I have a friend in ATL that started his own contracting company for all his rehabs. He’s buying around 5 properties a month though, so would there be benefit to doing this if you are maybe just buying one a month?
Tax benefits or anything?
Does he have employees, or just him?..
If he’s a one man marching band, I can’t think of any tax benefits claimed under his company that he doesn’t have anyway for rehab expenses…he can still claim deductions for tools, vehicle, etc…For the company he ends up paying more for his licensing since the license costs are usually based on gross receipts…
If he has employees, he’s paying matching FICA taxes, FUTA/SUTA (unemployment) taxes, etc…He’s better off paying his guys on a 1099…
I don’t see any tax benefits to his company…Actually, just the opposite…
When you are doing 5 a month there is a great reliability factor in owning your own company. When you are your self you have to either bid out projects or have a relationship with a contractor to get things done in a reasonable time frame.
When you start doing 3-4 a month though, the problems of sometimes flaky contractors can get worse. Also, a lot of potential profit is being made by the contractors off your work. When you do a contracting company at that level, you capture more profit out of each rehab.
The real negatives are that if the real estate is your major profit center and if you get too tied up in the contracting then your real estate wilol suffer. Working with subcontractors and individual workers is even more time consuming and often frustrating than doing real estate deals.
So normally it is better to either have some one you hire to run the contracting side, or partner with someone who can do it. Otherwise you get so tied up with contractor issues that your real estate dies.
That’s a GREAT idea. If you do all your flips in a seperate entity, say XYZ Homes LLC, and hold your rental houses or other types of real estate investments in seperate entities as well, that will really provide you great protection over time. If you did not properly rehab a house and get sued for it a couple years later, then XYZ Homes LLC will be the target, not you — especially if you have subcontractors actually doing the work. However it’s smart to have insurance that covers the entity AND it’s owners/officers, just in case, as usually the lawyers try to sue both the company and it’s owner anyway.
being the contractor on your own rehabs is certainly very cost effective. That is what we have done here in michigan. If you do consider doing this, be sure that you set up or have set up your business as a separate entity so that your personal holdings are not at risk in case of a lawsuit. (corporation, llc, etc)
Even though your friend is doing 5 per month, he is still saving money because he knows exactly what the job is worth and isnt allowing contractors to bully him. Assuming he is the general contractor, he is subbing out a lot of his work to subcontractors. IMO, it is smart for anyone doing rehabs because of permits, etc… also, there are some good discounts available to builders/contractors through some companies…materials…