Family gave us substantial start up money, need help figuring out
Member since 2021 · 4 posts · 1 vote
Family gave us substantial start up money, need help figuring out
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Rental Property Investor · San Francisco, CA · Member since 2021 · 19 posts · 21 votes
4yHello @Christopher Lamp,
Congratulation on getting your startup fund from a family member. That's the best way to start. I admire your courage to pick up a flipping project on your first deal as it is harder than buying a turnkey or a minor rehab property.
1. LLC - unless you need to share the equity or profit with this family member, otherwise I don't think it is necessary to have the LLC for the first deal because you do not have a property or tenants yet IMO.
2. Internet: LLC will be under commercial and not residential loan. Interest rate percentage is different. The lender will look at your rental income under LLC. Since you do not have a property under LLC yet, it might be harder to get a loan under LLC. LLC or commercial loan might be ARM and balloon payment vs. personal will be a fixed rate mortgage
2. Fix & Flip - you might need an experienced partner or a project manager that knows about the construction unless you are going to oversee the project yourself.
3. Gift or Estate taxes - This is minor, but I will suggest to look into gift taxes in your state, so you do not end up paying extra taxes on the gift for 2021. Parents can give up to $15K per year for children. Federal estate tax is $11.58 millions in the 2020 tax year. You might need to check on your state law for more details. Some states are very specific about it.
4. Title: not sure if this family member needs to be on the title. You might want to check the probate law in your state to ensure there is no issue on this in the future during the sell.
5. Credit: if you have a good credit score and have less than 10 properties. Your credit might work better to get a lower interest rate than a business loan.
6. Finance: Hard money loan, private lending, or some local credit unions might be better. Big banks will not fund a distressed / fixer upper property. If you have a good relationship with a local small bank, they might be willing to work with you for a construction loan.
7. Contractors: It's very hard to find a general contractor or sub-contractors due to surge of demand. I will recommend you check to make sure a general contractor is available based on your timeline before starting the project.
8. Realtor: You would also need a good realtor that understand investors/flipper and have lots of local connections. It's harder to find a realtor that wants to deal with foreclosure /short sales/for sales by owners/distressed properties.
Hope those tips help. It is my personal experience, please do check with your legal/CPAs/lenders for advices in your particular state. Best luck on your project!
Candy
12 Replies
- Lender · Texas; Arizona · Member since 2019 · 276 posts · 282 votes4y
It would be your credit, whether you are going thru your LLC or individual. For a flip, you are going to want to use a hard money lender, they fund flips.
- Member since 2021 · 14 posts · 8 votes4y
congrats on the exciting prospect of getting into real estate. There are lots of great resources on this forum, youtube, and podcasts that can help you get started. Some of the "Rookie" podcast episodes are great in telling the story of people starting out and might help you get some confidence in knowing how to overcome challenges that may arise. I'm just starting out too and I've found all of these resources very helpful.
I'm not going to be flipping houses, so I can't help much there. We've decided to focus on getting into short term rentals first.
- Rental Property Investor · San Francisco, CA · Member since 2021 · 19 posts · 21 votes4y
Hello @Christopher Lamp,
Congratulation on getting your startup fund from a family member. That's the best way to start. I admire your courage to pick up a flipping project on your first deal as it is harder than buying a turnkey or a minor rehab property.
1. LLC - unless you need to share the equity or profit with this family member, otherwise I don't think it is necessary to have the LLC for the first deal because you do not have a property or tenants yet IMO.
2. Internet: LLC will be under commercial and not residential loan. Interest rate percentage is different. The lender will look at your rental income under LLC. Since you do not have a property under LLC yet, it might be harder to get a loan under LLC. LLC or commercial loan might be ARM and balloon payment vs. personal will be a fixed rate mortgage
2. Fix & Flip - you might need an experienced partner or a project manager that knows about the construction unless you are going to oversee the project yourself.
3. Gift or Estate taxes - This is minor, but I will suggest to look into gift taxes in your state, so you do not end up paying extra taxes on the gift for 2021. Parents can give up to $15K per year for children. Federal estate tax is $11.58 millions in the 2020 tax year. You might need to check on your state law for more details. Some states are very specific about it.
4. Title: not sure if this family member needs to be on the title. You might want to check the probate law in your state to ensure there is no issue on this in the future during the sell.
5. Credit: if you have a good credit score and have less than 10 properties. Your credit might work better to get a lower interest rate than a business loan.
6. Finance: Hard money loan, private lending, or some local credit unions might be better. Big banks will not fund a distressed / fixer upper property. If you have a good relationship with a local small bank, they might be willing to work with you for a construction loan.
7. Contractors: It's very hard to find a general contractor or sub-contractors due to surge of demand. I will recommend you check to make sure a general contractor is available based on your timeline before starting the project.
8. Realtor: You would also need a good realtor that understand investors/flipper and have lots of local connections. It's harder to find a realtor that wants to deal with foreclosure /short sales/for sales by owners/distressed properties.
Hope those tips help. It is my personal experience, please do check with your legal/CPAs/lenders for advices in your particular state. Best luck on your project!
Candy
- Rental Property Investor · St. Louis, MO · Member since 2014 · 741 posts · 424 votes4y
@Christopher Lamp The LLC is a great. You can now open a bank account and put the money to work. This bank account will allow you a way to keep your investing/ business expenses separate from you personal expenses (my CPA's bugg-a-boo.) Every dollar you spend related to real estate or business building activities will be a business expense. You will pay income tax on any profits your business creates. A bank may lend you money (a mortgage) in your personal name, but the business could manage the property, if you were to hold the property for the rental income.
Welcome aboard.
- 4yBen RhodinBusiness MemberRealtor · Denver, CO · Member since 2020 · 338 posts · 331 votes
Hey @Christopher Lamp! Congratulations on the gift, and way to take the first few steps. Setting up an LLC is never a bad idea. If Flipping is the way you are going, you will need some hard money, or private money lenders in order to acquire and fund these projects. The first step however is honestly solidifying everything on the partnership end, I'm guessing you and your GF are going in on this 50/50? Get things figured out, who does what, what is the game plan, and how are you going to be scaling, and so forth. It will save you in the end, when you have differing opinions or someone thought something was the other person and job and vice versa.
I've got quite a few clients that are flippers, and have solid Hard Money contacts. Of course, as a new flipper, you won't be getting the best rates or terms as you don't have the track record. So I would focus on a small cosmetic flip to begin, just to test everything out before you sink everything into a larger project. You are going to want to get contractors, and other vendors lined up so you can hit the ground running. Another reason to start small, don't want to hire a contractor for a massive job just to find out they suck or are ripping you off.
Then it's onto the fun part. Finding the deals... the Denver market does have tough margins, but I know a lot of flippers that do well and create a business here. It's good to get hooked up with Realtors that have access to pocket listings, off-market properties, and wholesalers. Building a good relationship with a Realtor, in the beginning, will mean you are set up for when the time comes to listing the property, treat them well, and they will treat you well.
If you need recommendations, I have most things set up for Flippers, in terms of lenders, contractors, and deals as well as solid contacts for other bigger flippers that may be willing to help out and partner. Just let me know!
- Real Estate Agent · Denver, CO · Member since 2019 · 45 posts · 44 votes4y
Hi Chris! My wife and I flip homes here in the Denver metro and are starting on our 3rd project this month. We were in your shoes not too long ago, so I totally understand the information overload that often happens early on. I’d be happy to connect and share what we’ve learned, and potentially connect you with some good people in the biz. Feel free to pm me anytime!
- Lender · United States · Member since 2020 · 1k+ posts · 499 votes4y
Investing in real estate is one of those things that pay you instantly, but not a lot. But 6-8 years from now, you'll be very happy with yourself that you did.
- 4yNicholas L.Pro MemberFlipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes
@Christopher Lamp do you own or rent now? Can you house hack? Use as little of that money to get started as you can while you figure everything out.
- Rental Property Investor · Boston, MA · Member since 2019 · 2k+ posts · 1k+ votes4y
@Christopher Lamp make sure your girlfriend becomes your wife before starting a business with her…
- 4yBasit SiddiqiBusiness MemberAccountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
@Christopher Lamp
First determine the purpose for the funds that were given to you.
Was it a loan from a family member to you?
Was it an equity position in a company that you will manage?
Was it a gift where there are no strings attached of you giving it back.
Best of luck
Basit Siddiqi CPA4.979 Reviews - Realtor · Castle Rock, CO · Member since 2021 · 38 posts · 15 votes4y
@Christopher Lamp exciting time for you and your girlfriend. My wife and I have house hacked, flipped, STR'd, MTR'd and LTR'd rentals for 20 years, so I've got some experience in all areas. We have an LLC we run our business through but when we get loans, it's still through our personal credit. W2 income is very helpful in obtaining the loans. Hard money loans are an option but keep in mind, the fees/rates can be significantly more so you don't want to hang out long with a HM loan.
You can always do more with leverage, but I agree with other posters here that when you flip the first few times, you will learn a lot but you likely won't hit your optimal budget, so you may want to start slow. You'll learn a TON. I keep "lesson learned" notes to reference as we go along because it's too much to remember (and sometimes you want to forget some of the painful moments, ha!)
I love to talk real estate and investing anytime. Lots of options and paths forward and a great community hear to connect with. Good luck!
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