All Forum Posts by: Noah Condon

@Noah Condon,

I want to add a few thoughts here before you set up an entire REI model on flipping that just happens to be structured in a way that let's you navigate around 1031 exchange rules:

The IRS wants to clearly distinguish between "dealers", such as residential home builders, and long-term investors. The IRS does not allow 1031 exchanges for dealers and developers. LT investors can use 1031s. If you want to do 1031s, your properties must be "held for investment" with the intent for long-term use. 

The regulations do not define "held for investment".  Simply holding a property for 12+ months does not guaranty anything in terms of qualifying for an exchange (although holding any given property for 24+ months and renting for at least 14 days per year does guaranty the IRS won't challenge you under Rev. Proc. 2008-16).   

If you sell property regularly as a primary business, or in the ordinary course of your business, you could be labeled as a dealer/developer and have your property classified as inventory rather than a capital asset. Inventory can't be exchanged via 1031.  It doesn't matter if the average age of your inventory is 12+ months. 

If you're not careful, you can have your entire gain converted into non-exchangeable ordinary income.  It's not common (because audits are rare), but this type of reclassification does happen and is messy when it does. 

That's all to say that you simply need to be careful.  It wouldn't hurt to hold onto some properties for the long-run and treat them as rentals year-after-year.   I would strongly suggest working with a good CPA if you plan to build a business around fixing/flipping. 

Noah,

Congratulations on your first flip. I see no issue with using your own cash to buy properties, I do the same thing quite often. If I have the cash available I see no reason to go to someone else to get it. I would echo that you hire people to work on your projects that have their own businesses not hire employees. Also make sure you work with your insurance advisor to ensure you have the right coverage. I would not own one investment property without it being within a business structure like an LLC. Get with your asset protection attorney and CPA to find out what structure makes the most sense for you and your particular situation.

A long time ago someone asked me what I could hire someone for to tear out old cabinets, carpet, drywall, and other task. They continued to ask what I could hire someone for to paint, install a vanity, install lights and so on. After giving them the cost for each they told me that every time I do one of those things I am working for that amount. This got me thinking....

I, like you it sounds, have the skill set to do many of the repairs myself. This can be a good or a bad thing. If you really enjoy doing those things than so be it keep doing them. If on the other hand you do them to save money then maybe take a closer look at your options. What I determined a long time ago is that I need to focus my attention on what matters the most for my real estate investing business and that is finding and negotiating the deals. Yes I may make less on each project by hiring out the work, but I will do a lot more deals and thus likely make more money overall. 

I do not hire general contractors that oversee my projects. I hire the specific contractors I need to do each thing I need done. I find, for me, I save a lot of money by doing it that way. My, and yours as well, knowledge of how things should be done, what they should cost, and how long they should take is very valuable. I have had a lot of contractors over the years try to blow smoke up my rear thinking I didn't know what needed to be done and how much it was really going to cost. This is where your experience doing the rehab yourself will pay off. Now that you have that knowledge you can use it to hire and oversee those that do the work. Anyway, just something to think about.

At the end of the day you are personally responsible for the success or failure of your business so you need to decide how you want to run it. There are many ways to be successful in real estate. You only need to find one that works for you to be profitable. Good luck. 

Hey @Noah Condon, 

Congrats on finishing your first flip!

When I finished my first flip, I felt so good because I proved the concept, and it made my vision clearer. I understood back then that for me to build and scale the business, I needed to always make decisions based on numbers and not emotions, and that's one big reason I've kept myself in the industry now for 4 years.

I see a lot of people getting too emotional after their first proof of concept, and most of them are not in the business anymore. My advice would be to never bend your numbers because of the fear of missing out.

My husband and I have done just this. I find the houses and do the designing/ decorating and financial stuff, he does the majority of the labor. We have hired contractors for new windows, foundation work, roof work, etc. But most everything interior we have done ourselves. Time is money. Make sure you are accurately calculating your holding costs. Sometimes hiring a contractor to do a project here and there will save you time...which costs you money. Our current strategy is buying homes with cash (great leverage). We have a line of credit that funds the rehab costs. 1, Form an LLC if you have not already. 2,Track all of your expenses accurately. 3,Talk to a CPA about what you need to track and how (Ex: new appliances for a home are taxed differently than flooring or paint, insurance, Mileage, disposables, tools, etc.) We are reinvesting the majority of the profit back into the business so that eventually, we will not need that line of credit. Also, note that a lot of the home improvement box stores have a credit card with 0% for 6 months. Take advantage of that.

Hiring contractors will decrease the profits you would make if you had done those projects you were able to do yourself, but it will also shorten your holding time.  It's like comparing fast nickels to slow dimes...you have to find your happy medium and what works for you.  Best of Luck!

@Noah Condon unfortunately you can't use the 1031 for a pure flipping model.  The properties you are selling and buying in a 1031 must be properties you intent to hold for investment use.  If your intent it primarily to resell (the definition of a fix n flip) then you can't 1031 it.

But that being said, there are a bunch of my clients over the years who have shifted their model slightly so they can get the adrenaline rush of fixing and the tax deferral of 1031.  

It all comes down to the old BRRRR model - Instead of buying, fixing and selling, you buy rehab, rent and then refinance. The refinance frees up the cash to live on or to purchase your next "flip" immediately. Then you start the whole process over with that property while you wait for that first property to season a bit so you can demonstrate an intent to hold. Most folks feel comfortable with any hold of more than a year. So after that time while you're still accelerating your BRRR properties you start to sell the properties you were renting. And you use the 1031 exchanges for these and buy more "flip" candidate properties.

I've actually had clients who built up to 20-30 exchanges a year doing flips and value adds.  But their 1031s had all been owned for a year.  Lenders also loved them because there was growing cash flow from the rentals to provide more lendability.

The formation process will be state specific. However the operating agreement is the most critical component. Will this be a single member LLC or a multi-member LLC? This will determine how the operating agreement should be papered. There are a lot of variable depending on how you intend on operating your business and I would recommend hiring an attorney in the state in which you will be operating your businsess. It's also helpful to loop in your accountant at the same stage.

Your GC license is not related, but smart of you to conduct your business the correct way. Many work in the shaddows without proper licensing and it usually comes back to bite them. Remember to also obtain appropriate types and levels of insurance for the properties as well as your construction business.