New Investor looking for guidance in CA (Inland Empire & LA area)

[Nicole G.]

Hello BP Members!

I am a brand new investor and I need a little help. I am in my 20's and I would love to flip. Here's my story:

I purchased a small home (short sale) in 2013 for $55,000 in San Bernardino. Right now there is about $75,000 of equity (the tenant has paid down about 1/2 of the mortgage and the value of homes in the area went up). I graduated from law school and was able to purchase the home because I was working. However, I decided to open my own law practice last year and as you know businesses starting out do not make much of a profit the first couple of years. So I cannot qualify to purchase another home. Buying with cash is my only option.

What do you think would be the best option for purchasing with cash to flip? I was thinking if I get a HELOC for $75,000 and I am able to find similar small properties (short sale, foreclosure...etc), I can put a cash offer on a property, fix it up and sell it. Then I can pay back the HELOC within maybe 90 days and possibly make 10-15k. I would then use the HELOC again + my profit (1031 exchange for tax purposes) and continue the cycle until I am able to have enough cash without using the HELOC for investment purposes.

My questions are:

1) Does this seem like a feasible plan that can work? If not is there a better way to do this?

2) Do you think if I am going to begin flipping and using cash that I should form an LLC?

Thank you so much!! 

[Dave Foster]

@Nicole G., one big issue is that using your model of "flipping" you will not be able to use the 1031 exchange so you need to put ordinary income tax + Self employment etc into your proformas to make sure you can still get the return you want.

1031 exchanges are for property that has been held for "productive use in business trade or investment".  The primary intent has to be to hold the property.  "Flipping" implies that your primary intent when purchasing the property was to resell it.  That does not qualify.

There's no statutory holding period but the pattern and nature of your activity will demonstrate whether your intent was to hold the property or to resell it.