Entity structure for doing wholesale, rehab flips, and rentals

Entity structure for doing wholesale, rehab flips, and rentals

Real Estate Investor · Salisbury, NC · Member since 2010 · 67 posts · 16 votes

I've searched the forums and have not found exactly what I am looking for though I don't think my situation is all that unique.

I have been investing for some time now and have acquired several rental properties.  I have also done some rehabs that I sold, some with owner financing and, I have done some wholesaling (just flipping to other investors properties that I have found through my marketing but did not want to add to my own portfolio at the time).  I plan to continue doing all of the above.

My overarching goal is to build a passive income so that eventually I can quit my corporate job which is as an independent computer consultant. This work is done though my Single member LLC, taxed as as S-corp.

My CPA says to just run my real estate transactions through my Consulting LLC.

However, I also had a local mentor/coach tell me that I needed an entity structure that is much more complex but that I need to separate my rental hold properties in an entity separate from my flipping and wholesaling properties. Basically anything I hold longer than 1 year should go in one entity and anything held for less than 1 year in a different entity. And, that these should be multiple members LLC, not Single member LLC so that therefore I have charging order protection.

They also recommended that I set up an LLC taxed as a C-corp that would provide marketing services to the other entities. Somehow this provides some special tax advantages including being able to deduct medical expenses, rent my home to the corp for business meetings tax free, etc. And that I could avoid the dreaded C-corp double taxation by keeping business profits at or near zero for the year in this entity. This mentor/coach group uses some very aggressive tax strategies.

When I mentioned this approach to my CPA he dismissed it almost immediately without much consideration at all saying it was too complex and expensive to maintain.

Like anybody else I want to pay as little tax as possible but if my CPA does not buy into (or understand) the strategy is it really any good to me?  Preferably I'd like to spend less time each year maintaining entities than it took to write this post.

Any and all informed suggestions and advice are welcomed.

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CPA · Raleigh, NC · Member since 2013 · 1k+ posts · 2k+ votes
11y

@Bob Yon 

I've never heard of the exact strategy you are speaking of but it is intriguing and I will certainly look into it. Can you provide any more detail?

I disagree with your CPA in that you should use your Consulting LLC to hold rentals and also flip houses. I agree with the comments in that you should separate these different businesses into different entities. The sole purpose is to protect one from the other. If a contractor on your flip is seriously injured, you will want the peace of mind that your "buy-and-hold" properties are protected.

That being said, you don't really need to put your buy-and-hold properties into an LLC. It's often cheaper and less of a hassle to just purchase an umbrella insurance policy.

If you really want that added layer of protection, consider opening up a property management LLC instead of putting your buy-and-hold rentals into a LLC. You would then run all property management activities through the LLC like signing leases, contracting repairs, etc. In theory, if a tenant tried to sue you, they would likely only be able to sue the property management LLC and your buy-and-hold properties would be protected.

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  • Residential Real Estate Agent · Knoxville, TN · Member since 2014 · 41 posts · 8 votes
    11y

    There are significant advantages as far as liability and protecting your personal assets when you use the sort of multi-level LLC structure that was suggested. Likely though it is not worth your time or money.

    If you have significant personal assets separate from your LLC and/or do tons of deals (multiple monthly), then is might be worth looking into.

    It varies greatly by state but generally each LLC requires a fee to start and a yearly fee to a registered agent or the state to keep the protection up. Paperwork multiplies, accounting get more complex (more expensive too), multiple bank accounts under different LLCs. It is a little much for a single person to comfortably handle and tax saving would likely be less than the cost of maintaining the structure (I'm no CPA though). Big headache unless your business is big enough to justify hiring someone to deal with all the yearly requirements.

    In accounting the rentals are considers a fixed asset and the flips are considered inventory (there are other ways to do this too) in the same LLC. Your CPA should know and be doing this already. Not sure about the c-corp/s-corp thing but if your CPA is good he should know.

  • Real Estate Investor · Salisbury, NC · Member since 2010 · 67 posts · 16 votes
    11y

    Thanks for the reply Ted.

    I am doing deals monthly, and hope to be doing multiple deals per month very soon.

    I'm leaning toward creating separate entities for each type of activity. I.e. keep my consulting LLC, create one for flips and another for holds. That makes sense. But, all of this about having a Ccorp to manage the others seems a little much.

    Still not sure though whether they should be single member or not, and if not whether my wife should be 95% owner so she claims passive income and avoids some taxes.

    Who knew making money could be so complicated?

  • CPA · Raleigh, NC · Member since 2013 · 1k+ posts · 2k+ votes
    11y

    @Bob Yon 

    I've never heard of the exact strategy you are speaking of but it is intriguing and I will certainly look into it. Can you provide any more detail?

    I disagree with your CPA in that you should use your Consulting LLC to hold rentals and also flip houses. I agree with the comments in that you should separate these different businesses into different entities. The sole purpose is to protect one from the other. If a contractor on your flip is seriously injured, you will want the peace of mind that your "buy-and-hold" properties are protected.

    That being said, you don't really need to put your buy-and-hold properties into an LLC. It's often cheaper and less of a hassle to just purchase an umbrella insurance policy.

    If you really want that added layer of protection, consider opening up a property management LLC instead of putting your buy-and-hold rentals into a LLC. You would then run all property management activities through the LLC like signing leases, contracting repairs, etc. In theory, if a tenant tried to sue you, they would likely only be able to sue the property management LLC and your buy-and-hold properties would be protected.

  • Jason BottPro Member
    Insurance Agent · Nationwide · Member since 2014 · 2k+ posts · 1k+ votes
    11y

    @Bob Yon 

    From an insurance perspective, it would be very difficult to find an insurance company comfortable, or capable, of properly covering an entity involved in both computer consulting and real estate transactions. The E&O & liability exposers are completely different.

    Another vote for the multiple entity structure.

  • Real Estate Investor · Salisbury, NC · Member since 2010 · 67 posts · 16 votes
    11y
    Originally posted by @Brandon Hall:

    @Bob Yon 

    If you really want that added layer of protection, consider opening up a property management LLC instead of putting your buy-and-hold rentals into a LLC. You would then run all property management activities through the LLC like signing leases, contracting repairs, etc. In theory, if a tenant tried to sue you, they would likely only be able to sue the property management LLC and your buy-and-hold properties would be protected.

    I like the idea, but, what entity then would hold title to the rental properties. 

  • SFR Investor · Dallas, TX · Member since 2011 · 604 posts · 243 votes
    11y

    On your buy and hold, get a big umbrella policy and let them stay in your name (unless your willing to get the shorter term/higher interest rate commercial loans.

    When you start talking about mixing several businesses, you need to be talking to you CPA and attorney,,the need a lot more detail than you can put in a couple of paragraphs on a message board.

    Also as great as much of the advice in on this board regarding REI,,,tax and legal advice should come from someone 'in your corner' that your paying, and who has liability if they give you bad advice.

    There are some CPA's and real estate attorneys that give advice on this board, and obviously know what they are doing, but i doubt they would want to make a guess at what is right for any individual's situation without knowing a LOT more information with something this complex....spend the money, listen to the professionals

    andy

  • Charlotte, NC · Member since 2015 · 9 posts · 4 votes
    11y

    Hi Bob, Im a new investor and was looking to try and wholesale some to build my name and network. Just wondering what your method is to finding these deals and how you manage them. Broad question I know but any advice appreciated. Thanks!

  • Member since 2018 · 1 post · 0 votes
    8y

    If you don't know, you don't know. Keep in mind, you can learn from a 2 yr old, you just have to listen. Everyone that blows legalities off... DO NOT take their buisness serious. Guess what.... everyone else that counts.....DOES.

    Research what you do not know. Seasoned investors have reasons for their complexity.

    https://m.facebook.com/notes/real-estate-investing...

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