Total newbie here. I’m thinking of getting into real estate investing, rehabbing in particular, with some rentals eventually. I see the “I BUY HOUSES!” ads in the paper, and they usually say that they can offer cash within 48 hours or so. I just want to make sure I’m understanding this correctly. Do these people have cash in their bank accounts to pay with, or do they have the ability to get very quick financing of the whole amount so that the seller can be paid immediately?
Here’s my situation: My wife and I got really lucky and our property value has doubled since we bought our house 4 years ago. I have qualified for a $122,000 line of credit from Suntrust Bank, but I haven’t opened it yet. I’m still waiting to find out how much money the mortgage company (Suntrust) is willing to loan me, but I suspect it’s in the $150,000 range. Most of the houses I’m looking at buying are in the $125, 000 to $175,000 range. If I’ve got my line of credit ready to go, and I’ve been pre-approved by the mortgage company, am I in a position to offer “QUICK CASH!” for properties in this range?
And just how effective are those ads?
“I buy houses full value all cash or terms” means: I’ll give you all cash if the price is low enough for me to do so: if not, we can agree on terms we can both live with. Or…we might do a combination of both: as much cash as I can come up with while you carry the rest. It’s not a Bait and Switch, just a well worded “Get off your butt and check it out” ad.
Down boy! Hold the reins!
First off, learn about the tax implications of what you’re about to do. If you just start buying properties in your own personal name using your HELOC (Home Equity Line of Credit) then you’ll be risking all of your own personal assets as well as setting yourself up for a butt raping by the IRS (You’ll pay over 40% in total taxes if youre a sole proprietorship).
To gain the best tax treatment you’ll need to start an S-Corporation or an LLC taxed as an S-corporation, then you’ll need to make a loan to your new company in the amount of your HELOC, so you can begin to buy houses and materials in the name of that company, not your own personal name. The IRS doesn’t encourage property flipping (Buying and selling of houses) as it aggravates inflation rates. Because of this fact the IRS has an array of different rules and regulations to fulfill if you fall into this category (Real Estate Dealer or Real Estate Developer, according to the IRS definitions).
Consult a real estate accountant and let them explain the ramifications of being considered a real estate dealer or developer. If you’re new to this “game”, I’d recommend starting off as what is called a passive investor, or silent partner. Passive investment returns are taxed MUCH more favorably than ordinary or business income, not to mention they aren’t subject to Self-Employment tax (15.3% more on top of everything else).
Those guys you see offering cash for houses are very, very seasoned real estate businessmen and know all the caveats of investing, whereas you don’t. Trust me, it’s not as simple as “Build it, and they will come!”, especially since we’re beginning the downturn of this real estate cycle. Buy a few books on real estate investing and the taxes associated with it. After you read those you’ll be in a much better state of mind when it comes to making financial decisions affecting not only you, but your family.