QUESTION: Jennifer’s husband recently lost his job as a roofing and remodeling contractor. Now, she says, he’s considering opening his own roofing company and bringing in a former co-worker. Jennifer asks for Dave’s advice on how to proceed with setting things up.
ANSWER: His former co-worker should be what’s known as an employee. That’s the relationship. You could bring him in as a subcontractor, or you could just bring him in as an employee on a percentage of the jobs he brings in — which is kind of like being a subcontractor pay-wise.
I would open it as a sole proprietorship. I think you’ve got two major areas in this business. Your husband knows how to sell jobs. That’s going to be the easy part for him. But he’s got to line up some crews before he sells any jobs. So he needs to get out there, hustle up, and find three or four people who are willing to work with him and what kind of pricing they’ll give him. He needs to get that lined up, and if he’s buying supplies, he needs to swing by a supplier, set up accounts, and negotiate his prices on the shingles, nails and so forth.
When it comes to taxes and bookkeeping, just hold back 25 percent of your net profit each month in a separate account before you take it home. If you do that, you’ll be okay on your taxes until you get above $80,000 net profit. That’s probably not going to happen for a little while, so just start with a fourth and you’ll be in good shape.
QUESTION: Juan calls in from a small island in the Caribbean, where he just graduated from high school at age 16. He knows about Dave’s love for real estate and asks about real estate investment trusts (REIT) versus actual rental properties.
ANSWER: In general, were I not talking to someone on a small Caribbean island, I would say real estate gives you a much higher rate of return. Real estate investment trusts are basically a mutual fund for buying real estate, but that doesn’t matter. What matters is what the actual customer who buys the shares makes. There are a few of them now that are performing well.
Basically, the guys running the thing own the property, it creates rent, you sell the property, it creates capital gain and all that, and it’s all supposed to filter back through to the shareholders. The bottom line is, though, that the vast majority of them have been under a 10 percent rate of return in the States, where a good growth stock mutual fund would’ve outperformed them. Now, there are a few of them here and there that have been doing better lately. But in general, the category has not kept up with good growth stock mutual funds.
I’ve told folks instead of doing that to do good growth stock mutual funds, and definitely buy regular real estate in your name before you buy an REIT. Now, that might change on your island. I don’t know the real estate market on your island. It’s probably volatile, because it’s a resort market in general, and I don’t have any idea about your governmental situation to be able to tell the volatility of the market. But in the States, I would rather own real estate than deal with an REIT.
Good question! It’s an honor to speak with a 16-year-old from the islands. Thank you, sir.
QUESTION: Jeremy is a software developer in Fort Wayne, Indiana, who has an opportunity to start a side business with a senior developer at his company. Together, they would create applications for the legal community. Jeremy’s wife is an attorney, and together they decided there was a market for their ideas. He wants to know if starting a business is too much of a risk while they’re in Baby Step 2 and paying off debt.
ANSWER: I think it’s just your part-time, side job. That’s what it sounds like to me. You shouldn’t have to put a lot of money in this. It’s just the sweat of your brain, right?
The trick is I don’t want you to end up in a partnership if this thing works. That’s the only downside. So we’ve got to figure out how to structure this where you guys own different parts of it, and you’re just working together in more of a joint venture. And you can tell it’s a joint venture if you can take it back apart without a lot of pain.
That’s what I would aim at just in terms of structure looking forward. But in terms of can you do some side deals and create some apps and make some money? Sure! Absolutely, I would do that. Let’s just figure out how to structure it intelligently with your buddy so you don’t get pinched.