Obviously this is a trading forum, but I know several of you are diversified (and it sort of is trading anyways). Does anybody do much flipping of houses? I've just gotten going with it and quickly realizing I am going to have a heck of a tax bill, which is of course still a good problem to have. I'm still working full time, but more than half of my income this year will be coming from real estate. I have only been doing it for like 3 or 4 months, but hopeful that next year I will make a multiple of my regular job income. If that is the case and I can set aside a few years salary, I will contemplate doing it full time if the numbers make sense and if I can benefit enough from the additional time. All comes down to me being able to source enough deals to make that work. Ultimately would like to start keeping some as rentals, but I'm in a cash building phase, trying to generate as much as I can while I can. Anyways, I'm curious if any of you all are doing this how you are structuring it? Whether via an LLC or just under your name. I have been planning to run it through as capital gains if I can. I know part of that is based on intent so that will play a factor. I have a partner in it, we are both invested equally and split it 50/50, but I do all the deal sourcing and handle all the repairs/workers basically everything other than them contributing some labor when working on the house, so that split will probably change if/when we formalize it as a company. I'm probably going to find a CPA specializing in real estate so I can figure out how to minimize the tax bill here. Mainly just wanted to feel it out and see how anybody else was structuring it. Thanks for any input!
I insure a heck of a lot of people who do this. Insurance is a big one in this situation, and the LLC is definitely the way to go (or even S Corp). The best way to manage the risk from an insurance stand point will be at odds with what an accountant tells you is the most tax efficient way to do it. So that's one thing to consider when getting tax advice (and also remember, an accountant will save you a few bucks up front...an insurer will save you from bankruptcy on the back end). But the LLC will protect your personal assets against a nasty claim where doing it under your own name will not. That's the corporate veil--and short of criminal negligence, it will hold up.
Right very true. I haven't been as concerned on the risk apart from property insurance since I'm not renting them out, but you are right it probably would be a good idea to incorporate and get additional coverage overall since there is work taking place on the properties most of the time.
You need to protect yourself. Don't assume that buyers won't come after you after closing, because they can and they will. You shouldn't be doing anything in your name.
There's nothing inherently wrong with doing it in your personal name...but there's better ways. And you're absolutely right, the guy at the top is doubtless to end up in any liability suit regardless of who performed the work or to what extent he was involved. And defense costs on this tend to far exceed damages. Moral of the story, buy general liability insurance from a reputable agency and insurance company.
Not in the U.S., but I have done many real estate deals over the years so I can offer some general observations from my actual experiences on tax and risk management. I have stepped back from it in the last few years and am living away from any major city to make it worthwhile. TAX Interviewing and selecting professional advisors is just like hiring a plumber. Most will lie and say they can do it all. They can’t. I find corporate tax to be a specialist niche and not every accountancy firm can do it. I have an accountant that specializes in corporate tax. Not a regular accountant and not one of the mega-firms. A small shop, with 20+ years experience in corporate tax matters. I would speak with him before I committed to a deal not afterwards. His rate was less than the mega-firms, but more importantly he did not pile 8 other staff onto the bill for a simple matter. This adding on of people literally makes the large firm 10x more expensive. They certainly have their place, but for a small business they are a waste of money. Lawyers, same thing. I have a list ready of who to call for a particular issue. Construction law is a niche and I needed someone for that and commercial leasing. The lawyer who did the real estate buy and sells is someone else. Legal work on real estate transactions are so competitively priced they need to run a legal factory with hundreds of real estate deal a month. Great at what they do, but they do not do it all. Insurance, as @beerntrading stated is vital. Joey the roofer takes a header off the building and snaps his neck. Unfortunately he does not have the good sense to die, so Joey’s wife calls the ambulance chaser from the late night TV ad and you are being sued for $200 million. That is the moment that you discover that your residential insurance policy does not provide coverage for a home under renovation and a separate construction policy or rider had to sought and paid for. Then you also learn about an insurance company’s duty to indemnify is not the same as the duty to defend. I never broke the law. I’d push hard for the best deal possible, but never illegal and pay every penny of legitimate tax. All part of risk management.Sometimes it seemed so easy to look the other way on something, but never did. Flip side to the drive a hard deal, is that I paid very fast, within 5 days on invoices. Then when I needed a favour I could point to that fast payment as to why they should help me rather than the other guys who pays them in 90 days after a series of phone calls and letters. Prompt payment has value that is recognized. I am basing this on dealing with small local companies and not a multi-national with a call centre in India, they will never give a shit about you. Risk management, just like in trading, it is critical to success. As part of risk management I compartmentalized with multiple companies (and when I say company I mean a completely limited liability entity with zero comeback onto my personal assets). My company A owns the property. And if there are several properties each gets its own company. Nothing that happens at address A can effect address B and cannot get back to my personal accounts. My company B is the contractor / construction manager that contracts with sub-trades and suppliers. If I retained ownership and there were tenants; my company C did the ongoing property management, repairs, leases, marketing. I never did residential tenancies, only commercial, this could be different in another jurisdiction. Here a residential tenant who completely stops paying rent and destroys the interior will take 6 months to get evicted. For commercial tenants I change the locks after 15 days of non-payment. Residential tenants also carry a higher risk for grow-ops and drug labs. Here the government can seize the property under civil forfeiture laws and the entire investment just went to zero with my doing nothing wrong, except not watching the tenants regularly. If I was going to let out to residential tenants their financials, employment history, credit history etc. would be given a colonoscopy with everything verified. The starting point would be everything in their application is a lie, now lets find proof of the lies. Compartmentalizing with several companies obviously has much higher initial costs and ongoing administrative costs to do this. Depends on whether it is a sideline or an ongoing enterprise. It allowed me to approach situations more creatively. For example; a commercial tenant is going to move in and wants to renovate to make offices to suit their needs (they are paying to renovate my building). They use my list of approved contractors not just anybody they want. If they do not pay a supplier and a lien is registered on my building, then my property management company takes action against the tenant under the terms of the lease. Tenant had to pay off the lien immediately or were locked out. Even worse for the tenant, if they had valuable goods on the premises, then rather than change the locks, I would distrain the goods and have them seized by a bailiff. Bottom line my investment was risk protected. BANKS & MORTGAGE BROKER & INSURANCE BROKER Having the companies compartmentalized forced separate bank accounts for each location and each company. It made the accounting simpler if it ever had to be presented in court or at an audit Mortgage brokers, insurance brokers, real estate agents can all be worth their weight in gold, they can shop deals, get better rates, and are a wealth of knowledge in their arena. But they can be a nightmare that causes lost deal because they could not respond fast enough. Finding good advisors in every area is vital. OK rambling on again. This really is a massive topic, sort of like answering the question; “How do I trade”? Real estate can be a vehicle to make money and many have done so, but like all ventures it is a highway littered with broken dreams of get rich quick. The many late night TV ads for seminars by the likes of Ed Beckley, Tom Vu, Russ Whitney, and Donald Trump should be a caution not an impetus. Good luck to you. DISCLAIMER Here’s a link to my disclaimer rather than cluttering the thread - one correction is first sentence - This post only concerns: COMMERCIAL REAL ESTATE IN CANADA https://www.elitetrader.com/et/threads/who-is-your-favorite-fx-broker.301046/page-10#post-4530735
Bingo...except the part about the roofer falling off the roof, that's employer's liability in the US, not tort. As long as you hire an insured contractor (in some states licenced), they are presumed to be a separate business for which you do not have an employer's liability. But if they're not insured, they will be considered your employees regardless of whether you pay them on a 1099...and beyond that, your general liability policy will contain an exclusion for their injuries (unless you're in a "stop-gap" state...WA and WY are the only two I know of off the top of my head...I don't come across it often). The nasty claims are things like contractors injuring passers-by (operation hazard), people (especially children) trespassing and getting injured (premises/existence hazard), and construction defects after completion and sale (products/completed operations hazard). You're 100% right about the separate entities, one controlling S-corp, one directly owned (personally, not by the corp) LLC as the general contractor retained, and an individual LLC to own each project owned by the S-corp. And the S-corp hires the general contractor LLC. That's what I mean about tax and risk advice being at odds with each other. That puts the existence hazard in the hands of the project LLCs (and the lowest risk because courts are very unlikely to award in excess of insurance for this), the operation hazard in the hands of the general contractor LLC with no assets (which can be dissolved if damages exceed insurance), and the assets to the corporation upon completion of a project and insured as vacant building / lessor's risk appropriately.
I appreciate the input on the insurance and risk side of things. I'll work on finding a real estate tax guy. Need to figure out some simpler things like whether to write off the cost of my truck (it qualifies for the full write off) or to just stick with the standard deduction and mileage so it's less to deal with and don't have to pay when I sell it etc. Lots to figure out.