Ok So I am a rehabber. I am tired of buying, fixing and markleting properties to sell, either on MLS or wholesale cash flows, to rental investors. I am tired of paying realtor fees and the hassel of getting these masterpieces sold in todays market.
Now I have a new plan and I would like to know if it can work.
I want to have 2 Real Estate businesses. One that continues to rehab the properties and a second that buys these to rent. Basically a no money down system that is paid by the profits of the rehab. Too hard to re-finance with seasoning and what not.
I am going to use nice round numbers to illustrate my intent.
If My rehab company buys a house at $60,000 and puts $15,000 in (fix, hold, closings…). The Property ARV is $100,000. I buy this house with the second company for $100,000. Making a total profit for the rehab company of $25,000. Now the rehab company would give the rental company the $20,000 for the downpayment on an investor loan. I am able to PG the loan and everything. The rehab company would then hold the additional $5000 for taxes. Can this work?
I know the tax situation is not ideal, but are there any other major flaws to this model that I can not see?
Are there mortgage companies out there that will lend 80% LTV on a SFH for rental? I could have 2 years worth of mortgage payments sitting in the bank as well.
The major flaw that I see is that you are “tired” of rehabbing and flipping so you are going to rehab and landlord?!?!?!?
Everyone has their preferences but to me, you are replacing the easiest part of the job (selling) with a tough, high-hassle (landlording).
You are going to get tired of answering complaints about the furnace on weekends, repairing tenant damage, vacancies, deadbeats, etc.
But that doesn’t mean it won’t work for you. Lots of people enjoy being a landlord. Just don’t kid yourself that it is easy.
I don’t really see the benefit of 2 separate companies. You don’t say how you are financing the $60K purchase and $15K rehab, but I would think you have a better shot at a 75% refi or HELOC than doing this convoluted set-up.
With the tax benefits of being a landlord, I think you can mitigate the taxes pretty well.
THe real answer is to ask your accountant, I guess.
On another forum, a very knowledgeable person posted this comment that might be appropriate
"I think that everyone that plans to be a real estate investor should have two separate entities. The first entity buys and sells for profit inside of a s-corp. The other entity (or entities) hold rentals that are leveraged properly and spit off a sustainable cash flow that increases over time. This portfolio also provides a nice tax shelter, amortizes debt, and MIGHT appreciate in real (after inflation) terms. "
The tax treatment has to do with “dealer” status and passive income, etc.
You will also have to disclose that you are the owner of the property as well as the buyer which is not going to sit well with most lenders. On top of that the capital gains on the profits is going to be a touch pill top swallow and with closing costs on both of the loans you will see your profit go up in smoke.
Capital Gains + Multiple Loan Closing Costs = No Profit
Appreciate the input. I have a friend with a holding company that said he could buy. My hard money loan costs are minimal $1000 per loan. And I would factor in the additional loan costs into my pricing strategy to make it work, probably looking at no more than 2-3k. Right now in a buyers market I have to pay these closing costs anyways. Does anyone know if corporate taxes work the same as personal with thresholds of brackets? ie first 8k is taxed at 10%.