All Forum Posts by: Will Barnard

Kevin,
Rookie or not, you are correct in your thinking. Having multiple properties in one LLC exposes all of the assets in that LLC to law suites. Grouping the nice homes together in one LLC and the low end units in another, etc. etc. does nothing for liability protection, or accounting/paperwork reductions. It all depends on the "equity" in the property, regardless of the fact that the property may be a high end unit or low end unit, or a residential or commercial property. Separating your assets into multiple LLC's does add cost (Entity formation costs, etc.) and more paperwork, so the decision to do so should be based solely on the "equity" you choose to expose in one LLC. Also, an LLC does not give you "maximum" liability protection, only additional protection. You should always have adequate insurance, operate your business in a responsible manner (do not be negligent), and do not do anything to allow an attorney an easy way to "pierce the corporate veil".

Best advice is to get an experienced RE attorney on your team to discuss this topic and your personal situation. An LLC can add some liability protection, but so does an insurance policy along with an umbrella policy. There is also the option of using land trusts, depending on the state you are investing in.
1. Confer with attorney.
2. Make sure you have adequate insurance or even over-insure.
3. Do not act in a negligent manner while operating your business.

Mike, you have stated many times before that you pay no income tax from your business, thus you report no net income. If that is the case, then how do you get your commercial loans from the bank when, as you just stated above, that the bank WILL look at your personal financial statements? This is just no possible, so which one is it - you either do pay taxes and show sufficient income, or you are not getting these loans you are claiming.

Ben,
You must of missed my last post that stated we did find an insurance company willing to wite pmi loan on NOO property.
I am not misinformed at all. On the contrary, I am in contact with my team of professionals on a daily basis where I get my updates. 4 plex units have not "ALWAYS" been 25% down. I have these units in my portfolio and got 90% financing at one time. I believe you are the misinformed one.
Finally, you need to do a bit more research on Freddie and Fannie. You will not be able to get FHA fianancing on more than 4 properties now.

Your welcome!
No problem.

Mike,
if you read the IRS guidelines, you will note how you become classified as a "dealer" and thus how you are taxed differently. This is assuming you can make sense of the IRS publications as they are very difficult to read as they are poorly written.
Just becuase you were to "flip" a property, does not make you a dealer. You do want to avoid the "dealer" classification. I have flipped properties and have never been classified as a dealer by the IRS. It is not the only thing I do of course and as such I can avoid that classification. It does not matter if your intention is to hold or to flip, either way you are an investor. The "dealer" is simple an IRS clssification which affects how you are taxed.

Tim,
Our conversation was not talking about an investor being classified as a "dealer" If that was the case, then yes, you would be correct. Just the same, we were not talking about the IRS clssification of real estate professional either. If that were the case, then all profits, including cap gains would be hit with self empl. taxes.

Also, an LLC does eliminate self-employemnt tax compared with an S-corp where you must pay yourself a reasonable salary which would include self-employemnt taxes. My statement was not intended to refer to other possibilities such as a "dealer" classification, etc.

I hope this clears the air.

Originally posted by Richard Warren:

If you are flipping properties you have a good chance of being liable for self-employment taxes. For this reason an S-Corp could actually be the preferred entity. Personally, I would NEVER consider a Sole Proprietorship for ANY investment, flip or rental. I’m surprised that your CPA made such a recommendation, the vast majority of them would never do so.

I or my CPA has never heard of the IRS going after anyone for flipping properties as self emplyment income. I do not believe this statement to be true. In addition, as long as the investor has adequate insurance for liability protection, why would it surprise anyone that a CPA would suggest holding a property personally? There is nothing wrong with that strategy, as long as the investor "minds his/her business"

Having an S-corp for flips does not make sense either, unless I am missing something (if so, please point it out). In an S corp, you would be required to pay yourself a reasonable salary and thus have self-employemnt tax, therefore, LLC's make the most sense if you are choosing to use an entity.

Scott,
Lots of questions asked, not enough time for them all, but here I go:
I was not talking about lease options, however that is just another option available to you. I was talking about an owner financed property in which the buyer buys the property on day one (no lease) and you carrry the note.
A balloon payment is when the entire balance of the loan is due on a set date, ie in 2 years or whatever you both agree upon. The down payment is not an option payment, but a down payment and thus deducted from the purchase price. Example: You sell the property for $130,000 require 10% down ($13,000) and carry a note for $117,000 at say 10%. Then in 2 years the balloon becomes due and the buyer must refi with a lender to pay you off. If they do not, you foreclose and either repeat the process or sale in a number of alternative ways.
Lease options are another great startegy in that you receive profit via an option fee on day one, hopefully cash flow during the lease term, and then final payday on option exercise day (assuming they buy, if not do again).
Look into this as it can provide a great way to make $ in RE, particularly these days where loans are hard to come by and many buyers do not have the proper credit scores to qualify for traditional financing.
Good luck to you.

Scott,
Another option for you is to sell and carry the paper. Collect a nice down payment (10% or more) and charge 8-12% interest rate depending on credit and job worthiness. Include a balloon payment in two years. This assumes your loan from your parents can be longer term. This strategy gives you upfront profit of the down payment + positive cash flow from the interest, and a final payday in 2 years. If they default, you keep the down and sell all over again. You can also demand a premium price for the home due to the buyer's advantage of no bank qualifying.
You eliminate most risk as the new buyer is responsible for the property, insurance, taxes, etc. All you are is the bank.