First Time

7 Replies

My girlfriend and I are planning on investing in a rehab project. This would be our first time and we have a few questions. We have spent the last year reading and learning as much as we can about the business and we would like to get our feet wet. We don't have much money to use as far as a down payment or for actual rehab. Although we understand this is a large hurdle, we have to start somewhere. Now, for our questions...

1) What are the best financing options, if any, available for rehab projects that do not require a ton of $$ up front? I already own a home, but my girlfriend does not, so she has a better Debt to Income ratio for buying another home... although we are not sure if that matters when buying a home that will not be your primary residence??

2) We have researched starting our own company quite a bit. We researched starting an LLC vs. an S-Corporation or both and the benefits/pitfalls of each entity. Down the road, we hope to be involved in a wide range of real estate investments. Would it be beneficial for us to start the business before we start our first rehab project... to protect our personal liability, or should we wait? If it helps, we live in NC.

3) For the last 3 months we have been looking at different homes in our area and are ready to finally make the step to purchase. We have found one house in particular that we are interested in (if it is still available) that looks to be priced under the market value. It looks like all major rehab issues are ok; ac, water, heating, etc., but of course we will get a full inspetion. What are some tricks of the trade to get the most out of our investment for this home?

Thanks!
Sheppie

Sheppie - if you have answers and a plan for everything that can possible go wrong in your project and you can handle those obstacles -then I say move forward.

However, I will suggest that you start off small in your investment size.

Example: Purchase a home that you can afford to make the monthly payments in the event the home does not sell as quickly as you would like it to.

Also, don't try to get rich over night...ifyour profit is about $20 -30K...consider yourself a success story instead of trying to make $70-100K your first time around.

Things come up in a project that you sometime do not anticipate.

Also, as far as the loan goes...if you plan on flipping the home within a year...don't go for the fix rate - but I recommend an ARM - the rates are lower and buy out of any pre-payment penalities.

Skippie, I'll second everything that monique said, with one additional proviso that you won't like and will ignore at your extreme peril!

Do NOT go into this or any other deal with a girlfriend, fiance or any other party that you're not married to WITHOUT A VERY DETAILED BUY/SELL AGREEMENT to cover EVERY contingency. If you doubt my words on this please search the archives on this and other investment sites!

And trust me on this, THINGS will go wrong. With the deal, with the financing, with the rehab, with ourside contractors and with the sale. REI is fraught with problems, it's not like buying a mutual fund, you are HANDS ON every day.

I've been doing this for almost 30 years, I've experienced every type of problem you can on rehabs. I've been married for 27 years and the BIGGEST AND NASTIEST fights my spouse and I have ever had involved problems on our RE investments.

Word to the wise.

all cash

Originally posted by "Sheppie":
My girlfriend and I are planning on investing in a rehab project. This would be our first time and we have a few questions. We have spent the last year reading and learning as much as we can about the business and we would like to get our feet wet. We don't have much money to use as far as a down payment or for actual rehab. Although we understand this is a large hurdle, we have to start somewhere. Now, for our questions...

1) What are the best financing options, if any, available for rehab projects that do not require a ton of $$ up front? I already own a home, but my girlfriend does not, so she has a better Debt to Income ratio for buying another home... although we are not sure if that matters when buying a home that will not be your primary residence??

2) We have researched starting our own company quite a bit. We researched starting an LLC vs. an S-Corporation or both and the benefits/pitfalls of each entity. Down the road, we hope to be involved in a wide range of real estate investments. Would it be beneficial for us to start the business before we start our first rehab project... to protect our personal liability, or should we wait? If it helps, we live in NC.

3) For the last 3 months we have been looking at different homes in our area and are ready to finally make the step to purchase. We have found one house in particular that we are interested in (if it is still available) that looks to be priced under the market value. It looks like all major rehab issues are ok; ac, water, heating, etc., but of course we will get a full inspetion. What are some tricks of the trade to get the most out of our investment for this home?

Thanks!
Sheppie

Just to chime on additional information that might be helpful. I use to think that financing was the hardest part of the deal but as you will see it is not, it's actually the easiest to obtain. The hardest is finding the deal. there are plenty of options out there that can work in your favor. Its great to start planning the financial aspects of funding the deal from the very beginnings.

With that said i will say this that you must contact a real estate attorney to verified this or do some dual diligence on your part to see that entity is best for buying real estate. I will say this pretty much across the board LLC fit the bill to hold property. S-Corp are very similar to an LLC as they provide pass through income to its share holders or board members if you will. Meaning that the corp. does not pay taxes but the share holders do, so you only get taxed once and not twice as you do with a C-Corp.

You would only need to create on entity and not two. Go to the local library and check out books on LLC creation by Mark Warda or Anthony Mancuso. You can also find them at your local books store or buy them on ebay. Warda and Mancuso have really good books out on LLC and will help you guide you in making a better inform decisions.

When transaction business it’s always best to be incorporate because corporations help shield you from liability and help buffer taxes.

When partnering up with someone its important that you spell everything out on paper, that way all parties know what they are getting into and they are no surprises.

Partnering up with your girlfriend may or may not be the best ideal only time will tell. It will all depend on your relationship and where its headed. If you have any doubts let me save you the trouble right now and tell you don't do it. Even people who have been married have gotten divorce over finances. Throwing this into the mix might put a strain on your relationship and once things sour up you will wish that you never would have gotten involve with that person in business.

Think about it long and hard before you work on this business together. Sign documents stating your expectations and in the event of a break from the company and relationship who the assets will be divided amongst you and so forth, you get the picture. This will protect the both of you.

For the latter question make sure the inspection report present a solid picture of the property and its foundation. When rehabbing you need to do the cosmetics of the property with out breaking the bank. Try to keep your rehabbing costs as low as possible but bring the property to its nature beauty as great as possible.

Anything that is eye appealing and noticeable is what need to be taken care off. Don't over spend and useless upgrade on a property that will not bring a higher dollar amount in the long run such as when you sell. If it will not add to the value of the property don't spend it.

Originally posted by "all cash":

Do NOT go into this or any other deal with a girlfriend, fiance or any other party that you're not married to WITHOUT A VERY DETAILED BUY/SELL AGREEMENT to cover EVERY contingency. If you doubt my words on this please search the archives on this and other investment sites!
all cash

This issue has been in the back of my mind... My boyfriend and I are beginning to start investing. We have been together for 5 great years, and we plan to be together for many more to come. Although I feel confident that we are on the same page and can work any problem out, I still want to protect myself (and him) in case something should happen.

What kind of agreement should we draw up, and where can I find a sample agreement of this kind? Thank you.

Dextera3, to answer your question-
Keeping your personal assets protected from claims of other people can depend on how you hold title to your personal residence (joint tenancy, tenants in common, etc.) However if you're speaking of how you will be protected from each other in a deal...have your real estate attorney explain to you what steps you'll need to take and who will get what incase of a dispute.

And to sheppie, I believe if you're just rehabbing/flipping, you wont even need to form an entity. Since if you flip properties consitently, you can be taxed as if it were your profession, and as if youd have earned that money from a salary. So entities are, in my eyes, much more efficient when you do rentals, so you are protected from tenants claims. Hope that helps you guys

Having a corporation is important because it will help buffer the taxes when it comes times to sell. Not having one will cause you to be taxed at a much higher tax rate and if you like to give more to uncle then why not.

Not having a corporation will bring more liability to you and you will bring the pain home should things head south. Even if you flip houses its important to be able to write off business expenses, all though you can do it on your own, a corporation has more legal rights to write a lot of other things that individuals can't, its that plain and simple.

While a corporation has over 600 plus tax write off as of the summer of 2002, the individual person has maybe at best 6 tax deductions. Which would you rather be? The little corporate giant who is able to write things off to a grander scale or the individual who can write only a few things off?

If you like to read books on incorporating go to your local library there are so many and is great ways to help you get started. Think like a corporation and not as a sole proprietor, sole proprietors always bring the pain home when the finances hit the fan. Corporations allow you to isolate and disconnect should things ever go wrong.

A corporation will help you clone your self, so there will be two of you so to speak. One will be the individual and the other will be your legal you. You are able to clone your self and get twice as much done.

It is writing in the constitution of the United State that you are allowed to be a legal you, in other words; to incorporate.

Those articles in the Charlotte Observer show entire neighborhoods that have many many foreclosures and values dropping as buyers struggle with those subprime loans. I'd read their circumstances and realize how easy it is to lose money making bad decisions about real estate.

One important decision to have in writing between partners in real estate is under what circumstances will that other person sell the property? They need to know under what circumstances will you sell the property. That lack of understanding can really take you down when one is dying to sell and the other is emotionally attached and wants to hold. Figure the worst scenario like rates go sky high....short term money can't be renewed. That type of thing.