How to leverage Interior Design business to flip or hold props?

Question

I’ve been an interior designer for over a decade now, and truly feel that my experience and degree have brought me to this new venture! I love my job, but recently turned my focus to [somehow] investing in either SFH or multi units... have not decided where I’ll start yet. I feel that with my trade discounts, connections, management and construction experience, I have a pretty good advantage to start making things happen! My question is, would I start another sister company (for liability purposes) and utilize my design business discounts and sub-contractor connections to flip houses OR is it more profitable to buy and rent out multi-family and hold onto that for long term? I’m very confident that I can manage a full scale remodel while still running my design business, but I’m not too sure I’d want to sell right away due to loosing $ on capital gains.

Lien Vuong · Answer

Given that you have skills and contacts in the design/contracting space I would utilize that rolodex and move it into flips. You can use say 50% of the profits from you flip and move it into buy and hold properties and the other 50% into the next deal.  That way, you are able to increase your rental unit counts for passive income and diversification of assets while still keeping the large profitable flip business going.

I would consult with a CPA first in terms of how to set up your business for the best tax vehicles and $ movement and start aligning yourself with professionals who are familiar with this investing space in your local market. I am certain you can find an abundance of my peers in California.

Good luck!

Jenny Gremillion · Answer

@Mandi Lambert Anderson Advisors out of Las Vegas are great. Good luck! You would be great at flipping and then buying and holding due to your experience!

Mandi Lambert · Answer

@Jason Turgeon I love this response!!! You just totally boosted my excitement for this next chapter. And that’s exactly what I was thinking - managing both, and rehabbing all as needed. The toughest part of my job is playing marriage counselor or trying to design based on an individuals likes and dislikes. Remove the client, and I can move so fast, designing like a spec home! I recently did a remodel on my first home prior to move in... and it was so great not having to spend so much time on approvals! My full scale remodel took 2 full months and my house did a complete 180!  Design is tough, but learning this whole new world of REI is so intimidating! Not knowing all of the logistics and loop-holes and how-to’s stresses me out... I don’t want to wait but feel that I should get a better grip on ironing out the details and educating myself. I’ve heard a lot of WHY I should get into REI, but not many specifics on how to!

Jason Turgeon · Answer

I thought design was easy until I renovated two houses on my own. Now I have a whole new appreciation for your job. You have a very valuable skill and it will give you a huge leg up when you are getting started. I am currently rehabbing my 3rd property and buying a 4th, and almost every day I wish I had a really amazing designer I could partner with.Look at every flipping show on HGTV. It's all about design. They show 2 minutes of buying the house/before shots, 1-2 minutes of demo, 1 minute of framing, 2 minutes of a manufactured "unforeseen problem" to overcome, and the entire rest of the show is design design design. And half the designers on HGTV are hacks with no formal training who paint the woodwork in old houses and stick fake "old" looking woodwork in new houses. If you've been doing this as long as you say, you can wipe the floor with them.

What I would do in your shoes is find a talented contractor to partner with. Contractors (most of them, anyway), are terrible at design, and at communicating design needs to clients. They want the design to be done as far in advance as possible and to be done by someone else so they can just get to work building and installing stuff. Ideally, the finish materials all show up just in time for them to install them, so all they have to do is order the building supplies.

You are in a unique position to come into a house, figure out a design that will fetch top dollar and get it sold or rented in mere days, consult with the contractor to make sure what you want to do is constructible in your budget, and get on to your next project. They get to do what they do best - build stuff! - and you get to do what you do best - design stuff! - and you both can make a ton of money.

As far as whether to hold onto the houses for rentals or to flip them, I'd say @Lien Vuong is on the right track. Do both. Let your CPA help you with the nitty gritty of tax planning, and focus on building a business.

I would suggest you do a few singles or properties up to 4 units, then once you are comfortable with that (and you have found a contractor or two that you enjoy working with) you can start moving into bigger projects. There is a sizable group of people in this country who want to live in beautiful, modern, professionally-designed spaces and are willing to pay for quality work. They can spot shortcuts and big box knockoffs a mile away. Go make those people happy and take their money.

Will Barnard · Answer

Having a design background definitely gives you a leg up in the rehab game. If you have the bandwidth to accomplish this, I say go for it. Your question of fix and flip or fix and hold is a tough one to answer and only you can do that. I would recommend speaking with your tax and legal pros on your team to identify what is best for you. From a tax standpoint, and to correct what you stated in your first post, any profits from a flip are NOT "capital gains" rather ordinary income tax at your marginal tax rates. Buy and hold on the other hand will provide "capital gains" income upon resale so long as the intent was to buy and hold and you keep it for at least 1 year.

Here in SO Cal, it is very difficult to find deals that allow for cash flow so to hold, you really need to find some superior value add opportunities (the rehab portion) and get a really good deal at purchase to have a shot at cash flow. That said, cash flow is only one of several income streams that may be derived from a buy and hold. Forced appreciation, market appreciation, amortization (income from these can only be accomplished from a cash out refi or from selling to capture that equity), depreciation, etc.

To operate a flipping business, you will need a good team, specifically your rehab/construction crews. Good contractors are not easy to come by and as investors, we need good pricing so it is always a difficult job balancing price with speed and quality.

Mandi Lambert · Answer

@Parker Eberhard Oh I absolutely agree! I would design for budget and longevity. What’s going to get me the best look at the lowest cost, whilst being a long-lasting and durable material.  Also where I should put my money and what areas can I hold off on. I hope you’re seeing lots of benefits from your experience in your friend as well :)

Parker Eberhard · Answer

@Mandi Lambert I am an architect by trade so have asked the same questions. Having a strong design background is obviously a plus on any type of flip / renovation that you will be doing for sure. The one danger that I see in this, however, is wanting to design more than what the market can handle, if that makes sense. I know I would want to come at these properties from the design side of things, but they are ultimately a numbers game, and if the numbers don’t work there won’t be money made.

I think it would be very easy to end up wanting to use a beautiful $10 sq ft tile when the budget really is requiring using a $2 sq ft tile for example.

Mandi Lambert · Answer

@Greg Dickerson Thanks so much Greg! I appreciate your input... not to find an attorney to figure out the details :)

Greg Dickerson · Answer

@Mandi Lambert Make sure to discuss with your accountant and your tax and asset protection attorney to determine the best overall structure for you and your businesses but yes you would want to set up a separate entity for flipping and a separate entity to own each property you plan to hold long term.

Sounds like you have a lot of talent and resources you can leverage into the real estate investing side of the industry. The decision to hold or flip is ultimately up to you. As you said there is a capital gain consequence for flipping but there is also velocity of cash that can be taken advantage of.

If you are holding long-term you can refinance your cash out of the properties and as long as they still cover themselves you get the best of both worlds.

How to leverage Interior Design business to flip or hold props?

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