Rehab- Business Accounting Questions

Flipper/Rehabber · Kansas City, MO · Member since 2010 · 758 posts · 780 votes

I am currently looking for my first rehab project and had some questions on the accounting process. I am assuming that I will need to track the amount of money used for the repairs, holding costs, realtor fees, etc in order to calculate profit for tax purposes.

What accounting software/practices do you use to track this information?

Should I establish an LLC and a business bank account to better track the transactions of ingoing/outgoing transactions?

FlipperForce

Website View Page

0 Reply

45 views

Most Popular Reply

J ScottPro Member

Moderator

Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes

15y

QuickBooks (or at least Quicken) is a good choice for maintaining the books.

As for business entity, it's always a good idea to protect your assets and minimize taxes -- talk to a CPA for your best choice of entity.

And definitely have a separate bank account for all business transactions. Don't mix personal and business funds -- it makes accounting more difficult and impact the protection you get from having an entity.

Podcast Guest on Show The Truth About Real Estate Investing in 2024 (What Investors NEED to Know)

2 Reply

See this reply in the discussion

28 Replies

Jump to latestLatest

Sort by

J ScottPro Member
Moderator
Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
15y
QuickBooks (or at least Quicken) is a good choice for maintaining the books.

As for business entity, it's always a good idea to protect your assets and minimize taxes -- talk to a CPA for your best choice of entity.

And definitely have a separate bank account for all business transactions. Don't mix personal and business funds -- it makes accounting more difficult and impact the protection you get from having an entity.
Podcast Guest on Show The Truth About Real Estate Investing in 2024 (What Investors NEED to Know)
2 Reply
David RobertsonBusiness Member
OP
Flipper/Rehabber · Kansas City, MO · Member since 2010 · 758 posts · 780 votes
15y
Originally posted by J Scott:
QuickBooks (or at least Quicken) is a good choice for maintaining the books.
As for business entity, it's always a good idea to protect your assets and minimize taxes -- talk to a CPA for your best choice of entity.

And definitely have a separate bank account for all business transactions. Don't mix personal and business funds -- it makes accounting more difficult and impact the protection you get from having an entity.

Thanks,

I will definitely look into Quickbooks or Quicken. I don't have any experience with those programs, but I imagine they are fairly easy to pickup.

I have heard that banks will not lend to LLCs to purchase investment properties, is this true? If so, what purpose does the LLC serve if it does not have the property under its name? Will I have the property under my personal name with the repair transactions being funded by the LLC through the business bank account?

Thanks
FlipperForce
Website View Page
0 Reply
Will BarnardPro Member
Moderator
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
15y
I too use quickbooks for accounting. I also keep a folder and write the property name on it and place all reciepts into this folder. I then imput all the items into quickbooks from this folder. I also now keep a talley on a notepad with all expenses I pay so I know how much I have spent as I go along.
As far as entities, it is common for the appropriatre entity for flips to be an S-corp or an LLC taxed as an S-corp, but this is a question for your tax advisors as every investor's situation is different.
Podcast Guest on Show #130
0 Reply
J ScottPro Member
Moderator
Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
15y
By the way, for a flip, all expenses are considered "cost of goods sold" and gets added to the basis of the property. In other words, you add up all costs, subtract the total from your income (the sale price) and that's what you owe taxes on.

By contrast, with properties you hold, some things are expensed, some things are depreciated, some things are pro-rated, etc. So, detailed records are going to be much more important for buy-and-hold properties.
Podcast Guest on Show The Truth About Real Estate Investing in 2024 (What Investors NEED to Know)
2 Reply
J ScottPro Member
Moderator
Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
15y
Different banks have different policies. The bank I borrow from requires that I hold my properties in my business name. If a bank requires you to hold in your own name, there isn't much use for a business entity.
Podcast Guest on Show The Truth About Real Estate Investing in 2024 (What Investors NEED to Know)
0 Reply
Will BarnardPro Member
Moderator
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
15y
You do not want to hold properties in your personal name. You place all of your personal assets at risk. If a lender (this is typical) will not lend to your entity as it does not have adequate credit history typically, then you get the loan in your name and then after closing, transfer the title into your entity. I have done this many times without any issues.
Podcast Guest on Show #130
1 Reply
David RobertsonBusiness Member
OP
Flipper/Rehabber · Kansas City, MO · Member since 2010 · 758 posts · 780 votes
15y
Originally posted by Will Barnard:
You do not want to hold properties in your personal name. You place all of your personal assets at risk. If a lender (this is typical) will not lend to your entity as it does not have adequate credit history typically, then you get the loan in your name and then after closing, transfer the title into your entity. I have done this many times without any issues.

I'm curious. How do you do this? Does the lender not have any issues with you transferring title? If the lender has no objection to you transferring title then why would they not lend it to your business entity in the first place?
FlipperForce
Website View Page
0 Reply
Will BarnardPro Member
Moderator
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
15y
Great question David. The reason is simple. Upon obtaining the loan, they want YOU to be persoanlly liable for the loan, not some entity. Once you have that personal liability to pay them, transfering title into your entity does not relieve you of that responsibility and as long as they continue to recieve the monthly payments on time, they have no issues.
Podcast Guest on Show #130
0 Reply
David RobertsonBusiness Member
OP
Flipper/Rehabber · Kansas City, MO · Member since 2010 · 758 posts · 780 votes
15y
Originally posted by Will Barnard:
Great question David. The reason is simple. Upon obtaining the loan, they want YOU to be persoanlly liable for the loan, not some entity. Once you have that personal liability to pay them, transfering title into your entity does not relieve you of that responsibility and as long as they continue to recieve the monthly payments on time, they have no issues.

Who makes the payments once the property title is transferred, the business entity or me personally?
FlipperForce
Website View Page
0 Reply
J ScottPro Member
Moderator
Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
15y
Originally posted by Will Barnard:
Great question David. The reason is simple. Upon obtaining the loan, they want YOU to be persoanlly liable for the loan, not some entity. Once you have that personal liability to pay them, transfering title into your entity does not relieve you of that responsibility and as long as they continue to recieve the monthly payments on time, they have no issues.

Problem is...if you stop paying and the bank tries to foreclose, it causes lots of problems, as you no longer own the property...

This is why banks have a provision in their note that says they can call the entire balance due if you transfer title before the loan is fully repaid...

Of course, it's hard for them to find out you transferred title -- and they may not call the loan due anyway -- but there is certainly a risk associated with this...
Podcast Guest on Show The Truth About Real Estate Investing in 2024 (What Investors NEED to Know)
0 Reply
J ScottPro Member
Moderator
Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
15y
Btw, this also makes accounting more complicated, as you purchased the asset, but the business has racked up the expenses and income from it.

The IRS will want to see that the business purchased the property from you at market value to take all deductions in the business.

Podcast Guest on Show The Truth About Real Estate Investing in 2024 (What Investors NEED to Know)
0 Reply
Bryan Hancock
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
15y
That is why many people use trusts with the beneficiary of the trust as your legal entity. I don't like the banks knowing that they can call the loan if it is beneficial to them.
1 Reply
Steve Babiak
Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
15y
I suggest QuickBooks. I also suggest you get yourself a real estate savvy CPA / accountant, to help you set up the QuickBooks from the "template" that they follow. Even if you think QuickBooks isn't hard to learn on your own.

QuickBooks allows you to set account types and classes so that at tax time reports can be produced to identify which amounts fall into what box on tax forms (OK, it's not quite as simple as that, but the accountant will then know which numbers are supposed to go where).

My accountant also set me up with some excel spreadsheets to do certain things. For example, he gave me a spreadsheet to handle amounts from the HUD1; this needs to be adjusted for every property transaction (since the line numbers for lots of fees will vary from one closing to the next). After the HUD1 amounts are entered into this spreadsheet in the correct box, it totals things and allows for easy identification of items that are expensed vs capitalized.
1 Reply
Paul B.
Real Estate Investor · Alpharetta, GA · Member since 2010 · 415 posts · 484 votes
15y
I would advise against getting a loan in your name then transferring the property to a business entity. Sure, the lender may not know, but if they specifically told you, "We will make the loan only to you, not a business entity," and then you thumb your nose at them and transfer the title to the property (and they find out about it), I predict a bumpy, unhappy, and short-lived relationship.

You should be able to put the collateral into a business entity and then either do a personal guaranty for the business borrower, or, for an even more "belt-and-suspenders" approach, be a co-borrower alongside the business.

As for your personal liability risks (non-debt related), you can cover most of those with insurance. I think far too many investors place far too much confidence in the thinking that an "entity" absolves them of personal liability. The deepest pocket in the room always gets sued; on this, you can count. Pay an insurance company to be that "deepest pocket."
1 Reply
Mike G.
Rehabber / Flipper · Simi Valley, CA · Member since 2010 · 597 posts · 259 votes
15y
Of course, some banks won't even offer a loan on a rehab property. But you can use a private investor and then you can purchase the property through your LLC and avoid the issues of having to transfer the title.

I use Quickbooks, too (of course, who doesn't?), but I also use an Excel spreadsheet. The Excel doc lets me track things more immediately and also put in expected expenses to estimate the profit from the property. Maybe you can do that in Quickbooks, too, but I'm not as experienced in QB as I am in Excel.
0 Reply
Nate Worcester
SFR Investor · Dallas, TX · Member since 2009 · 29 posts · 23 votes
15y
Originally posted by Paul Broni:
As for your personal liability risks (non-debt related), you can cover most of those with insurance. I think far too many investors place far too much confidence in the thinking that an "entity" absolves them of personal liability. The deepest pocket in the room always gets sued; on this, you can count. Pay an insurance company to be that "deepest pocket."

I second that. Some states make it very easy for people suing you to 'pierce the corporate veil' and get at your personal assets anyway, regardless of how your company is set up. I know a guy who has a very complex structure for his LLC and he uses all of these "shady" tactics like false liens but I really think that all this does is help him sleep at night. I'd be very curious to see how all of this stands up in court.

Your best defense against a lawsuit is your management style and the choices you make as your business. In the event that you do get sued, I think insurance is much safer than any entity.
0 Reply
David RobertsonBusiness Member
OP
Flipper/Rehabber · Kansas City, MO · Member since 2010 · 758 posts · 780 votes
15y
Thanks for the input.

It sounds as if establishing a business entity maybe unnecessary. I can buy the properties personally and establish a seperate personal banking account used to manage the rehab or investment properties.

I will look in to an insurance policy to provide protection against legal liabilities. What kind of insurance is this?
FlipperForce
Website View Page
0 Reply
J ScottPro Member
Moderator
Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
15y
Originally posted by David Robertson:

I will look in to an insurance policy to provide protection against legal liabilities. What kind of insurance is this?

Liability and/or Umbrella policy...

Podcast Guest on Show The Truth About Real Estate Investing in 2024 (What Investors NEED to Know)
0 Reply
James Vermillion
Lexington, KY · Member since 2009 · 2k+ posts · 1k+ votes
15y
Originally posted by David Robertson:
Thanks for the input.
It sounds as if establishing a business entity maybe unnecessary. I can buy the properties personally and establish a seperate personal banking account used to manage the rehab or investment properties.

I will look in to an insurance policy to provide protection against legal liabilities. What kind of insurance is this?

David,

If investing is something you plan on pursuing over the long haul, I would recommend setting up a business entity, as it will help you in the long run. For now you can personally guarantee the loan, but once you establish a good relationship with the bank and a history of on time payments, they will not continue to require the guarantee.

The reason I say this is I am betting down the road you are going to want a business entity set up, so why not go ahead and to the work and start developing it now?
0 Reply
David RobertsonBusiness Member
OP
Flipper/Rehabber · Kansas City, MO · Member since 2010 · 758 posts · 780 votes
15y
Originally posted by James Vermillion:
Originally posted by David Robertson:
Thanks for the input.
It sounds as if establishing a business entity maybe unnecessary. I can buy the properties personally and establish a seperate personal banking account used to manage the rehab or investment properties.

I will look in to an insurance policy to provide protection against legal liabilities. What kind of insurance is this?

David,

If investing is something you plan on pursuing over the long haul, I would recommend setting up a business entity, as it will help you in the long run. For now you can personally guarantee the loan, but once you establish a good relationship with the bank and a history of on time payments, they will not continue to require the guarantee.

The reason I say this is I am betting down the road you are going to want a business entity set up, so why not go ahead and to the work and start developing it now?

What are the advantageous establishing a business entity instead of purchasing the properties under my name with an insurance policy and seperate bank account?

FlipperForce
Website View Page
0 Reply
James Vermillion
Lexington, KY · Member since 2009 · 2k+ posts · 1k+ votes
15y
David,

At some point you may want to limit your personal liability. Right now, you will not really be able to do that with or without a business entity, because you will likely have to personally guarantee the loan. However, if you start your business entity now and get a few deals under your belt with a local/regional bank, they will likely not require your personal guarantee in the future, thus somewhat limiting your liability.

I do not know what your goals and business plans are, nor am I an attorney or CPA, but if you plan on being in the real estate business long term, you will likely want to perform your business under a business name/entity.
0 Reply
Will BarnardPro Member
Moderator
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
15y
Soryy, I have been gone from this thread for a while and missed quite a number of questions and responses.
I want to clarify a few things here as they are very important.
To be clear, you are not avoiding the "loan made to you personally" nor are you tossing your thumb in their nose. What the bank is saying and meaning is that they can not loan to an entity because your entity has no credit history or ablity to payback the loan. So you personally take out the loan and at that time, YOU must be the one on title as you are the one taking out the loan. Transfering title via quit claim deed (which is no money exchanging hands which avoids any transfer taxes) does not remove your personal liability from the loan you took out. At that point, I contact the bank and have them update the billing information (without explanation) giving them my business mailing name and address. Once this is done, the bills come and are paid with the business check. I have done this for years and NEVER had one lender question it or call the note due via due on sales clause. The reason they don't is two fold. 1. They are getting their timely payments. and 2. They have less legal grounds to do so since they have been accepting my busines checks as payment for the loan and they were "informed" of the change via public records and my mailing and name address update to them at the start.
Originally posted by J Scott:
Problem is...if you stop paying and the bank tries to foreclose, it causes lots of problems, as you no longer own the property...
The key for any investor is not never allow a situation to get foreclosed on. If you buy right and manage yoru properties right, and have adequate reserves, you have no risk of foreclosure. I also had a friend who had two of his properties quit claimed over to his entity and he eventually lossed the homes to foreclosure. No problems existed other than his credit getting trashed.
In regards to insurance, it is true that a proper policy will provide you protection, however, why not have an additional layer with an entity! I believe in covering all my bases and you should too. (Just a suggestion)

Disclaimer: This information is not to be construed as legal or tax advice. It is only the opinion of one investor to another.
Podcast Guest on Show #130
0 Reply
Raymond B.
FL · Member since 2009 · 2k+ posts · 357 votes
15y
Thank you to all of the posters, to this thread.
It is very helpful.

Ray
0 Reply
Paul B.
Real Estate Investor · Alpharetta, GA · Member since 2010 · 415 posts · 484 votes
15y
Will, I appreciate your reply, and I won't argue with your personal experience.

What I will say, as someone who has made a lot of loans to borrowers in the past, is that if I ever found out a personal borrower moved my collateral into a business entity -- in strict defiance of the terms of my deal, which is that HE/SHE is the owner of the property, and HE/SHE is my borrower -- I'd foreclose so fast his head would spin, timely payments or not.

Now, that's just me, and it assumes I'm still at one of the big mega-banks where we didn't have a lot of wiggle room for judgment calls. But if my borrower did that, he wouldn't be a borrower for long. My credit policy officer would have seen to that.

FYI, I have bought property "subject to," and I agree that, for the most part, banks don't care as long as they are getting their payments.
0 Reply
Mike G.
Rehabber / Flipper · Simi Valley, CA · Member since 2010 · 597 posts · 259 votes
15y
Paul, why do banks not have a problem with subject-to but they would in this case? It seems like an entirely new owner on the property is more risky than the same owner transferring the property into his own business. What triggers the additional concern here?
1 Reply

Join the conversationCreate a free account to reply, vote on answers and follow this thread.