I got this idea the other day and im trying to decide if its feasible, or even possible, maybe somebody can help me out!
Basically ive done a few rehabs and the first two went well, and the second two not so much! I dont seem to have much of a problem finding decent deals, but, finding a buyer to buy in a reasonable time, at a reasonable price is proving to be a challenge. I have also been thinking of getting into rentals, and thats when I got this idea. If I form two entites, one that buys and sells houses, and one that holds and rents properties, could I buy a house with “entity A” fix it up, and sell it to “entity B” both of which I own??
I buy a house with entity A inc, for 50k,
spend 10k in renovations and sell it to entity B inc,
for 100k, I would make 40k(before taxes!) with entity A inc, and entity B inc, would hold the property and build equity.
This eliminates the biggest obstacle for me, finding a buyer, and of course
holding costs. It would also allow you to purhcase more homes.
If B pays A $100K, where does that money come from?
In the normal course of business, when A has income from the sale of a rehab-flip, it is taxed as ordinary self-employment income. In your proposal, is the money paid by B your money in the first place? If not, then you are using outside financing, so you are paying taxes on borrowed money.
Ordinarily, borrowed money that must be repaid is not taxable income, so why make it income to A? Since B ends up with a rental, why not have B buy the property in the first place and complete the rehab. Lot less hassle and no tax liability on the “sale” from A to B. If B buys the property for rental use, you also overcome that obstacle of finding a buyer. If you want to get your money back out after the property is rented, then refinance to cash out some of your equity.
Just thinking out loud here. I am not commenting on the feasibility, practicality, or legality of your proposal.
If you are going to get a mortgage for B to buy from A, you’ll still be depending on the appraisal, no? You’ll run into the same issue… but you will pay taxes on borrowed money… Just buy it and refi it… besides, why would you want to take out a mortgage that is 110% or 120% of ARV? Company A might have more cash, but unless you get some considerable appreciation, Company B is going to get hammered (or unless rental rates are very high in the area, in which case, you’d still just want to buy and refi - just more of them.)