All Forum Posts by: Luke Tetreault

Hello Luke! Congratulations on the deal and additional opportunity. Unfortunately new construction verse resale will always have a decent spread. Since every market is different you could pull a general search for resales that have sold around that are in a certain square footage vs. new construction. The price per square foot should help give you some general guidance on what you would be looking at to build new vs. finding another existing home. Keep in mind it's always more cost effective to build up instead of out...You mentioned a single story duplex. I'm not sure if a similar design would work with a smaller footprint but 2 stories? The huge "pro" to building new vs. existing is that you can typical get top rent, and have little to no capital expenditure. If your planning on holding the properties for long term you can't go wrong vs. buying a house that's 30 years old and holding it for another 20 years etc.  Another perk would be that due to the proximity you would be able to somewhat force appreciation on all three of the potential homes. Overall, building is going to be rather expensive compared to existing homes but they will sell at a premium and with historical low inventory levels you may be surprised to see what you could get if you build and then sell (or rent out long term as a backup strategy). However, overall it's going to be rather cash heavy and at a potential higher risk.  

This is very good advice to flippers to 1) file as S corp status on your LLC and 2) contribute to a retirement plan to offset a lot of your profits from flipping. Pay yourself a "reasonable" salary on a W-2 and use a big chunk of that to contribute to a solo 401(k) (no other LLC employees except a spouse allowed) or a SEP IRA (other W-2 employees allowed) plan.

The allowable contributions are in two parts:

1) employee salary deferral (just like any other 401k) - of your "reasonable" salary, contribute up to $22.5k in 2023 (more if over age 50)
2) employer profit-sharing contribution (the LLC directly contributes lump sum as much as 25% of the of the employee salary)....

The limit of parts 1 + 2 here is max $66,000 in 2023 (more if over age 50)....meaning this amount can go into a properly set up retirement account tax-free instead of being added to your ordinary income and taxed.

I am not a CPA so be sure to consult one accordingly, but from my experience not too many flippers are taking advantage of this great opportunity. You will need to get the right advice to set this up properly and then you will need to maintain good records and file proper tax forms on this structure.

@Ryan Stuckey because my husband and I are the only two W-2 employees we chose the SEP option. As a flipper, others who work for me are always 1099 subs. And yes, once the money flows into our personal account I make additional retirement contributions to our IRAs. @Luke Tetreault we pay ourselves a "reasonable" monthly base salary and toward the end of the year I see how much money is leftover and then make those final paychecks "bonus" - with appropriate taxes withheld and additional monies paid into the SEP. As you know, flip funds can come in chunks rather than a steady income. I always make sure that my personal accounts have enough to carry us for awhile. Sometimes I have to play catch-up and the "monthly" checks get written in batches. 

Flipping is taxed as ordinary income, not lower capital gains tax rates.

I lived in my flips and sold them tax free after two years.  I did the math and determined that I would have to flip extra properties just to cover the taxes compared to flipping one house every two years tax free.

Luke - To me, that is a very successful BRRRR... Your ROI is essentially infinity because you have no cash (after refinance) in the deal. Another option in the future is to not take out a large of loan on the refinance and therefore lower your payment and increase cash flow. For example, if the loan was $10k less how much more would the property cash flow? When rates are lower I typically try to take out as much cash as I can from a BRRRR, but in this environment my bias would be to get all my money back, but not take too much more given the rates are higher. Now, go find your next BRRRR!

What is the denominator in your COC? It should be negative $21k...making the COC metric not a good reflection of this investment's performance. I'm genuinely interested in how you arrived at a 6% COC since you pulled your investment out...

@Luke Tetreault Property is being paid for by your tentants, you got back your initial investment plus 21k on top.....why would the CoC matter at this point? The interest rate is high but thats how it is in these current times but me personally, if the numbers work then I don't even look at the rate. Can always refinance down if the rates dip.

Great job on the purchase and rehab, perfect BRRR, Infinite returns on CoC and IRR, the return on equity is what you need to calculate to help you make the decision on hold vs sell.

(Annual principle pay down + annual cash flow + appreciation) / Equity left in the property

Then you need to ask yourself if you sold what would you do with the money and what kind of return would you get. Also consider future rent increases and refinancing..