All Forum Posts by: Ed Matson

We just sold a flip with a termite inspection that showed no evidence of current infestation and relatively minor damage when viewed from the inside.  Demo revealed an active infestation and damage requiring about $15,000 in additional costs. I learned more about termites than I wanted to know.  Not sure if they travel the same way as powder post beetles, but if they do, be very careful.  

I have not done it and never would.  Custom build and flipping are two different business models.  The only way I think I might consider it is if the buyer made progress payments throughout the build and only paid the final 10% at closing.  Even so.....  I think J Scott makes a lot of sense.  We just sold a flip and the buyer was asking for substantial changes throughout the selling process and even after contract signing.  Nice folks, but we would have lost a ton of money if we were doing a custom build for them.

I agree with the article on a macro and national level. However, all real estate is local, and there is opportunity in every market. Certainly in 2010 it was much easier to get a good deal, but solid deals still exist. The old adage "people always need a place to live" is a truism. I have always believed that timing was more a function of my personal situation than the market. And, with the wide variety of passive investment options, there is a way to make solid real estate investments today. I retired early two years ago and thought I would purchase a mid size MF to replace lost income. With high prices and compressed CAP rates, I didn't find any properties that met my criteria. But I was able to put together a portfolio of shorter term investments that got the job done.

@Aaron Lovett is spot on. Having just sold our first flip confirms his comments.  Absolutely no one commented that we put in upgraded windows.  It was all about the kitchen, open floor plan, beautiful hardwoods, and baths. 

Raymond, In general, yes. Some of this will depend on the type of investment/business. In one of our LLC's we have a larger multifamily that is professionally managed. All of that income is passive and comes to me in a K-1 and I have no salary. In another LLC where I am "active" I take a salary and pay employment taxes on the salary, but I also get a distribution which is not subject to employment taxes.

Raymond, An LLC's purpose is primarily asset protection/risk reduction, not tax advantage. It separates your business activities from your person. Then, when you establish the LLC, you elect what type of entity the new enterprise will be , C Corp, S Corp, partnership, sole proprietorship. This decision influences the taxation. For flipping, my partner and I use an LLC and have elected a Chapter S for tax purposes. We have put very little cash into the LLC. So, its not really LLC vs, S Corp.

Correction:  It is "The Wall Street Journal's Complete Real-Estate Investing Guidebook"

Complete Guide to Real Estate Investing.  Available from Amazon.  This, easy to read book will provide enough basics for your to make RE strategy decisions.

Hi Pat,  I think @Rick Santasiere makes a lot of sense. I am a RE investor with long term buy and hold MF and has just completed his first flip, a very major rehab.  (What an education).  You really do need a good CPA, but to answer your initial question in the most broad terms:

Income from flipping, whether it takes less or more than one year is generally "regular income" and not tax advantaged.  Its sort of like the IRS considers flipping a job, rather than a RE investment.

Income from buy and hold properties can be tax advantaged, as you can take depreciation, a paper expense, and recognize the gain at time of sale as capital gains, not regular income.

1031 exchanges are very complex.  The costs and complexity to administer them are generally applicable to the sale and purchase of long term buy and hold properties. Also, the way I understand them (have gone through one) a 1031 exchange would preclude you from using your flip profit as income, which is generally the point of flipping.

One of the best books that summarizes real estate taxes (and a host of other issues) is The Wall Street Journal's Guide 

We just finished a rehab that had "signs of previous termite activity" (some tubes and a little floor joist damage) but "no current activity" and had previously been treated some years ago.  During demo we found a tremendous amount of additional damage and a very active infestation. Tubes are only evidence of a passageway to the house's wood.  There could be damage anywhere (those little buggers travel!), depending on how long the termites have been active. We did full repairs and a full treatment and passed on the warranty.  We also found and fixed the underlying problem/place where the termites could get in.  I fully agree with those saying get the treatment now.  If you found the tubes, so will the buyer's inspector.  Then you will look like you were trying to pass on a potentially serious problemm to the buyer.