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House Flipping Advice Thread (1 Viewer)

RedmondLonghorn

RedmondLonghorn

Footballguy
I have a friend who is a general contractor and used to flip houses. He did pretty well for himself over several years, buying and selling 9 properties. He made money on 8 of the 9 and made a very good return on several of them. He eventually stopped because after a while the stress and strain of carrying that much financial risk was too much.

It looks like the business I am a co-owner of is about to be sold. I should get a pretty nice up front payment. I will continue to be employed for at least 18 months and will get a second, hopefully much larger, check a little over two years from closing.

My friend would be willing to get back into the flipping business if he had a partner to share some of the risk. I am considering this, but I want to learn as much as possible about everything I can before I even consider moving forward.

I have questions about almost everything, but a couple that I am keenly interested in are the following:

What is the best structure for a venture like this? LLC? C-Corp? Partnership?

What kind of financing is available? Obviously using 100% equity is possible if there is enough cash. My friend used to use a "hard money" lender that charged what sounded like loan shark rates (3% origination fee up front + 1% per month).

Anything else that a total noob ought to be thinking about?

 
My neighbor does this and has seen his profits drop dramatically lately due to everyone wanting to get in. It's driven the prices up on profitable projects.

If you/he have good contractors, you have a big piece of the puzzle. Good luck.

 
You buy the house. Pay him a nice hourly rate to rehab the house.

Some houses you make a lot, some maybe a little, but he does all the work. He can set his own schedule.

You both end up making decent money without the whole "partnership" that can be a problem.

 
Interesting.

I was already thinking about the idea of me being the 2/3 partner and him being 1/3, plus the contracting work (at an agreed to margin).

 
A friend of mine does this, has done pretty well the last few years buying houses at auction, fixing them up, and either flipping or renting.

He says the run is pretty much over. Everyone and their brother is going to auction to bid on a rapidly decreasing number of houses, bidding things up beyond what they should go for, and making life harder for the actual investors.

 
RedmondLonghorn said:
What is the best structure for a venture like this? LLC? C-Corp? Partnership?
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When you file the certificate of formation with your state you will do so as an LLC. Then when you file for an EIN with the IRS they will automatically classify you as a partnership since there is more than one member of the LLC. That's okay, because all you will have to do is then file a form 2553 with the IRS to convert your partnership into an S-corp. The three entities (you, the other dude, and the company) will all file seperate tax returns, but only you and the other dude will pay any taxes, based on your individual tax brackets. Depending on your state you might have to draw up a company agreement to submit to the secretary of state with your formation papers. Otherwise you will just be operating under standard business practices.

 
RedmondLonghorn said:
Interesting. I was already thinking about the idea of me being the 2/3 partner and him being 1/3, plus the contracting work (at an agreed to margin).
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Yeah dude. You don't want to give him a share of the profits if he himself is going to be charging the company professional fees. If he is involved, he should receive a pre-determined stake of what he is bringing to the table. For example, if he invests 33% of the initial startup money then he receives 33% of the profits and is entitled to his 33% back to him if the company dissolves for some reason. You need to think start to finish, which is usually why you want the operating agreement in place first. It defines how everything is going to be run, from startup to the dissolution of the company. You don't want to be in court down the road whenever someone backs out of the company or moves to Kentucky.

 
ChainsawU said:
RedmondLonghorn said:
What is the best structure for a venture like this? LLC? C-Corp? Partnership?
Click to expand...
When you file the certificate of formation with your state you will do so as an LLC. Then when you file for an EIN with the IRS they will automatically classify you as a partnership since there is more than one member of the LLC. That's okay, because all you will have to do is then file a form 2553 with the IRS to convert your partnership into an S-corp. The three entities (you, the other dude, and the company) will all file seperate tax returns, but only you and the other dude will pay any taxes, based on your individual tax brackets. Depending on your state you might have to draw up a company agreement to submit to the secretary of state with your formation papers. Otherwise you will just be operating under standard business practices.
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Why S-Corp and not LLC taxed as a partnership?

 
It's harder to get rid of a partner than it is to get rid of a wife. With two owners of an S-corp set up to receive 50% of the profits you are doing the same thing without the burden of a partner.

 
ChainsawU said:
It's harder to get rid of a partner than it is to get rid of a wife. With two owners of an S-corp set up to receive 50% of the profits you are doing the same thing without the burden of a partner.
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Why not structure it as a corp and then elect S status? Why LLC filing as an S? Just curious.

 
A corporation pays its own taxes, but in an LLC the taxes pass through. The individual members pay income tax based on their own tax brackets. You're not going to be issuing stock, there are only two dudes. An LLC just makes better sense. It's simpler and then the S status just lets every man remain independent. That's another reason why you want that operating agreement in place before you start.

 
ChainsawU said:
A corporation pays its own taxes, but in an LLC the taxes pass through. The individual members pay income tax based on their own tax brackets. You're not going to be issuing stock, there are only two dudes. An LLC just makes better sense. It's simpler and then the S status just lets every man remain independent. That's another reason why you want that operating agreement in place before you start.
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The income taxes will be the same whether it's an LLC electing S status or a corporation electing S status.....they will be passed-through either way. If it's easier to get rid of a shareholder rather than partner/LLC member (not disagreeing with you) then could it be better to go corp rather than LLC?

 
That's interesting. But just for us to be on the same page, I was more describing the differences between the c-corp and s-corp. The c-corp is what I thought you were talking about..

 
I think that the issue of state taxes might come into play also. But I couldn't really speak to that being from Texas. That's where all my (limited) knowledge is based. An LLC operating as an s-corp is a good way to set up a company for flipping houses in Texas.

 
proninja said:
A friend of mine does this, has done pretty well the last few years buying houses at auction, fixing them up, and either flipping or renting.

He says the run is pretty much over. Everyone and their brother is going to auction to bid on a rapidly decreasing number of houses, bidding things up beyond what they should go for, and making life harder for the actual investors.
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This is interesting and relevant. My friend made the same observation about how competitive the foreclosure market has become.

I am wary of getting involved in something cyclical that is in its late stages. I know you have hard won experience with that. But on the other hand, the Seattle area housing market is tight, both for buying and renting and until something changes dramatically with the employment dynamics around here, that isn't likely to change a great deal.

 
ChainsawU said:
I think that the issue of state taxes might come into play also. But I couldn't really speak to that being from Texas. That's where all my (limited) knowledge is based. An LLC operating as an s-corp is a good way to set up a company for flipping houses in Texas.
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I am in Washington. Like Texas we have no state income tax.

 
Redmond, find yourself a different business partner. Just because this dude used to flip houses for himself doesn't mean he will be good for you to partner up with now. Find yourself someone to strategically align with, like a real-estate agent. If you have a chunk of cash, find someone who can see these houses before they go on the market so you can just make cash deals with the seller. It just sounds like this other dude might be dead weight for you. You might not need him.

 
I have been thinking about this too. It might be useful to get a real estate license so you can handle that aspect yourself.

 
proninja said:
A friend of mine does this, has done pretty well the last few years buying houses at auction, fixing them up, and either flipping or renting.

He says the run is pretty much over. Everyone and their brother is going to auction to bid on a rapidly decreasing number of houses, bidding things up beyond what they should go for, and making life harder for the actual investors.
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That's because Seattle has been one of the hottest markets in the USA.

It won't be this same story in other market

RedmondLonghorn said:
proninja said:
A friend of mine does this, has done pretty well the last few years buying houses at auction, fixing them up, and either flipping or renting.

He says the run is pretty much over. Everyone and their brother is going to auction to bid on a rapidly decreasing number of houses, bidding things up beyond what they should go for, and making life harder for the actual investors.
Click to expand...
This is interesting and relevant. My friend made the same observation about how competitive the foreclosure market has become.

I am wary of getting involved in something cyclical that is in its late stages. I know you have hard won experience with that. But on the other hand, the Seattle area housing market is tight, both for buying and renting and until something changes dramatically with the employment dynamics around here, that isn't likely to change a great deal.
Click to expand...
Too late to get into the game in Seattle, imo.

 
Frostillicus said:
Flipping houses just sounds like a horribly stressful way to live.
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Back in 2004-2006 it was great with values skyrocketing. Flipped about 15 houses back then but saw the down fall and got out just in time. Saw a lot of investors go belly up. It's much harder now to earn good profits because of stagnant values, smaller supply and most auctions are now online which let's out of town investors (competition) in. Another thing big investment groups are also buying up properties.

 
mr roboto said:
mr roboto said:
No. Don't. Partner. In. This.
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If you do, one of you has to have majority. 50/50 rarely works.

And you probably can't make an actual living doing it either.
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I do. But I work in a small rural town on the edge of the planet. I normally buy for 20k, put 20k in and sell for 60-70k I usually end up around 14k profit. I like to do 4-6 per year. That's pretty decent money around here.

 
I'd stick to small cities at this point if you're going to do. Made a killing buying properties 2010-12 throughout AZ & FL. Late to the party here. Prices have skyrocketed back up and a good buys are far and few between these days.

And as others have said Don't Partner in this.

 
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