All Forum Posts by: Derek Wheeler

I have a potential listing that surprised me, today, when I went to check it out for the first time. It is a nice little home near downtown Fort Worth, Texas. CMA puts it at about $130k. Not a big fish, by any means. So, when I walk inside, half of the house is closed off. It looks pretty decent inside (just small compared to outside) - 3 bed, 1 bath, updated kitchen, yada yada yada. But I was curious what happened to the rest of the home. My potential client says that she renovated it into rental units. Hmmm.

So, she took me to two doors around to the back of the house. Both opened into separate living spaces. Both had 1 bed 1 bath. One had everything you'd imagine in a home (albeit a tiny home) - kitchenette, bathroom, washer/dryer, and a bedroom. It was surprisingly very nice. But the other had only the 1/1, a small space for a washer/dryer, and a little alcove for a fridge but no kitchen. Both of the units are currently occupied and bring the seller about $800/month altogether. 

At first, I thought this was pretty cool. Rental income in a low-value home - could bring potential investors and others looking to have passive income. But here comes the problem: she didn't have the units permitted nor renovated by a certified/licensed professional (though both units are very well done). She has the blue-prints and plans all together for the units, but before she could follow through with permits, she got a divorce from her husband who was her business partner in this ordeal. So, now she has occupied units and wants to sell her home. What problems would this cause in the selling process? I've only ever done SFH listings.

Obviously, FHA loans are out of the question, I would think, due to non-permitted rental units. When listing this property, would we be able to accept offers from conventional loans or would cash buyers be our only option? And how would I price this listing? She doesn't want to put any more money or time into it. So, no permitting the units, no tearing them down and reintegrating them into her home, etc etc, and she wants to sell AS-IS. Sheesh... I went in thinking it was a SFH 3/2/2 and come out with a MFH 5/3/0.

TL;DR - SFH turns out to be non-permitted MFH. What proposed financing options would we be able to accept, and would non-permitted rental units default this home to not being passed by any appraiser, or would the appraiser leave out the rental units in the appraisal?

S-Corps (which I talked about wanting to create in my original post) are taxed like LLCs. They are pass-through entities. 

@Kyle Pierce Awesome info! I didn't know that if you tax an LLC as a S-Corp, you can pay out salaries. I did read that as of around 2010 the IRS decided to start creating "reasonable salaries" for certain jobs within corporations, due to many deciding to not take a salary but taking their pay in distributions from their corporation and not paying payroll taxes on their income. I've been keep money out of each commission to pay our quarterly taxes. I'm holding back a little more than I read up we need, just in case. But the "just in case" part is what is making me think that I will be consulting a CPA and using QuickBooks a lot sooner than expected. Thanks again for the information.

@Account Closed : Thanks for the info, Kyle. I understand the upkeep of a Corp is more rigorous. We aren't wanting to really use it for investment purposes, but to flow our real estate sales commissions through and turn them into W-2's for personal reasons. Once we start investing, we'd probably just structure an LLC for the investment properties and keep our real estate sales commissions separate.

Basically, we need the corp for W-2s. We are working on rebuilding our credit, as we were hit with some major medical expenses from our first baby having health issues very early on in her life, and we had to survive off of our salary income mixed with credit cards. And since we are both real estate agents now, we are considered self-employed and have no proof of income. We are trying to repair our credit and structure our real estate careers into such a form that we can purchase a multi-family home with a FHA 203k for our initial investment properties in about a year or so. But, as you all know, without proof of income and working under 2 years this way, it is extremely tough to get a loan from any bank.

Ken Min Any specific reason why an LLC for investment properties is better over corps? I have specific reasons for needing a W-2 from a corp without working for someone else. We could always structure an LLC for investment properties under the corp can't we?

Originally posted by @Jeff B.:

It's an extremely bad idea to form an entity and pay yourselves w2 wages...

 Don't most people form a corp to give themselves salary pay? We were trained from a few classes @ Keller Williams to form entities to help reduce our taxes. I want to utilize an S-Corp to supply ourselves with a steady income from what our commissions, and the rest of it will be held in a AAA account. Why is paying yourself a w2 wage a bad idea, if you report everything appropriately to the IRS?

We weren't planning on starting our S-Corp for maybe another few months; definitely way after we got in touch with a CPA. Currently, we are only bringing in commissions on real estate sales which are only subject to self-employed and income tax. The investment part is going to come way after we have a handle on our finances. We need Quickbooks and a CPA, right now, for simple self-employment and income taxes. 

Natalie Kolodij Thanks for the response. I was kind of thinking that. I don't feel comfortable with leaving our taxes up to myself entirely. I'd feel way more comfortable hiring a CPA to help out.

My wife and I are realty agents, and we are in our first year. Up until now, we have been employed by companies that provided W-2s. I am doing what I can to keep track of our finances and tax obligations, but we are looking to start an S-Corp due to wanting to pay ourselves salaries to provide easier proof of income for loans and what not. So, while looking over a lot of tax information, I think that I have a gist of it, but I want to cover our backs and have our taxes handled professionally. I was thinking of getting Quickbooks, as it seems relatively cheap and thorough. But would getting a CPA be better for us? Or would utilizing both be a good solution? Has anyone used both and prefer one or the other? Some background info: being our first year into real estate sales, commission isn't what is will be in our second or third year, as we are building our leads-database. So, we don't have a lot extra to spend on financial preparation. If a CPA is expensive, we might only be able to go that route, instead of Quickbooks as well. We are hoping to head away from real estate sales later on, as we save up, and start investing (another reason for the S-Corp). Thanks for any help you can supply us.

Crazy story. How people come up with those ideas is beyond me.

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