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?
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.
Just to be clear. Conventional loans (Fannie/Freddie) on 1-4 unit properties will only be made to individual names. Commercial/portfolio loans are often made to entities, though generally with personal guarantees these days, unless your business has a substantial track record.
The purpose of an entity is not to shield the mortgaged property from the lender. It's to (attempt to) shield your personal assets from lawsuits when/if something occurs related to your property.
For conventional loans, I've been a bit puzzled how to move title into the LLC without running the risk of triggering due-on-sale. Do banks care, as long as I'm making my payments? If you have long term fixed-rate financing and rates skyrocket, then the bank/bond holders would have a great incentive to have their servicers search out these situations and call these loans. To assume that banks would not exploit this profit opportunity in that environment is a bit naive, as its easy money on the table.
That said, this exchange with attorney Clint Coons was posted recently on his blog, and I'd like to get the opinion of folks on this technique with land trusts.
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"[i]Author: Justin in KC
Comment:
Great Post!! Do you find it necessary when transferring mortgaged property into an LLC to get written permission from the lender (i.e. big banks like Chase, Wells Fargo). I've heard this may or may not trigger a due on sale clause; and that some lenders won’t give permission and require a refinance. Many Thanks!! - Justin"
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"Author: Clint
Comment:
Justin,
You do not have to get permission. If you do call the answer will most likely be "no" unless you re-finance. Skip the call and put the property into a land trust then assign the land trust to your LLC.
I will write something this week or next on land trusts.[i]"
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With a commercial/portfolio loan, if they loaned to you personally, and you transferred the property, my take from conversations with bankers is that you would need to give them a personal guaranty, or make sure they will credit-qualify your entity prior to transfer.
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?
I think the difference is in the credit product and the relationship around it. In most subject-do deals, the mortgage is probably one of your conventional-type mortgage loans that's originated, packaged up, and sold off, etc. Your loan is part of a sea of loans that, frankly, no one is really watching as long as the payments are made (and taxes and insurance are kept up, which they likely are through escrow). There's no real "relationship" here.
In those cases, I am sure you could do subject-to all day long and no one would care, particularly these days where mortgage owners have real problems on their hands, the least of which is that the property has changed hands but the loan is still performing (and if anything, has probably been brought back to life from a near-foreclosure situation).
What I'm talking about is a different kind of loan where I have a personal relationship with my borrower and the loan sits in my portfolio and is still owned by my employer, the bank. Call it a "commercial loan," if you will. And if I told my borrower, "My credit policy dictates that I make the loan to you, personally, and you need to own the property, personally," and all of my paperwork includes the obvious "due on sale or transfer" clause, and then I find out my borrower didn't honor our agreement and the terms under which the loan was made by transferring the property to another entity -- trust me, we're headed to Knuckle Junction. I'd call the loan in a minute and probably extract a pound of flesh for every 30-day extension of the loan in exchange for forbearance. And that customer would be on "the list" of people we just don't do business with...
Remember, one of the "C's" of lending is still character.
You're getting one of the cheapest sources of funding out there (bank debt), but it also requires the most underwriting and documentation. If you decide to just change those things unilaterally post-closing, no bank is going to work with you in a commercial lending relationship.
