21, 2020.