Protecting Your Business During The Coronavirus Pandemic – Part 2 of 3

Protecting Your Business During The Coronavirus Pandemic – Part 2 of 3

Joe: Hey, it’s Joe Crump. This is part two of a three-part series on COVID and its impact on real estate investing. This one is titled Protecting Your Business During The Coronavirus Pandemic. Protecting your business, protecting your assets is very, very important.

Joe: The biggest problem any business has is cash flow. It’s the thing that can rise up and knock you out the quickest. Because you have to pay your bills. You have to pay your bills, you have to pay your business bills, you have to keep your employees alive. And so cash flow is a very, very important part of this. What’s most important when you set up a business is to try to have as little debt as you possibly can. And if you’re going to borrow money as a real estate investor, borrow it from sellers rather than borrow it from the bank. Because you can always go to sellers and you can negotiate extensions, you can negotiate payment plans, you can negotiate things a lot easier when you’re dealing with somebody personally than you can with a bank.

Joe: There’s also some restrictions right now about them being able to foreclose. So, if you took a land contract, and this is whether you’re with a bank or with a private lender. If you go and negotiate with them, they’re not allowed to foreclose on your properties at this time. Now, that’s going to change eventually, and if you’re not making your payments, it’s going to eat up all your equity. And your equity can go away a lot faster than you might think. If you put ten percent down on a property and bought it with a conventional loan, let’s say $100,000 property, now you have a $90,000 mortgage on it and your payments are almost $1,000 a month. And suddenly you go six months without making any payments, that’s $6,000 that you just ate away at your equity at that you still owe the lender. Eventually they’ll put that back onto the loan. So, now you owe $96,000 and you still have to make your next payment of $1,000 a month, and you’re still going to have 30 years to pay that thing off.

Joe: So, borrowing money can be a great problem. You want to try to borrow as little as possible. And if you deal with private sellers, rather than banks, it’s going to be a lot easier to negotiate that in the future. So, one way to protect yourself now and in the future is don’t use banks. Use money that you can borrow from the sellers and do seller financing structures. And that way, it also doesn’t impact your credit. If you’re not paying a lender, they may forgive it for a while, or they may put it onto the back of the loan for a while, but they’re going to show that you’re late on your payment and it’s going to damage your credit. And that’s going to be a problem for you on anything else that you might want to do. Buying a car, or buying a house to live in, or anything else that you need credit for.

Joe: The other thing to think about when you’re trying to protect your business is corporations. You put together an LLC for your business. Now, my CPA told me that you don’t really need a corporation for your busines to save money on your taxes until you make around $75,000 a year. And this is a ballpark number, but, and it’s going to be different for everybody, but, about $75,000 a year is where it starts making sense to have for your taxes. Now, for asset protection, that’s different. If you’ve got a bunch of assets to protect, and you want to buy real estate, then it makes sense to have an LLC right from the get go that puts your real estate in a separate place from those other assets.

Joe: So, if those assets, if the real estate gets attached because of a law suit, then it won’t impact your other assets. So, then that means an LLC would make sense right away. So, those are two structures that can really be beneficial to you.

Joe: Another thing to think about is an S corporation. And S corporation is typically for high income individuals. So, if you’re flipping properties, let’s say your using the For Rent Method that I teach, or you’re doing wholesaling, or you’re doing something else where you’re just flipping properties and you’re not keeping properties in that corporation. Then an S corporation makes a lot of sense because you’ll have a lot of income coming in and you’ll be able to deduct almost all of your business expenses, and a lot of the other expenses that you wouldn’t normally be able to deduct.

Joe: Now. If you don’t have any assets, if you haven’t done any deals before, or done very few deals, and just getting started, it probably doesn’t make sense to go out and spend money on an LLC. And you don’t have a lot of other assets. So, what makes sense instead is to just put it through your 1040 forms, your tax returns, except use a Schedule C on your tax returns. Then you can deduct all your expenses doing it that way as well.

Joe: Now, the problem with Schedule C over a corporation is Schedule C, people that are doing self-employed income like that, get audited a lot more often than an LLC. Maybe ten times as often. I was audited twice when I was doing an LLC back in the beginning of my investing career. I was audited two years in a row. And that was all because of Schedule C and all the deductions I was doing and they just spotted it and they targeted it and they know, the IRS knows, that it’s easier to go after people who have Schedule Cs than it is to go after somebody who’s got an LLC. And they would assume also that there’s, they also expect an LLC to have higher expenses.

Joe: So, you could have ninety percent of your income could be expenses in an LLC but if you do that with a Schedule C, it’s going to be less believable for the IRS to accept that. And they’re going to tag you a lot faster, flag you for audit and it’s more likely that you’ll be audited. So, it makes sense to have an LLC for those reasons.

Joe: Again, though, it probably doesn’t make sense to go out and spend a thousand bucks to put together an LLC for your first LLC, you know, on your first deal and you haven’t done a deal yet. I see so many people spend so much time, you know, working on things that aren’t important, when what’s important is they need to go out there and start putting deals together instead. Because the money comes from talking to people on the phone, putting deals together, you know, working your leads and making that stuff come together where you can actually have cash in your hands rather than worrying about your business structure. You can worry about that stuff later.

Joe: Maybe you’ll lose a little bit of money, make a few mistakes. It’s okay. Make a few mistakes. It’s not going to cost you that much most of the time.

Joe: If I had to think of the single most important part, the single most important way to protect yourself in this pandemic, other than all the obvious things like wearing a mask and the physical things – I’m talking about the business, the way to protect your business is to learn how to negotiate properly with your buyers and sellers.

Joe: If you can negotiate with your buyers and sellers and the other investors that you’re working with you’re going to have a much better chance of surviving this process because you won’t come at it with an angry, “Hey, you’ve got to pay me or you’ve got to get out of this house and there’s nothing we’re going to do about it other than that. I’m not going to talk to you and you’re just pissing me off and you’re done.” None of that stuff works very well.

Joe: Go to them as though they were family. Go at them as though they are a friend. As they are somebody that you love. And say, “Okay, I see the situation you’re in right now. Here’s the situation I’m in. Here’s how I think we might be able to make this work if you can’t do it the way that we originally agreed to do it.” And you just negotiate your way out of these problems. Because those problems are going to be there. They’re going to arise and you’re going to have to deal with them. And if you learn how to negotiate it’ll make you better as a business person in everything that you do.

Joe: As a real estate investor, the way you put together a deal is by negotiation. If you learn how to negotiate with people, if you learn how to listen and pay attention to what they’re saying and what they need you’ll be a far better, far wealthier, far happier real estate investor. Also, it’ll make your business a lot smoother. The people that don’t know how to talk to other people, the people who don’t know how to listen to other people are the ones that are making the biggest mistakes. And they’re usually looking at it with only self interest and never looking at it as how can I solve these problems? How can I make the world a better place with the business that I’m creating?

Joe: The next thing is cash flow. Your cash flow is a really important part of your business. As soon as you lose your cash flow, everything else falls apart. If you don’t have money coming in that’s going to be a problem. And that’s one of the biggest problems that we’ve got right now. If you have tenants who aren’t making their payments on the properties that you own, and you don’t have any cash flow, that’s going to be a problem. If you don’t have properties that you’re flipping and you’re not making money from the properties you’re flipping, you don’t have anything to live on. That’s going to be a problem.

Joe: So, you want to be able to keep everything moving smoothly. And to do that it’s going to require negotiation. Also, if you get into a situation where you can’t pay your bills, you can’t pay your mortgage, you can’t pay your lease option or your land contract or your rent. If you get into those situations, don’t hide. Don’t ignore the phone calls that come in. If it’s your credit card company that’s calling you and saying, hey, you’re not making your payments, get them on the phone, say, look, I can’t make my payments right now. I’ll make them as soon as I can. In the meantime, don’t call me again. I don’t want to hear from you again. And I’m invoking my right under the Fair Credit Collection Act for you not to call me. And I’m giving you notice right now, if you call me back, we’re going to have a problem. And then you can hang up after that. They’ll, you know, make sure they put that in their notes, and then if they call you again you can actually sue them. Because it’s illegal for them to keep pestering you for money like that.

Joe: Now, they can go through the legal proceedings and, you know, screw up your credit. It’s a credit card, it’s not going to do anything except screw up your credit. If it’s a house, they’re going to be able to go through foreclosure and take that property back. But they have to go through the legal proceedings to do that. But you don’t have to be harassed by credit collection people as you’re going through that process. So, you can put them off and get rid of them.

Joe: Now. The people that are, that you have mortgages with, those people you want to try to work something out with. So, you don’t tell them to stop you know, calling you. Those people you want to work with, unless there’s just no money and they keep harassing you, then you can tell them to shut up. But, what you can probably do is figure out some type of payment plan with them, or some type of deferment plan with them that waits until you can get back on track. Give me three months. And try to give yourself enough time where you know that you’re going to be able to get back on track with this stuff. It’ll make it a lot easier in the long run.

Joe: So, I know we’ve got some challenges ahead of us. You’ve got to protect yourself through this process. The way you build your business makes all the difference. So, if you’re just getting started in building a business, build it the way that I teach because it’s going to be a lot easier and a lot safer when these types of things happen. Again, this happened back in 2008. It happened in 1991. It’s going to happen again in the future.

Joe: So, as you build your business you don’t want to be in a position where you’re going to lose that business. So, structure it in a way where you have less debt and you have some abilities to negotiate as you go through this process and know what your exit strategies are and know what you worst case scenarios are. And if you buy a property, know what that exit strategy’s going to be. And know what happens if you can’t make your payment. Say, for example, if you took a property subject to the existing loan. Someone deeds you their property, let’s just for argument sake say it’s $100,000 property, it’s got a $100,000 mortgage on it.

Joe: So, as you build your business you don’t want to be in a position where you’re going to lose that business. So, structure it in a way where you have less debt and you have some abilities to negotiate as you go through this process and know what your exit strategies are and know what you worst case scenarios are. And if you buy a property, know what that exit strategy’s going to be. And know what happens if you can’t make your payment. Say, for example, if you took a property subject to the existing loan. Someone deeds you their property, let’s just for argument sake say it’s $100,000 property, it’s got a $100,000 mortgage on it.

Joe: You turn around and sell that property for $120,000 on a lease option and you start collecting payments on that. But, let’s say the person who’s buying it from you can’t make their payments, and you can’t evict them, and you can’t collect that money. And you can’t come up with that money yourself. Now, you’ve got a subject to property that you have to make payments on that you can’t afford to do that on. You’ve got to figure out how to solve for that problem. You can’t go back to the mortgage company because it’s not your mortgage.

Joe: You have to go back to the person who sold it to you and tell them here’s the situation we’re in. Here’s what we’re dealing with. You know, how do you want to proceed? Do you want to talk to the lender and see if you can get a deferment on this? How do you want to go forward? Do you want me just to give you the property back and you can take it back from here? There’s no equity in the property. And you can deal with it that way.

Joe: Let’s say you’ve got a property, though, that you’ve had for a long time. And it’s now worth, you bought it for $100,000 but now it’s worth $160,000. You’ve got some equity in that property. You don’t want to lose that equity. What you could do then is you could put it on the market on the MLS and try to get that property sold. You could ask your, the person who’s buying it, to come in and take it over and exercise their option faster, or maybe move out and help them find another property that they might move into instead. You know, you have to look at all your different options and see what makes sense and solve the problem.

Joe: So, don’t hide from the problems that happen. Look at it and say, “How can I solve it?” The way we make money as real estate investors is by solving problems. So, know that you’re always going to have problems as a real estate investor. That’s part of the deal. So, learn how to accept those problems and deal with them and negotiate your way out of them to the best of your ability and you’ll always be able to have a business. And I can tell you, even though you have problems in this type of business, it’s still way better than having a job that can be pulled out from under you and you’ve got nothing.

Joe: All right. I hope that helps. Tune in on the third part. We’ll do that next.