All Forum Posts by: William Harvey

My partner @Dan White focuses on our rehabs and can likely give you some rules of thumb and pointers. The only thing I would advise you on is to overestimate the rehab budget, especially in this market. If you think it'll be X, add 20%. It is rare even after doing many flips to come in at budget, there are always surprises. 

Hi @Rakesh Gowerneni! Good to meet a fellow Northern VA investor. My partner @Dan White can likely help refer someone. Reach out if you ever want to connect!

Quote from @Shiela R.:

@William Harvey and @Brett Tvenge.  I'm not a CPA but I did get some excellent advise when starting out with flipping.  I was told to create an S Corp and run all expenses through it and in QB the flips are divided by address into its own "class" as suggested by @Marty Boardman as well.  The S Corp treats each property as inventory (think retail) and it works out to save me on short term gains. 

I don't touch my own accounting anymore as I'm way better at other things. I would HIGHLY recommend getting a book keeper who is a REI or is an expert in REI. Then, once the book keeper gets everything into QB, send the accountants QB file to your CPA and it's mostly done. It's certainly a good exercise to learn what is what in QB. I've found some errors over the years, but mostly I am so relieved I don't have to think about accounting on the daily;)

 Great insight! I agree, being taxed as an S Corp saves lots of money from not having to pay the full SE tax. I had a bookkeeper for a while but I couldn't get her to wrap her head around how flips are treated different than rentals so I ended up just doing myself. If you know a good bookkeeper that is familiar with accounting for flips, please let me know!

Quote from @Brett Tvenge:

Quote from @William Harvey:

Hello BP community,

For house flippers doing consistent deals, what tool(s) do you use for accounting? I've tried QB (admittedly, didn't try for long) and it didn't seem to be a good fit. Seemed like QB would be good for a rental, but since with flips you have to capitalize every cost and everything is essentially on the balance sheet (versus the P&L) it didn't seem to work properly. Now, I manually export CC and bank statements into CSV files and then separate each transaction where it needs to go. I do at the end of each year and really dread it. It is super tedious and hurts my brain. 

For instance, we bought/sold 5 flips last year so we have 5 "buckets" each transaction could fall in PLUS our general office expenses (Google ads, Propstream, DealSimple, etc.) 

I manually go through every transaction to drop in the right "bucket" to figure out our profit for each deal and then I give to my CPA. Is there an easier way to do this? I've done this for years now and feel there has got to be a better way.

William, I have been wanting to make this same post. We do roughly 15 flips a year and do it exactly the way you do and it get's the accounting and taxes done but there has to be a better way. We make detailed P&L's for each property and then an LLC bucket with all relevant expenses.

My question for the forums is what do you do if you purchased a property in 2022 and ran the whole rehab in 2022 but it doesn't close until lets say January 4th. 

 Glad to hear I'm not alone! As far as your question, you capitalize all expenses and whatever date the property is sold is when the profit or loss is realized. 

For instance, in your example (btw, we have had multiple occasions where this happens in the past few years) if you paid $200,000 for the house, put $40,000 into reno, and then closing costs, commissions, etc. were $15,000 you would simply add all this up and that is your basis in the property. Then, let's say the property sells for $300,000. You'd subtract your basis from the sale price and you are left with a profit of $45,000 that is realized on whatever date the settlement occurs. 

As far as I understand it, when the repairs, updates, holding costs, etc. take place have no bearing on anything. It just all gets added up and is deducted from the sale price when that occurs. In your example, January 4th would be when the profit is realized. 

Would love for a CPA to chime in to confirm this or correct my understanding of how it works. If anyone knows a CPA on here please tag them!

@Marty Boardman very helpful. I am going to give QB another shot as this makes complete sense. Thanks for your input!

Quote from @Marty Boardman:

I use QuickBooks. For my fix and flips I use the class designation (each property is it's own class). On my balance sheet I have to assets: 1. The property and 2. Capital improvements (I call this my WIP, which stands for work in progress). I went into my accountant's office about 10 years ago and set it all up with her. It works great and we've never had any IRS issues. At the end of the tax year I just send her my P&L, balance sheet and settlement statements.

Got it, that makes perfect sense. So for the first item on the balance sheet you put the purchase price and then for the WIP item you add all purchase closing costs, reno/holding expenses, sale closing costs and then finally put the sale price as revenue? 

@Jeff Lines Personally, I would get on the same page with all partners you have in mind, and figure out all aspects of the business....roles, ownership %, capital contributions, etc. Once you have that all hashed out, I would find a templated operating agreement online that you can buy or download free and then tweak it accordingly based on everything you discussed. Maybe after that you could send to an attorney for review. 

My partner and I signed an operating agreement years ago and haven't looked at it once. I trust him, he trusts me, we knew each other well going into this partnership, and any issues we have been able to resolve way before ever looking at the OA. 

Operating agreements and contracts are rarely looked at unless issues arise. So, make sure you are partnering with people you trust and that you have a good understanding of. To me, that is way more important than having a rock solid OA. My partner and I have an OA more as a formality and to use when applying for loans and such for the business. But truth is that we have always operated in good faith with each other and a simple "handshake agreement" would work for us. 

We use hard money for 100% of the purchase and lately have been doing 100% plus reno costs. I agree with @Eliott Elias, cash is king. The more cash on hand, the better, especially in a down market. 

Only caveat is that in order to be comfortable using debt exclusively, you have to be very conservative on ARV's and buy the properties right. This is what mitigates the risk of having an all-debt strategy. We are super conservative on ARV's especially in this market. For instance, we just sold a property for $320k and had the ARV in our analysis at $300k and we felt like that was cutting it close.

Also, in my situation, we aren't dealing with big hard money lenders. We are dealing with local private individuals and don't have to worry about fitting into lenders' "boxes." We've performed well and returned their capital thus far on all deals so they are willing to essentially have a blank check ready for us. Highly recommend anyone using hard money to attempt to go this route. There are lots of people out there with cash looking for a healthy return, just need to find them!

@Russell Brazil got it. So do you actively flip houses and if so, do you personally use QB for that? I'm just trying to see if I should give it another shot or look elsewhere.  

@Katlynn Teague I agree with @Hampton Logan. I think finding a good/trustworthy mentor that knows your market is a smart play. I was nervous about the unknown, but as I've flipped more and more houses I've realized that there are only so many "moving parts" to a house and even if there are surprises (there always are) it shouldn't tank the deal. We've never done a single home inspection on any house we've flipped. Biggest things to focus on are foundation, septic, well, and those major items. Thinks like plumbing, HVAC, roof, water heater, are not going to kill the deal. Also, everything mentioned there minus plumbing is visible so you can see if they are old and likely need replaced. The only way these would kill the deal is if the deal was super thin. Which leads me to my next point...

Make sure you buy the property right. This is far and away the best advice I can give. The cliche saying "you make money when you buy, not when you sell" is so true. For my first flip, we made every mistake in the book in terms of the renovation and when we listed it for sale; we overimproved the property, made some bad decisions that delayed things, overpriced the home when we listed it, and many other things I'm sure I'm missing. But, we still netted almost $50k because we bought the property right and didn't overpay. 

Being ultra-conservative on the ARV is the most important thing. You can get away with messing up every other number, but if you are conservative on the ARV and buy right it'll almost always cure all other errors. My first flip is a textbook example of this. I'd get a good deal analyzer and start looking at deals to get comfortable with things. Hope this helps and best of luck to you!