All Forum Posts by: Michael O'Byrne

3/2/2 with large loft for gameroom or 4th bedroom, 1849 sqft. We bought this property last July as a flip project. It was occupied at the time. The tenants have moved out and we started demo (ripped out carpet and old stove), but due to higher profile projects needing resources, We haven't done anything with it since. I would like to sell this property to funnel cash into our other projects. As a rental it would need new carpet and a stove installed. As a flip, it needs $25 - $30K for: foundation work (local estimate is $6,900), AC condenser (still works, but old) flooring, garage work, bathroom and kitchen updates, and some cosmetics. ARV for this subdivision (Newport) is a solid $140 and rising. The lot next door was recently cleared and the new home construction is almost completed. Price is $78,500, we are somewhat flexible, asking buyer to pay closing costs, est. at $1,500. Property address is 742 Nautilus St., Crosby TX 77532. Send me a PM if you would like more photos or want to make an offer.

@Jeff Wallace 

Sure, no problem.  Hope it all works out great for you.

@Jeff Wallace 

Originally posted by @Jeff W.:

Yes, I would also be throwing away a pile of $ initially in taxes and penalties. What are you doing with the proceeds from the flips? Are you collecting a salary, or reinvesting? Since you are flipping, you can be actively involved, and therefore able to pull a large salary from the Corp. I have been told that the IRS frowns on upon a Corp wich mainly generates passive income paying a high percentage of the profit as a salary... and further, that passive income incurs an additional 20% tax for a corporation... Any thoughts or experience?

I pay myself a salary to cover my living expenses; it basically replaces the income from my old job which I quit in order to flip houses full time.  Any profits beyond my salary will be invested back into the corporation to grow the flipping business.  Since this is all active income, the chances of the IRS disapproving are much less than if I were buying and holding.  I have not heard about an additional 20% tax for passive income.  

@Jeff Wallace ,

There is certainly less headaches to deal with by going with an LLC. In my case, the $ amount saved through the tax and penalty avoidance was significant enough to clearly outweigh the extra hassles of running the C-corp. In fact, I couldn't have gone into real estate investment (flipping) as a full-time career without it.

Good luck!

@Jeff Wallace , 

I opened a BORSA with an accounting firm here in Houston this past May. It's too early to tell how really cumbersome it is with regard to accounting, taxes, annual filing, etc., because I haven't worked through most of it yet in practice, but it seems relatively straightforward. The main thing is to avoid triggering a "distribution" by following all the federal rules for maintaining and managing your new 401K. Still worth it of course, but the main drawback for me is the extra hassles of managing a C-corp vs. a sole proprietorship or LLC, e.g. double taxation on FICA and Medicare, paying workers comp tax, and having to buy general liability insurance for lawsuit protection. I priced $1,000,000 per occurance GL insurance recently, and it will cost me almost $5,000 per year (based on rehabbing 10 houses per year). Keep in mind that under the BORSA arrangement, your new 401K actually owns the C-corp because it holds all the shares of stock, which seems to me more vulnerable to lawsuts than operating as a LLC. So, I am investigating a way to form a LLC under the BORSA C-corp to do business. As I understand it, you can't form a stand-alone LLC and borrow funds from the C-corp to do rehabs or it will count as a distribution/withdrawal of your 401K funds, and you will have to pay the income tax and early withdrawal penalties on the entire 401K. Finding an attorney or CPA to form the LLC under the C-corp is proving to be challenging as most of them aren't familiar with the BORSA set-up and don't want to be held liable if a distribution event is triggered.

I am currently working with a realtor to submit an offer on a short sale.  The realtor said that the bank is only considering one offer at a time, and that my bid won't be considered unless the offers submitted before mine are rejected.  Is this normally how it works with short sale bids?  The listing ads for the property on Zillow, etc., states that all bids need to be submitted by June 23.  That seems contrary to what the agent is telling me, but this is my first attempt at a short sale and I don't know how the asset managers process or evaluate these bids. 

Thanks for any guidance - 

I am in the process of completing a robs now. I am working with a reputable CPA firm in Houston that does these routinely. Once the money is rolled over from my old employer plan into the new c-corp's plan, I can issue shares to the 401K from the c-corp in exchange for the funds in the 401K and use it to run the c-corp, including salaries for employees (my wife and I) and real estate investments. We have to conduct a share valuation every year, submit a 5500 to the IRS, put up with the payroll taxation, etc, but definitely worth not paying distribution taxes and early withdrawal penalties. It requires some diligent management, but everything is above board as long as you follow the guidelines and are actually running a viable business. Our CPA claims to have never failed an audit, and guarantees this as part of our contract. I realize there are risks associated with this due to some gray areas in the tax code, but we feel confident in the process and outcome.

@Jon Holdman Thanks, this is pretty much what I expected. I'll revisit options in a year or so and talk to some potential lenders in the meantime to get a feel for what they expect.

We are just starting to flip houses, and have decided to go at it full time which means I retired from my old day job. We have some cash on hand to start with, enough for 3-4 all cash deals of typical size (for Houston rehabs), or 8 - 10 deals if we used hard money via wholesalers. We have run some numbers, and the hard money route gives us opportunity to do more deals (concurrent) and the returns look better than all cash based on sheer volume, despite the extra financing costs and lower profit/deal. We are risk-takers, so we are looking to get all of the money out there working for us, along with fast turnover. That said, finding our own deals and using cheaper money is a big short term objective to make our deals more profitable, which means finding portfolio lenders and private money.

My question is, with no current income (no real DTI ratio) can I expect to secure financing without showing any revenue from the new business as yet? I assume that credibility is a big issue, I can't point to any investing successes yet as we are just getting started. If so, I would love to hear some examples and suggestions from those who have been down this road. Thanks!

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@J Scott , @Bill Gulley , thanks much for your responses. A c-corp setup is necessary for a robs transaction to avoid 401K distribution taxes and the early withdrawal penalty. This is a big deal as it provides me significantly greater financial leverage to do some deals and get our business off the ground.

Originally posted by @Steven Hamilton II :

No it is not the end of the world. A "dealer" depends upon the transaction. If you purchase a rental, and keep it for years as a rental it is not inventory. If you try to flip a property and end up holding it, it is still inventory. It strongly depends upon your approach.

We will be primarily flipping houses, and don't plan to invest in buy and hold until we at least double our current cash on hand. That said, it sounds like cash method is simplest and better suited in our case, except for inventory accrual - is this considered a hybrid accounting method, and will it likely survive an audit?

I also need to do some research on the c-corp double taxation referred to by @Bill Gulley . I was told the corp will need to match the FICA tax paid by employees (my wife and I), but clueless beyond that. As you can tell, I haven't hired or consulted with a CPA yet, definitely need to do that very soon. We just formed this business 10 days ago, we haven't bought our first property yet, but expect to in June.

Thanks again, I highly appreciate the feedback from everyone - what a great resource!