What are your startup and operating costs?

Question

Hi everyone,

First, thank you to everyone for making this forum such a useful resource. This is my first post, but I was using BP for a while and learned a lot from all of you.

About myself. I am starting my business of rehabbing and selling distressed SF homes in North Metro Atlanta. I spent years as an investment analyst for a commercial real estate investment and development company overseas.  I truly enjoyed working in real estate, and this passion is what brought me here today. I am currently not employed and plan to fully commit to real estate investing. My husband has a full-time job and is very supportive.

I will be a cash buyer (some savings + HELOC) and plan to rehab 1-3 properties in 2016.

We are currently trying to estimate our budget for overhead costs, and this is what prompted me to write here.  I was wondering if you could help with understanding all expenses involved in setting up and operating this business in the first year? I searched BP for this information but stopped after 30 min of unsuccessful digging. Here is what I have so far:

1. Tax accountant: $1,600 (annual retainer, or pay $250/hr - what would you recommend?)

2. Setting up LLC: $400

3. QuickBooks: $300 (I will do bookkeeping myself in 1st year)

4. Obtaining RE license: $574 (course $289, exam $117, license fee $170) + $3,600 "desk fee" to employing broker (I might wait with getting my RE license until Year 2)

5. Local REIA Membership: $100 (undecided about this one)

6. BP Pro Account: $290 (undecided about this one)

7. General Contractor's estimates for properties I would end up NOT buying: $50-100 per quote. I am referring here to situations when quotes on rehab will make me realize that this is not a good deal, yet I still have to pay the GC for his time.

8. Home inspections for properties I will end up NOT buying: $450 each.

9. Networking costs  - coffee/lunches/etc for people I would like to meet: $?

10. Fuel: $?

11. Attorneys, title companies, anyone else - is there any cost associated with these people in regard to properties that I investigate but don't buy? Also, if I plan to work with a realtor at least in the first year, would that eliminate the need for attorneys?

Anything else I am missing? As to marketing, books, office supplies -  I can make assumptions on those.

All in all, I can see that it can easily get to ~$10K in out-of-pocket overhead costs in the first year. Does this sound reasonable? I will appreciate any feedback. Many thanks in advance!

Ludmila

Jeffrey S. Breglio · Answer

1. Yes. All you need is year end. Personal tax return. Possible entity tax return. Probably between $250 - $500 a return.

2. You need an entity. Other commenter is from CA, very different there because of a high yearly renewal. that's the exception to the rule. But even my clients in CA have an entity. $400 would actually be pretty cheap. You need a good one if it's for asset protection, and one done by an attorney who understands real estate investing, not just someone who sets up business entities, and not an online source. There are different entities for different reasons and if you mix them up, you can hurt yourself. You need solid advice in the beginning and it will save you in the end. Probably looking at $500 - $1000. It's worth it and is one time investment.

3.Quickbooks is great. Or bookkeepers are $15-30 an hour in most places.

4. RE license is up to you. But there are yearly "association"  and "board" fees as well. Here in Utah, it's about $1000 a year to maintain the license. It can save you a TON of money, however, if you're buying and selling your own properties! Most investors do get it at some point, or establish a strong relationship with an agent. I wouldn't say it necessarily adds extra liability, but definitely some extra hoops, and a little more scrutiny from the state division of RE. Working with a good broker is important and he/she will carry an insurance on you.

5. Definitely do every REIA you can. Cheap education and networking.

The rest I think you can answer. You're smart about getting a handle on costs. I'm actually presenting to a REIA this week on the "hidden" costs of RE investing. Here's just an outline:

Legal (entities, transactional, consultation)

Accounting (tax prep, possibly payroll)

City business licenses

Taxes (SE tax, Cap Gains tax)

Closing costs/title insurance

Homeowners insurance

Bookkeeping

Property taxes

Agent/Broker fees

Property management fees

Hard money fees

The opportunity cost of money and time.

That's just a short list. But.... Don't let it scare you. Not all this comes at once!! Start slow, start wisely, and grow from there. You're on the right track wanting to get as much info as you can upfront! You'll do great.

Jeff

Ludmila M. · Answer

Hi @Steuart Wright, I am glad this was helpful! I also felt this topic was a bit overlooked here.

In addition to what you see in this thread, I'd recommend adding a fat safety cushion to your budget for all unplanned expenses. Since I posted my question, I already ran into some costs that were not on my list. For example, subscription to  certain databases that I didn't even know existed. I am sure there are more surprises ahead, but thankfully my "Miscellaneous" category is generous :).

Steuart Wright · Answer

@Ludmila M. Thanks for posting this question! I've been searching for this information with no luck as well. This gives me a much better picture of what the actual costs will be and how to budget each $1 that comes into the business! Hopefully @Brandon Turner will write a post about this soon...

Ludmila M. · Answer

Thanks, NA Beard, for the comments. S-Corp and LLC is what "my" tax accountant recommended for me as well.

Interesting note on setting up an out-of-state PM company. While I am years away from anything like this (first need to learn to be efficient in flipping, then buying and holding), I will keep in mind this information. Or maybe things will change in a few years? :)

Ludmila M. · Answer

Thank you, NA Beard, for taking time to read and respond to my lengthy post.

I will do some homework on COE, as this is a new term for me.

I feel I need to give some explanation regarding the $1,600 budget for a tax accountant. This is a quote from a guy who was highly endorsed here on BP, and @J Scott is one of his long-time clients.  He specializes exclusively on real estate investments, and charges either an hourly fee or a retainer. He also provides services of setting up LLCs and registering them with the required authorities. With a retainer he offers $100 off each LLC set-up. Otherwise, his full fee would be $500 for the main LLC, and $400 for each "daughter" LLC (hence $400/$300 with a retainer).

Being a beginner, I am not sure how much of his help I would need outside of filing tax returns, so I am open to recommendations. Your comments indicate that a retainer would be unnecessary, I'm happy to hear this.

In terms of setting up an LLC, I'd need to better understand what an attorney would do that this guy won't.  It wold be convenient if this is done by the accountant.

Jeffery, a separate Thank you for listing all the hidden costs that you plan to discuss at your REIA. Any chance you could share that presentation? Also thanks for a motivational note at the end, I appreciate it!

Ludmila

Jeffrey S. Breglio · Answer

Ludmila:

You're welcome!  I hope you find a competent, trust-worthy attorney and are able to build a lasting business relationship!

Much Success to you,

Jeff

Ludmila M. · Answer

Thank you, @Jeffrey  S. Breglio.

Identifying and meeting with an attorney is on my to-do list, however, I was going to let the tax guy (he is not a CPA) set up my LLC. I  thought that he wouldn't risk his reputation by offering something he wasn't qualified to do.  But I see your point and now altering my approach.  I will speak to an attorney as soon as I locate a good one in my area. I just asked BP for help with this.

Thanks again for your input!

Ludmila

Jeffrey S. Breglio · Answer

An attorney can provide legal advice and consultation on the best legal structure for you as well as on other legal matters relating to your entity. A CPA cannot without practicing law without a license. (Some CPAs are also attorneys). This is a pet peeve of mine and I do go after accountants who do this. And 9/10 they set up THE WRONG ENTITY OR STRUCTURE it incorrectly for real estate investors! They have generic corporate docs. A good real estate investment attorney will have very specific doc for their clients. I always work WITH my clients' accountants and refer them to their own CPAs for specific accounting advice. If the CPA has an attorney that is providing their forms, work directly with the attorney. The CPAs retainer will not cover legal advice. It's for accounting consult, which you probably won't need, or can just pay for an hour's consult once a year as needed. Find out what's included and what's not.

I just used the outline I gave you and talked about it at the REIA. I don't think they recorded the presentation.

Jeff

Jeff B. · Answer

I went the S-Corp and LLC route, but being unable to acquire the portfolio I intended, I found that the NV setup and CA Foreign Filing just added to my efforts and cost, as I held only one property.

Another note:  I attempted to setup a Property Mgmt company out of state  and Calif only to discover that the DRE usually requires a BROKER as an executive, and the kicker is - - "trusted agent to hold deposits".  This kills out of state PM and investments for me.  As an owner, there is no such requirement, so I can move deposits to a separate account and all is well.  In my book, this is just the old-boy's club protecting their turf, but if you want to play the game, first learn the rules :)

Jeff B. · Answer

• 1. Tax accountant: $1,600 (annual retainer, or pay $250/hr - what would you recommend?)

Pass, year-end filing is all you need

• 2. Setting up LLC: $400

pass: did that and gave it up due to year over year file requirements

3. QuickBooks: $300 (I will do bookkeeping myself in 1st year)

Yep, works well, use the Setup wizard for Real Estate (maybe Rentals now available)

• 4. Obtaining  RE license: $574 (course $289, exam $117, license fee $170) + $3,600  "desk fee" to employing broker (I might wait with getting my RE license  until Year 2)

pass: over kill and actually adds extra liability and access to MLS in my book doesn't cover it.

• 5. Local REIA Membership: $100 (undecided about this one)

• 6. BP Pro Account: $290 (undecided about this one)

Depends on you

• 7.  General Contractor's estimates for properties I would end up NOT  buying: $50-100 per quote. I am referring here to situations when quotes  on rehab will make me realize that this is not a good deal, yet I still  have to pay the GC for his time.

GOOD for you, be professional and don't expect freebes.  When you need their help, they will be there for you.

8. Home inspections for properties I will end up NOT buying: $450 each.

Defer to COE and that eliminates the fodder.

• 9. Networking costs  - coffee/lunches/etc for people I would like to meet: $?

hmm:  buy-n-hold can minimize this as you'll be evaluating NOI and cash-on-cash.  Wholesalers and flippers will do more of this

• 10. Fuel: $?

Don't drive - - let your fingers do the walking/driving.  Running the numbers doesn't depend upon location, condition, curb appeal and if they  don't pencil  out, look how much effort you saved :)

• 11. Attorneys,  title companies, anyone else - is there any cost associated with these  people in regard to properties that I investigate but don't buy? Also,  if I plan to work with a realtor at least in the first year, would that  eliminate the need for attorneys?

Again, COE coverers these

What are your startup and operating costs?

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