Buying a property through an S-corp

[Yoann Mamy Randriamihaja]

Hi All,

I was wondering if you could help me analyzing this deal.

It is a multi-family (4 units) that is owned by an S-corp through a land contract.

We would be buying the S-corp for ~$20k and would continue the payment of the existing 30 years mortgage.

Note that the $20k are significantly less than what it would cost to go through traditional financing with 20% down payment and closing costs (definitely a plus).

I ran the numbers using conservatives rents, 12% vacancies, 15% maintenance/repair and 10% for property management.

If we do the PM ourselves, I find $100 cash flow per door and $50 if we outsource the PM.

One concern is the property price which is on the high side for the area (around $10k to $15k, accounting for the cost of repairs needed).

Which brings me to the questions I have for you:

1) Can it make sense to "slightly" over pay for a property if it cash flows and if the deal structures allows you getting in much more easily?

2) Do you have any advice on what due diligence are needed when buying an S-corp?

I greatly appreciate the help of the BP community! This would be our second deal with a completely new deal structure so I'd rather do my home works.

Thanks,

Yoann

[Linda Weygant]

Owning rental property in an S-Corp, where that is all or nearly all of the income, can invalidate the S election.  S-Corp's are intended for active self employment income.  Having a significant amount of passive income can trigger the IRS to revoke the S election, making your corporation a regular C Corp, subject to double taxation and extra capitalization requirements.

Unless you have a way of pulling in a significant amount of non-passive income into this S-Corp, I'd walk away from this deal.  Or buy the property outright and leave the S-Corp alone.

Additionally, as @Wayne Brooks said - it is difficult to know if an established S-Corp has some large liability that hasn't been disclosed - a large balance on a corporate credit card, a pending lawsuit or unpaid payroll taxes (yes, an S Corp MUST do payroll) can ruin your whole day.