Hi everyone, I'm a newbie in real estate investment. I'm learning a few courses about flipping houses now. My goal is to get my first deal in the next 5 months. I feel overwhelmed because there are so many things need to done before I can get start with a professional look and high credibility. Can anyone share your beginning story with me and the community? And do I need a Website, and S-corp or LLC to start buying houses?
I'm going to say, "It depends".
If you acquire income producing assets, do you intend to keep that income? ... or risk losing it and your properties - AND personal assets/possessions - in litigation?
Do you enjoy paying more taxes than you need to?
Remember also, that if an "umbrella policy" has to pay out it means litigation was brought and you lost. Your personal assets are now exposed and at risk.
You'd do better to establish your business entity structure beforehand. Then, you don't have to think later about deeding a property from your own name into an entity's name and possibly triggering Due on Sale.
Your goal should be "Control everything, own nothing". You control the business entity structure, but you personally do not own it. It is owned by a trust you establish with yourself as the beneficiary and build entities from there. Start with an S-Corp and the first LLC. Acquire the first property into the LLC and build from there - it is never owned by you personally. You receive income through the S-Corp using the salary/dividend split: use a 1-to-2 ratio: 1/3 salary, 2/3 dividend. This limits your self-employment tax liability - the dividend portion is taxed as regular income.
A lot of folks will argue against all that based on costs and management effort. Again, it depends on your goals. Do you want to be in the REI business or just do it as a hobby? Do you want your income properties to endanger your personal assets and possessions including your family's home and savings? ... or keep everything separate and out of reach (as much as that's possible)?
Your choice, really.
Hey Vee, I started learning about investing relatively recently as well, and while I haven't done my first deal yet, I would say that a website and LLC is definitely not a necessary pre-req to getting started. That is, you do not HAVE to have these in place to begin.
In fact, I would argue that creating an LLC from the get-go might be more of an impediment than anything because of the fees associated with its creation and maintenance, not to mention that it makes obtaining financing much more difficult than if the property were in your name alone. While an LLC does offer personal asset protection, there are other ways to cover yourself as well, such as an umbrella policy.
As for the website, I think it depends on your business strategy, but again, this is something that could be added as you go.
Great advice! Thanks Stewart
@Stewart Vargas-Sosa Thanks Stewart. Can you explain a little bit about the "umbrella policy"?
@James You I'm thinking about using HML and private money. What are you going to invest (rental or flip or something else)? Sorry but how long have you been an agent, I'm looking for one now :)
I don't think you need a website unless you are advertising and or doing yellow letters and you need a place to gather information and show some credibility. There are plenty of investors out there who do all their flips via the MLS and Auctions and neither of those require a website.
I can't 100% agree with this.
Yes, it can be harder to find funding for an LLC, depending on the type of funding you are trying to get and from where. You can start flipping houses in your name, but you open yourself up to personal liability that could otherwise be protected by a separate entity like an LLC. Also, if you try to get a conventional loan (that would you would normally use if it were your personal residence), then you need to know that there are certain restrictions when it comes to flipping houses.
As for the impediment because of the different fees associated with starting and maintaining an LLC, if you cannot get the funds for starting and maintaining an LLC, then you probably don't have the funds to flip houses.
Some options for lending are private money lenders, hard money lenders or smaller banks who are willing to give you a rehab or construction loan, which are similar to hard money loans but with better terms. As for getting approved, if your LLC does not have any long standing credit or history of successfully flipping houses, then you will have to personally guarantee the loan, which means that your ability to get funding will be based on your personal ability to pay. If you have other businesses like I do, then they may require that those businesses be guarantors in the case that you personally default.
I'm going to say, "It depends".
If you acquire income producing assets, do you intend to keep that income? ... or risk losing it and your properties - AND personal assets/possessions - in litigation?
Do you enjoy paying more taxes than you need to?
Remember also, that if an "umbrella policy" has to pay out it means litigation was brought and you lost. Your personal assets are now exposed and at risk.
You'd do better to establish your business entity structure beforehand. Then, you don't have to think later about deeding a property from your own name into an entity's name and possibly triggering Due on Sale.
Your goal should be "Control everything, own nothing". You control the business entity structure, but you personally do not own it. It is owned by a trust you establish with yourself as the beneficiary and build entities from there. Start with an S-Corp and the first LLC. Acquire the first property into the LLC and build from there - it is never owned by you personally. You receive income through the S-Corp using the salary/dividend split: use a 1-to-2 ratio: 1/3 salary, 2/3 dividend. This limits your self-employment tax liability - the dividend portion is taxed as regular income.
A lot of folks will argue against all that based on costs and management effort. Again, it depends on your goals. Do you want to be in the REI business or just do it as a hobby? Do you want your income properties to endanger your personal assets and possessions including your family's home and savings? ... or keep everything separate and out of reach (as much as that's possible)?
Your choice, really.
@David Dachtera Thanks David. I'm serious about getting into REI business. I don't have too much money to risk. I can see the benefit of "Control everything, own nothing". What do you mean by "Start with an S-Corp and the first LLC. Acquire the first property into the LLC and build from there - it is never owned by you personally. You receive income through the S-Corp using the salary/dividend split: use a 1-to-2 ratio: 1/3 salary, 2/3 dividend.". I just need to choose between S-Corp or LLC, right? Or I can combine both?
@Dean I. Hi Dean, I just move from Canada so I don't have credit to get traditional loan in US yet. What do you think if I use HML to buy my first flipping deal (I have some money for the down payment) under LLC or S-Corp? Will they approve me or I still need to personally guarantee the loan under my name?
Generally speaking, most hard money lenders will only lend to a LLC, even if they do use your personal credit and income to guarantee the loan.
For tax purposes, you should elect the LLC as and S-Corp if you plan on flipping a lot of houses or enough houses to generate a decent income. I am not a CPA, so I don't know what that magical number is.
As for getting approved, even though they will be lending to the LLC, you will have to be approved based on your personal income and available finances.
To clarify the LLC vs S-Corp: When most people talk about an S-Corp, they are usually referring to a LLC that has elected to be taxed like an S-Corporation. Basically a LLC is a type of business entity or structure used to separate you (liability) from the business and the the S-Corp election determines how you pay your taxes. There is a lot more to it than that, but for the sake of this conversation, I am keeping it simple.
@Vee Vu love how helpful and informative BP community is! I was very curious and interested in this topic and i appreciate you bringing it up to the community.
I'm leaning towards starting with flips to generate capital then move towards rental property to build passive income portfolio. I'm very new just like yourself, and looking to build experience.
I'm actually preparing for my license at the moment, and hope to take my exam in March or so. I know some agents in LA area that I may be able to connect you with. In the mean time, I'll send you a connection request.
My advice is to do a deal first and then get an LLC.
If you get an LLC and dont do a deal in the first year, which happens a lot, you are going to pay a few buckaroos just for the papers that say you are a business. And I see you live in Commiefornia so its gonna cost over a grand once you factor in your state's lovely franchise tax etc. I'm not a CPA but I believe CA charges a mandatory $800 filing fee for all businesses regardless of income.
@David Dachtera is not incorrect in his strategy. I use it now. But I had two units before I did. I only had $7k when I started in real estate. If i would have paid $1-3k setting up some fancy pants legal structure, I would have never got started.
My honest advice, if you have never done a flip before, is to do a live in flip, or house hack a multi-unit. I was 23 when I bought my first investment. I wouldnt use hard money on your first deal unless you have a parent giving you financial backing, because you will eat up so much cash holding the property. And you won't be moving fast because you are a virgin and the learning curve takes time.
@Vee Vu as you can see there are many different ways to get things done in the real estate world! Building on @Dean I. 's comments. Because of the lending practices that led to the 2008 housing crash, the US created the Fran Dodd act (look it up on wikipedia). Basically, it put regulations on lenders who are lending to consumers. To avoid some of these regulations, most HML will only lend to corporate entities. These can be LLCs, S-Corps, C-Corps, Partnerships (hmmm... what about Trusts?) but they cannot be individuals. Many HML will lend on the value of the property and not look at your personal credit. This is why most don't loan 100% LTV on properties. If you default, they need to be able to recoup their money. Some of the ones I like will actually walk the property with you to ensure that it is a good deal for both you and them.
The cost to file an LLC with the state of California is $70 so it's pretty cheap. Personally, I paid a real-estate savvy lawyer to write my Articles of Origination and other docs, then file them with the state. You should be able to do this for about $750.
Now, for subsequent LLCs, you can take those docs and change the LLC name, then file them yourself with the state for $70.
How many LLCs do you need? That again, is up to you based on the advise of your lawyer and CPA. Most folks I know have an LLC for each of their buy-and-hold properties. The idea is that if you have a property that is being rented and that renter sues you for some reason, they will have difficulty finding what else you own. This brings up a point that you want to avoid using your personal info for these LLCs. Most people will use a "Resident Agent" to help obscure ownership. An RA is a third party (I usually see lawyers) who puts their corporate name on the paperwork that is filed with the state. You own the LLC but it's hard for people to see that. (Heh! This is some of the detail that Dean was wisely avoiding.... it can get complicated quickly).
As far as a website, it depends on what you plan on doing. Where are you planning on finding homes to flip? I'm a wholesaler meaning that I spend a lot of time, effort, and money trying to find properties. When I find them, I notify the flippers that I work with and arrange to sell them the contract to the property. I can tell you, it's a TON of work!
So, if your focus is going to be flipping, it seems that you could do the same types of marketing or you could just hook up with local wholesalers to get going. To find them, poke around BP and go to your local REIA groups and meet folks face to face. You don't need a website for any of this. If you decide you do want to try to find these properties on your own, you will want a website. I'm not affiliated with them, but for websites, I cannot say enough good things about OnCarrot.com.
Don't spend all of your time trying to design logos and cards and branding when you're starting out. Falling into the trap of getting things perfect is the surest way to fail. Go out and do something and slowly tackle those other things as you see the need. One of the best ways to get going in my opinion is to use Fiverr.com or offshore VAs. These are inexpensive ways to get the basics put together while you're trying to get your feet under you.
Best of luck to you!
@Sam White Thanks Sam. You did not get an LLC at first, so what did you do to protect your own asset? What type of OPM do you suggest new investor to get if they don't have credit for a traditional loan?
@Roy Leach Thanks Roy. Do you have any tips to find good wholesalers?
@Sam White you're absolutely right! An LLC is an entity in California (in this case), but you also have to register AS a business. I've got some friends in CA doing web businesses and $800 sounds spot on!
@Vee Vu the term "Your Net Worth is only as big as your Network" really applies! Go to the online forums like BP and make connections but really, the best way is to talk to people in person. REIAs are a great way to do so.
You can also watch for "We Buy Houses" bandit signs. Call 'em up and ask them to put you on their buyer's list. They will be more than happy to do so.
Search Craigslist for "Cash Only", "Fixer Upper" or "Needs TLC" in the real estate for sale section. These are usually flippers or wholesalers. If they're flippers, you can ask if they know of any wholesalers.
This is a weird business.... MOST of the people involved are willing to help out if you ask. There isn't a big "You're my competition so I'm going to try to steer you wrong" attitude.
Action is better than observation.... Just go do SOMETHING and things will start falling in place!
@David Dachtera Thanks David. I'm serious about getting into REI business. I don't have too much money to risk. I can see the benefit of "Control everything, own nothing". What do you mean by "Start with an S-Corp and the first LLC. Acquire the first property into the LLC and build from there - it is never owned by you personally. You receive income through the S-Corp using the salary/dividend split: use a 1-to-2 ratio: 1/3 salary, 2/3 dividend.". I just need to choose between S-Corp or LLC, right? Or I can combine both?
Because you run operating expenses / business through the S-Corp, but you hold properties in LLCs.
LLC is a "pass thru" entity. If you take money directly thru an LLC you have no tax advantage opportunity when it comes to self-employment tax - everything you "pay to yourself" is earned income. When the LLC's income is passed thru to the S-Corp, you can do the salary / dividend split. The first third of your income is treated as earned and the remaining two thirds is regular income (no FICA or other self-employment taxes (SUTA, FUTA, etc.)). You can also set up a retirement plan for yourself in your S-Corp and self-direct it.
When you acquire property first, not only is IT unprotected, it exposes your entire estate to its risks. Plus, in order to get it into your business entity structure, you must have your LLC "buy" it from you to eliminate Due on Sale concerns permanently.
You're still in the consumer "avoid spending" mentality - "How much money will it cost?" - instead of the entrepreneur's "invest for income" mentality - "How much money will it produce / loss will it avoid?".
Avoid the mistake of "pinch pennies now, pay the cost later". You're stepping over $Thousands to pick up pennies.
Make the investment in protection up front - you only need to do it once - for a lifetime / career full of peace of mind.
Also, remember that you should NOT be using your own money / credit. That's playing small and produces small results which don't last and cannot be easily duplicated. Learn how to attract / engage private lenders. You'll have all the funding you need for your deals.
fascinating thread!
I have two additional thoughts... What if you own a few properties, all in different LLC's, but then you establish a personal or family trust. Does this entity offer a further layer of protection or does it just complicate everything? Since some personal information is more or less in the public domain with a an LLC (viewable through the Secretary of State website where established), and trusts are not (between you and your attorney), does each property really need to be in an LLC, if it is in the trust?
There is some GREAT information here. Thanks!!!
Your business attorney can help you structure so that your trust becomes a member of the LLC. You then also need an S-Corp owned by the trust to be another member of the LLC for multi-member protection. The trust gives you the isolation you need.
Remember that you still need to have your entities insured for the best / fullest protection.
Vee- My partner and I have just about completed this "beginnings" journey . Getting ready for your first purchase will depend on the person, their goals, and their experience among umpteen other things. A few big picture things to focus on:
1. Your plan. Understand your ultimate purpose and your long term goals before you do anything. Put these in writing. If you have a business partner make sure you are on the same page. Having these will successfully guide you through your real estate journey. My biz partner and I spent half a day brainstorming about where we will be in 5-10+ years both in real estate and outside of real estate. We have no doubt that being upfront about our end-game will help us execute flawlessly TODAY.
2. Your education. Make it a habit or routine to educate yourself about real estate. Read books, listen to podcasts (BP is a wealth of info), talk to others about real estate. Take this information and organize it in a general reference file/take religious notes, and start picking and choosing what you think you can apply to your real estate hustle. Retain this information in a trusted system (RE: David Allen's Getting Things Done).
3. Your relationships: Start talking to people, call everyone you know with ties to real estate. Put your feelers out there, talk to people and start developing a network/mastermind team of people you can call. Lawyers, agents, lenders, property managers, contractors, etc. Tip: Create a contact list to organize this information.
The LLC, S-corp, website, etc. are just incremental parts of beginning a successful real estate hustle. Once you ID who you are and where you're going, start learning, and start developing relationships the rest will become evident.