Is this a good strategy to get started in fix and flips?

34 Replies

For my first flip i was thinking of getting an llc then opening up an account to get business credit. Then using the business credit to put down on a flip and have the hard money lender cover the rest. Then after the flip i pay the expenses back then pay my business credit card back and 1031 exchange…then rinse and repeat. Is this a good strategy?

it's really a general thing what you are saying here. You basically cannot 1031 a property if you own it less than a year, unless you rented it out and then you need an exception to accept 1031 before 1 year.

After 1 year, regardless of the status, you can do 1031.

I would suggest you learn about credit, lending for flipping, flipping itself...

Lenders don't look at Business credit, they look at your personal credit. if you have low credit, the recommendation is to increase it but not mandatory. You can start investing without even credit at all, you just have to bring more to the table.

After increasing your credit, score, forming LLC, opening a business bank account, start searching for your first flip.

Find something that is not a big rehab, start with a small-medium rehab, earn a little money and then after your experience, go and take a bigger project.

Good Luck

@Tyana Blackledge a 1031 has to be a "like" property and certain time frame to hold. The IRS has this figured out well or I would have used one of my many flips to scale up. Also, bag the LLC idea as its not worth it and also have to generate a separate tax return every year called a K1 on each LLC. My accountant wanted $1200 for one K1. Further, if you are not reckless the whole notion of getting sued goes out the window. LLC is good if you have partners in the deal however. If it were me I would try to buy and hold properties unless you need the cash generated for other purposes. Flip for cash, buy and hold for long term wealth. I have done both

So basically the feedback is that nothing in your plan will work. A bank isn't just going to hand you "business credit" cash that you can use to purchase a property, and you can't 1031 the sale. Take some time to learn the basics.

@Tyana Blackledge

1031 exchange has nothing about business credit.

You need to speak with a CPA if you want to make 1031.

Everything else sounds like a normal flip. Just don’t count on 1031 exchange

@Tyana Blackledge the creativity is there... Your biggest difficulty you can learn from personal experience or other’s is the holding time, and the difficulties of rehabbing anything in a reasonable amount of time, especially in this market. It takes way longer to fix these things than people think. You can do some ninja moves to come up with money probably, but the grindstone of making the house a reality and not getting stuck letting your interest eat your profits up is something that has to be calculated in. Other than the pain and suck, it’s hopefully rewarding once you get though a couple survival flips. Hope that helps your efforts. You can do it!

@Tyana Blackledge

If you are just starting out I would keep it simple if you have good credit and income. Forget about the LLC and all these other gurus tell people starting out. Most hard money lenders look at the property then you and what experience you have and what your capabilities would be with your personal finances. Most will finance the purchase and rehab portion so finding a great deal and figuring out the rehab is key.

I'd suggest finding someone in your area that is flipping successfully and see if you can partner up on a deal or two to learn the flipping business and then use that experience to go on your own. 

Many people think LLC will protect them from all liabilities but that is not really true especially for a single-member LLC. But won't get into that. So best protection when starting out is insurance. Get builders insurance when you are rehabbing so you are protected if something happens to the property. Make sure your trades have insurance and you will be good. Once you have assets then I would suggest forming LLC.

Using business credit takes time so why not get going on the how-to flip side while you build that credit up. Don't pay for those online courses that tell you if you sign up they can get you $100k in business credit. If it was that easy why wouldn't everyone be doing it? Just my two cents especially in this market where everyone is trying to find a way to have you depart with your cash.

Best of Luck 

@Tyana Blackledge as long as all of the numbers work, yes. But are you accounting for tail risk?

Every flip has at least a small chance to have a $20,000+ problem that's uncovered mid-reno. It's not that you need to hedge directly against that risk, but you do need to ask yourself what your ability is to withstand that possible outcome? Do you have the cash to absorb it, or will you end up at the mercy of two different creditors each with onerously high interest rates?

@Dan DiFilippo

Good point! The properties that I’ve looked at are turnkeys or require little-medium cosmetic work then after the work is completed the arv is high and will balance out as far as paying all the money back. I do have two jobs and have money to put towards it if a problem does a occur, but not a lot to put towards it which is why i was trying to use business credit

Hi Tyana,

I don't mean to pile on but I would hate to see you get burned.  Everyone who is saying getting a business line of credit is very difficult, especially for someone just getting into this, are absolutely correct.  Most if not all lenders will want something other than your personal guarantee.  They will usually want collateral or a lot of experience.  So I doubt you will be able to get it.  These high priced courses and so called gurus tell you the concepts but not how to really do it.  Bottom line it takes and experience.  Flipping can generate cash.  But one at a time won't make rich.  If you see a profit of 20k on your first deal you are doing really well.  And if you don't already have a team of contractors and a good accountant and realtor you will quickly find out how expensive carry costs can be.  Really good subs are hard to find and charging a premium.  And if you think you can do it all yourself be prepared for a very long rehab period.  I'm a GC and I don't lift a hammer any more.  I hire guys who do the work all day every day.

As for LLCs, if you are going to flip its probably not necessary. Like someone else said get builders risk insurance, runs about 100/month, and absolutely make sure your subs have workers comp and general liability. And make sure they name you in their policy. A sub can show you a policy when you hire him and drop it a day later. If you aren't named you will never know. If you plan to buy and hold you absolutely need an LLC and insurance. One disgruntled renter can cost you everything yo have.

Bottom line, your approach is the ideal that we all wish would work.  But it takes time to get there.  If you decide to proceed build your team first.  You should have an accountant, a real estate attorney, a business attorney, and a GC you can trust or a group of subs who are licensed and know what they are doing.  Get references and check them out.

Best of luck.  Let us know how you do.

I have established LLC credit, but did have to personally sign for the first loan. LLC's - these flow right to you with zero tax effect, unless you designate it as a "S" corp for taxes, dunno where the idea of a K1 is coming from, never came up with me, and I've had 10+ in operation over the last 25 years. LLC's are "disregarded entities" if it's a single-member LLC, for tax purposes.

The issue on the LLC is if it will be a sole ownership or a partnership. This is from the IRS website.

A Limited Liability Company (LLC) is an entity created by state statute. Depending on elections made by the LLC and the number of members, the IRS will treat an LLC either as a corporation, partnership, or as part of the owner's tax return (a "disregarded entity"). A domestic LLC with at least two members is classified as a partnership for federal income tax purposes unless it files Form 8832 and elects to be treated as a corporation. For income tax purposes, an LLC with only one member is treated as an entity disregarded as separate from its owner, unless it files Form 8832 and affirmatively elects to be treated as a corporation. However, for purposes of employment tax and certain excise taxes, an LLC with only one member is still considered a separate entity.

So basically unless you have a partner or choose to be taxed as an S-corp, Richard is absolutely correct.  The LLC won't file a tax return and you won't get a K-1.  The K-1 is what is issued to each member of a mufti-owner LLC to reflect their portion of the profit or loss and included in their personal income tax return.  You simply show the profit or loss on your taxes in I believe schedule C.  And be careful about looking like you are self employed.  You could get hit with an extra 7-1/2% in taxes.  It all depends on what types of income you have and how it is declared.  Just another reason to get an accountant involved.  Flipping and renting are a lot easier than the taxes.  Get help from an expert.