All Forum Posts by: William Whitley

Good evening, Barret,

I’m located here in Middle Tennessee.

I would encourage you to consult with an attorney to determine which organizational structure would be the best option for you and your brother. 

An LLC in Tennessee may be a good option, if that is where you plan to begin investing. As far as the organizational structure, it seems that multi-member LLC may be the way to go based on what you have described, but I highly recommend consulting with an attorney who specializes in business formation.

It also may make sense for your brother to have his own LLC for the construction component of the flips, in which case, the LLC for flipping can engage his LLC for performing the renovations. That way you can keep these two functions separate. It's cleaner that way.

In addition to legal counsel, you may also want to explore with a tax advisor what the various tax implications are based on the options you have regarding organizational structure. That way, between legal counsel and tax advisory, you can make an informed decision.

I hope that helps. 

Daniel,

I recommend using a tax advisor, but it doesn’t necessarily need to be a CPA. CPAs are absolutely well qualified to handle any tax situation that arises, but there are good tax professionals out there that are EAs (enrolled agents) who not only can provide tax advisory services, but also prepare your tax returns, and if necessary, represent you before the IRS.

I understand you may not think this is a necessary expense due to your current revenue, but if you have an issue like an audit, it would be better to have an EA or CPA that can represent you before the IRS than going solo. Furthermore, if you are transparent with your tax professional regarding your income and expenses, most likely they will make sure you get the benefit of every allowable deduction, while helping you avoid claiming deductions that IRS does not allow. 

I do not personally provide tax advisory and preparation services. I refer that out to Enrolled Agents. I’m somewhat partial to EAs because my father is a retired EA in his 80s. However, there are situations where you may need a CPA, like when you may need a certified financial statement. You typically need a CPA for that.

You don’t need an EA or CPA until you need an EA or CPA. The problem is you don’t know when you will need one, so it is better to have one before you need them, so that when you need them, you already have them.

I hope that makes sense. 

Good morning, Hailey,

Since you are here in Tennessee, perhaps go ahead and purchase here first. While no one knows how long values are going to increase in Tennessee, it seems like more people are arriving in Tennessee than are leaving, and that increase creates housing demand, whether they are purchasing or leasing. As such, if you can find a property where the numbers make sense for you and your investment objectives, I would encourage you to move forward. Too much delay May cause you to pay more in the future than if you move forward now.

I hope that helps you. 

Good evening, Pedro,

I had a mentor in the mid-1990s who taught me that most of the time you should not DIY. He put it this way: he began with asking the question, how much do you earn per hour (gross not net)? Let’s say $500 per hour gross before any costs/expenses. Okay, now how much per hour are you saving by DIY? Let’s say $150 per hour. So by DIY, theoretically every hour you DIY, you are potentially losing $500 to save $150, which calculates to a negative $350.

Now, that $150 per hour you are paying someone for their services really isn’t costing you $150 per hour. Assuming it’s a deductible expense, let’s say you’re in a 20% average tax bracket. That $150 per hour is effectively costing only $120 per hour, because you are theoretically saving $30 per hour in taxes on that deductible expense

So back to the $500 per hour example: if you are losing $500 per hour in potential revenue to save $120 per hour effectively, you are effectively negative $380 per hour. 

Now the numbers may not necessarily be this precise, but it’s about “time”. If you can focus your time and attention on revenue generating activities by partnering with others to handle necessary tasks that cost you money if you do it yourself, everyone wins. The person you engage earns money, and you earn more money than if you deviate from revenue generating activities to DIY. 

Good evening, Deborah,

Like for most questions, the answer is it depends. One thing I would look at is the cost of debt. Compare the interest rate on the primary residence with the investment property. That isn’t necessarily the deciding factor, but it is something worth analyzing. All other things being equal, I would probably cash out refinance on the investment property; however, I wouldn’t want to take so much out that it leaves little margin between cash flow in and cash flow out. Ideally you would have positive cash flow even with a cash out refinance, and enough left over to continue to build up a cash reserve. The reason why I suggest using the investment property is hopefully you have a tenant paying that mortgage compared to you personally paying the mortgage on your primary residence. Additionally, you may be able to expense out the interest on the investment property, whereas you may not be able to do so on your primary residence. As always, I recommend having a conversation with your tax advisor to discuss the tax implications of one option versus the other.

I hope that helps. 

Quote from @Justin Smith:

I'm looking to find other investors in real estate personnel to connect with and to hopefully build something together!  If you're in the area I'd love to talk shop with you!

Good morning, Justin,

I am no longer in the 757, but I spent the first 44 years working of my life there before relocating to Middle Tennessee about 7 years ago. Feel free to connect with me if you want. I know a lot of people in the Hampton Roads area, having been born and raised there. 

I’m sure you will find plenty of real estate investors and other professionals from your area here on BP.

All the best!

Good morning, Aaron,

Here are a few suggestions:

Equity Partners

Lending Group

Capital Group

Financial Group

I hope that helps.

Quote from @Tiffany Thomas:

My goal is to get enough passive income to surpass my monthly expenses. I am buying a new primary home. I currently own a primary home and a rental property.

I would like to keep my current primary home and use it as a rental as well. The issue is, it will require 30k to 40k to make it rentable and I currently have no money set aside.

My Mortgage for the new home will be $2,800 a month. I net $850 from the rental. My current primary home could potentially provide me with a gross rent of $1000. However, I would have to take put a HELOC in order to have a capital to do the repairs. So with the HELOC payment, and expenses, that would bring my potential net rent on my current primary down to $450.

If I sell the house outright, I wouldn't get much. Could potentially get double if I owner finance it. I would also get a larger cash flow as I would negotiate monthly payments of $800.

I want to acquire more properties ASAP on order to get more cash flow. What would you do to achieve this goal? Should I take out the HELOC and rent iut current property or Owner Finance? Is there another suggestion that you have? I am open to any and all suggestions. Is there a better way to leverage the equity? Should I sell and use the equity for something else? Outright or owner finance? Remember, I have no money but I have excellent credit.

Good morning, Tiffany,

You have a lot going on there. Your default option, which isn’t really an option is to let the house sit there and do nothing. Since that is not an option, you probably need to either sell it as is, most likely to another investor or renovate it to hold as a longer term rental. A third option is to treat it like a flip even though you have owned it a while, and renovate it to resell. Then, whatever profit you make off the resale you can use to begin buying other properties.

Whatever option you choose, you will need to get the renovation costs from somewhere, and if a HELOC is your only option, that’s what you need to do. However, once you renovate the house, if you decide to hold it as a long term rental, you could do a cash out refinance to pay off the HELOC, and then you could have a mortgage on the rental with tenants paying the mortgage, and ideally you still having positive cash flow from the property. 

The other option is to renovate it and go the “flip” path where you resell it for a profit. Since it was a primary residence for a period of time, you will want to talk with a tax advisor to determine what the capital gains may be in that situation, so you know your after tax profit on that. 

So you have several options, but it seems like renovating the property to either hold as a long term rental or to resell, so you have cash to invest in more properties might be your two best options. To sell “as is” to another investor even with owner financing, seems like your third best option, but without knowing what the projected numbers look like in those 3 situations, it would be difficult to say for certain.

I hope this is helpful for you. 

Autocorrect comes to "save the day" or ruin it. It should say "Certain costs are CapEx and certain costs are OpEx", but autocorrect couldn't leave well enough alone. 😁

CapEx and OpEx are not necessarily an approach per se. Certainly costs are CapEx and certain are OpEx. Renovations that are longer term type renovations like roof, HVAC, windows, and other major systems and renovations are typically CapEx, where as routine maintenance and repairs are typically OpEx. CapEx typically adjusts your basis (building book value) for annual depreciation purposes, as well as for calculating your capital gains at resale. You basically expense CapEx over time via annual depreciation.

OpEx gets deducted from income in the year of the expense occurred, which lowers your net income. Any operating expenses, including routine maintenance and repairs goes there. 

How can you find whether your tax preparer put them under CapEx or OpEx? Well CapEx appears on the Balance Sheet, whereas OpEx appears on your Profit and Loss statement. If your tax preparer is not providing you these reports, you would look on your tax return that reports the performance of this property. There should be a line item on that tax form that states your repairs and maintenance expenses. Compare that number with what you spent, and that should indicate how it was treated. 

I hope this information helps.