All Forum Posts by: William Harvey

@Chris Kendrick Check out the link in my signature. I wrote an article on taxes for flippers. @Randy Rodenhouse is correct, you have to pay the short-term capital gains rate both state and federal, which I believe is no different than the ordinary income bracket. If you do this for a living and flip multiple properties per year, you also have to pay the 15.3% self-employment tax. However, getting a smart tax strategy implemented where you switch your investing entity to be taxed as an S-Corp instead of a normal partnership, and pay yourself a salary is a way to lessen the impact of this SE tax. 

Also, if you're a full time RE investor (per IRS definition) you can use passive losses against earned income. So, if you invest in long-term properties, as well as flip houses, you can legally offset all or most of this income by taking advantage of the depreciation benefits that the IRS gives to RE investors. For instance, if I passively invest in apartments, self-storage, etc. I will usually get a nice negative K-1 for the first year I invested due to taking advantage of bonus depreciation rules. This loss can then be used to offset earned income from house flips if the IRS considers you a full-time RE investor. 

When you hear people saying that house flippers pay TONS of taxes, understand that they are usually comparing to long-term rental property investors and usually are not educated on the subject. Comparing an active business (ie. flipping houses) to a passive activity (long-term rentals) is an apples/oranges comparison. If you started a company buying and reselling widgets (which is how the IRS views flippers), you would never say "man it sucks that my active business isn't taxed like rental properties are taxed." Of course it isn't taxed like rental properties! It is an active business. 

There are absolutely ways to reduce the tax burden when you own a house flipping company, it just requires some planning like any other business. Hope this helps!

@Shaniqua Knight Take a look at the articles in my signature. The most recent one goes into detail about how to estimate rehab costs. Hope it helps!

@Justin Michael Check out the resources in my signature. I wrote an article that goes into detail how to analyze a house flip. Hope it helps!

@Matthew Stallings Check out the link in my signature. I wrote a 6,000+ word article going over exactly how to get started with house flipping. It's from my own experience starting a house flipping business almost 4 years ago. Hope it helps!

@Dan White what do you think?

I agree with @Dan H.. The bottleneck for experienced investors is usually deals. Finding a good deal is the best skill to master if you’re newer. Hard money, contractors, title company, realtors, etc. are all dispensable roles that can easily be replaced by someone else. But someone who can consistently find good deals is irreplaceable (in my opinion).

I think if you do go down this path and try to do this, your best bet is to find a high net worth guy who is not experienced in real estate. They likely will see more value in what you’re providing as opposed to a more seasoned investor who has a deep Rolodex of contractors. Just my two cents. Best of luck!

@John McKee I think the strategy is better at scale than doing 4 flips per year. If you do 40 flips using this strategy, you have “the law of large numbers” on your side. If a few go bad, it’s okay because the good ones outweigh the bad and it’s a net success. 

But if you only do a few properties annually, it’s way riskier. Opendoor (who buys thousands of properties annually….possibly tens of thousands) could do something like this, but my house flipping company (5-10 flips per year) couldn’t. 

Completely agree with @Account Closed. That is great advice to consider. 

One thing to add is that you could do a "hybrid" between doing a full rehab and selling as-is. We've done this before where we clean out a property, fix the blatantly terrible things, and then advertise it as a "handyman/HGTV special" on the MLS. We essentially give investors a blank slate. It seems like everyone and their brother wants to get into house flipping so this would be a chance to capitalize on that demand. And it is lower risk because you won't put more than $5-10k in it as opposed to a full rehab that could be wayyyy higher than that. This is a way to gain experience while not getting in way over your head, having bad contractors, other issues, etc. Just a thought!

@Christopher J Woodland If you check out my signature you can get an article going over estimating rehab costs in-depth. 

If the house is off-market and the seller is someone you are directly dealing with, then it likely wouldn't be courteous to bring contractors prior to going under contract. We never bring contractors until it is under contract because most leads never turn into anything so it wastes the contractors' time, and also it's a bad look (in my opinion) to be planning a renovation and talking about how you're going to tear down walls, change the flooring, etc in front of the seller. This is likely their largest asset with lots of emotion tied to it so I feel it's best to wait until under contract. And even then, we never discuss anything directly in front of the seller. 

I'd just be overly conservative with your first rehab estimate, and above all else, focus on nailing the ARV. It's much easier to recover from a botched rehab estimate than from a botched ARV estimate. Good luck!

@Lisa B. you would simply add up all costs related to flipping the property....purchase price, soft costs, reno costs, sale costs, etc. and then whatever is left over you would split based on your agreement. 

For instance, if you pay $200k for the home, soft costs are $10k, reno costs are $50k and sale costs are $15k, and you sell the house for $400k, then you'd add everything up and subtract from $400k:

$200k - purchase

$10k - soft costs

$50k - reno

$20k - sale costs

$280k - total costs

You'd then subtract this from $400k and you're left with $120k profit to split however you've agreed to it. 

The cost of everything, including what you're paying your construction company would be treated as an expense. 

If you're looking for insight on what the actual profit split should look like, I'd need more info such as who found the deal, different roles you each have in the deal, etc. Hope this helps!