Pittsburgh, PA · Member since 2015 · 33 posts · 6 votes
So I am looking to get my start in real estate investing by flipping houses. At first I plan on using a hard money lender to finance my purchase and rehab costs. Would it be a good idea to start an llc to do the deals through? I'm interested in building up some business credit to help with my rehabs every once in a while, and having that be separate from my personal credit is appealing to me. Also if I were to go the llc route and decided to keep one of my flips and rent it out for some time, how difficult would it be to refinance the hard money out of the property and get a new mortgage under my llc to rent out the property?
@Ryan Howard you might want to speak with a CPA and attorney. Some recommend you start a C or S Corp to avoid dealer/trader status with the IRS, especially if you plan on wholesaling some of your properties you get that you do not plan on flipping.
Yes an LLC is much better than your personal name. If you're holding a rental in an LLC it won't be any harder to get refinanced than if you held in your personal name. Most banks will want it seasoned a bit though, so hopefully your hard money loan doesn't have a balloon payment after 1 year. You're more than likely going to have to personally sign for it either way. It's going to come down to you, your assets/liabilities, income, reserves, credit, etc. Not what entity you hold property in.
thank you all for your information, eveything is greatly appreciated. I'm on my phone so I can't tag any of you. But my next question is, when building business credit for an llc or s corp. will the place I get a business card take into account all of the shareholders personal credit or the business itself?
I don't think it matters if you choose an S corp or LLC. Either way, if you flip houses that is ordinary income. The flips are inventory and tax is owed on the gain as they are sold. Flips are NOT held as rentals so you don't get any benefits of depreciation. If you hold them as rental properties as investment, the IRS treats them differently regardless of the entity they are held in. You can hold them in your name, in an LLC, or S Corp...and the IRS treats them all the same. The one BIG difference (for me) is that having a business entity allowed me to set up a retirement plan offered by the company and change the way income is taxed. If you are a sole proprietorship you get stuck with 15% social security/medicare on your net profits. As a business entity such as an S Corp or LLC, you pay part (deducted from your paychecks) and the business pays part (as an operating expense). You can take money from the business as a distribution which might be taxable as income but not as a paycheck therefor avoiding the Social security taxes. This might save you some money. I see lots of new investors worry about how they set up a flipping business. My advise is to talk to a good CPA and attorney and then determine if forming an entity at the beginning is a good idea. Either route you choose, insurance should be of utmost importance.
So I am looking to get my start in real estate investing by flipping houses. At first I plan on using a hard money lender to finance my purchase and rehab costs. Would it be a good idea to start an llc to do the deals through? I'm interested in building up some business credit to help with my rehabs every once in a while, and having that be separate from my personal credit is appealing to me. Also if I were to go the llc route and decided to keep one of my flips and rent it out for some time, how difficult would it be to refinance the hard money out of the property and get a new mortgage under my llc to rent out the property?
Honestly, business credit is not likely to happen for a flipping business. Don't waste your time. Instead, here is what you want to do. Every time you flip a house, set-up a separate checking account for each house at a local credit union. In my market, each flip involves $100,000 to $150,000 from the hard money lenders and private lenders. The credit unions pay attention when they see this type of cash flowing through your accounts and this is how to kindle the relationship for portfolio lending.
If you want to build business credit separate from your personal credit, it as a great idea to start an LLC. You want to separate your business doing from your personal credit. LLC also offers you gives you a layer of protections.
I think a Sub S allows you to claim part of the income as wages and part as dividends. There is some type of advantage anyway for using a Sub S over a regular LLC is my recollection. A good tax accountant could tell you right away what is best for you. I will see if I can tag @Steven Hamilton II he is very sharp on these things.
You can nominate whatever tax either C or S if you're an LLC, if my understanding is correct, S treats your income as a pass by, so whatever is income is left in the company, goes directly to the shareholders, the only difference between corp and llc is if shareholders on llc is 50/50, they could split them 30/70 or whatever, while corps can only get 50/50. You could however give your shareholders salary/w2 then the net income goes to dividends according to your operating manual. Not an accountant/attorney so take it for what it's worth and do your research.
In some posts, business credit is connected to your personal 50-90% when approving a credit line. Search the bar for something like business credit, I think I inquired that here, and had a pretty good advice from someone, haven't tried it still.