Many flippers are single-person or husband-and-wife businesses that operate as sole proprietorships. In general, this kind of business would benefit from setting up a limited liability company, or LLC, for these reasons:

1. Limited liability: If you get sued because your business defaults on a loan or a person gets hurt on your property, the plaintiff can only attack the assets owned by the LLC. Contrast this to a sole proprietorship, which provides no limitation on liability and puts the defendant’s personal assets at risk.
2. Tax breaks: LLCs are eligible for certain tax breaks beginning in 2018. Specifically, 20 percent of the LLC’s gross income is tax deductible under the new tax laws. That’s a very solid motivation to set up an LLC.
3. Pass-through structure: If you currently run a sole proprietorship, you can set up an LLC easily with minimal effects on your tax filings (except for the extra tax break). The LLC is considered a disregarded entity for sole proprietors, meaning you don’t have to file any special forms for the LLC. Instead, all the revenues and expenses pass through to the LLC owner, and taxes can be filed on Form 1040 and Schedule C. The LLC pays no taxes on its own. If you have employees, the LLC will have some additional filing requirements, but the pass-through structure remains the same.

Setting up an LLC is pretty easy. You can do it yourself, but if you want some expert guidance without spending a lot of money, consider legal assistance companies like LegalZoom and Nolo. The process is straightforward:

1. Pick the state in which you want to set up the LLC. This is normally the state you operate in.
2. Pick a name for your LLC. The assistance company will quickly check to see if its available.
3. Fill out some paperwork that the assistance company will use to prepare the various federal and state applications you will need. For example, most states require you to get a business license to operate. You will have to sign the applications before they are submitted to the various authorities.
4. Obtain an Employer Identification Number (EIN) from the federal government. You use this instead of your Social Security Number on your Schedule C. Usually, the assistance company will procure the EIN on your behalf.
5. Wait about a month or two for all the applications to be processed.

That’s it, a very simple process. Prices are low, ranging from $75 to $450 for most assistance companies. The more you spend, the more the company will help, a good bargain if you are a busy flipper.

The mortgage meltdown of 2008 triggered the Great Recession, which prompted banks to tighten credit and raise underwriting standards. This in turn gave impetus to alternative, or non-bank, lending, a sector that includes hard money real estate lenders. Each type of lender has its own characteristics, but five differences between bank and hard-money lending form a stark contrast:

1. Credit ratings: Banks predominantly rely on credit ratings and credit histories to evaluate loan applications. Consumers with less-than-good ratings or scant credit histories have virtually no chance of receiving a bank loan. Non-bank lenders are in general much more willing to provide loans applicants with low credit ratings by adjusting interest rates, demanding collateral, and/or using alternative underwriting methods.
2. Speed: Banks are notoriously slow to approve loans. They require voluminous paperwork and extensive credit checking as the process slowly grinds through the bank’s loan committee. Hard money lenders usually offer a streamlined application process and rapid approval/funding, often depositing loan proceeds in as little as one business day.
3. Size of loan: Lenders use the loan-to-value (LTV) ratio to establish the maximum amount it will lend on a parcel of real estate. But many borrowers don’t realize one important difference between banks and hard money lenders. Banks base their LTV calculation on the current value of the property, whereas hard money lenders use the estimated value following renovations. This means that, even if a bank uses a higher LTV ratio, flippers might be able to borrow more from a hard money lender. The more ambitious the rehab project, the more the flipper can borrow from a hard money lender. That’s not true for bank loans.
4. Minimum loan: Many banks have a minimum size loan threshold that bars small loans. A bank’s bureaucratic overhead costs preclude it from extending loans that are not “profitable,” which is how it sets the minimum loan size. Non-bank lenders are typically lean operations with much lower operating costs, allowing them to offer smaller loans.
5. Interest rates: Banks can afford to offer the lowest interest rates because they lend only to applicants with gilded credit ratings. Non-bank lenders charge higher interest rates in return for greater loan access. Some hard-money lenders, like Specialty Lending Group, offer very competitive interest rates.

Specialty Lending Group provides hard-money and bridge loans to flippers and developers in the Washington DC region, including surrounding states. We provide loans against the following types of collateral:

• Non-Owner Occupied
• Single Family Investment Property
• Multi-family
• Condo Conversion
• Commercial Property
• Retail, Office and Mixed Use

If you are looking for quick approval, fast closing and easy accessible funds, contact Specialty Lending Group today.

Getting the math right is the single most important factor in successfully flipping a property. Without doing the numbers correctly, you are most likely to fall short of expectations. You will need to get a handle on your costs (including financing costs) and the profit potential for the property and its neighborhood. Your math will probably include the following:

• Loan-to-value (LTV)
• Total costs
• Profit potential
• Timelines
• Purchase price constraints

Let’s look at a couple of examples.

Loan-to-Value Ratio

An example of the type of math you’ll use is the loan-to-value calculation. The LTV ratio is usually calculated by dividing a property’s value into the loan amount. It represents the percentage of the property’s value that a lender will lend to the borrower. A traditional lender like a bank would use the property’s current appraised value to apply its LTV ratio and determine the amount it will lend. For example, a bank with an 80 percent LTV policy that appraises the property you want to buy at $400,000 will lend you $320,000.

Hard money lenders do it differently, in that they use the after-repair value (ARV) of the property rather than the current value. For example, if the estimated ARV of the $400,000 property is $500,000 and the hard-money lender LTV ratio is 70 percent, the loan amount will be $350,000.

Hard-money lenders can provide loans to rehabbers who don’t qualify for bank loans, and do so at competitive interest rates. In return, they set their LTV ratio a little lower that a bank would in order to protect themselves. By demanding the rehabber put more skin in the game, they give the borrower greater motivation to finish the project rather than walk away.

70-Percent Rule

Another type of math you can use is the so-called 70-percent rule:

1. Estimate the ARV of a property, with input from a knowledgeable real estate agent who is familiar with comparables
2. Multiply the ARV by 70 percent
3. Deduct you estimated repair costs from the 70 percent figure
4. The remainder is the most you should pay to buy the property

For example, for a $200,000 ARV with estimated rehab costs of $40,000, the rule says that the highest purchase price is:

(70% x $200,000) – $40,000 = $100,000

It’s just a rule of thumb, but a pretty good one.

You can do the math on a spreadsheet with a suitable template, and/or use a fix-and-flip calculator available online from a number of sites. These resources usually contain a comprehensive checklist of costs that you should adapt to your particular circumstances. You can download this good example of a spreadsheet, or try out this online calculator. If you are having trouble with some of the numbers, you can ask questions on a house-flipping forum or from a real-estate expert, like Specialty Lending Group.

 

 

House flipping – buying, fixing up and selling a home in a year or less — is increasingly becoming a popular way to grow your wealth. RealtyTrac figures for the first quarter of 2017 show 6.7 percent of all condo and single-family home sales in the quarter stemmed from flipping, a total of 43,615 sales. Two-thirds of flips were paid for in cash. The average sale price and gross profit were $200,000 and $64,284 respectively. Note that gross profit excludes the costs of rehab, financing, property taxes and other carrying costs. The average return on investment in Q1 was 47.4 percent.

Clearly, there is a lot of profit potential in home flipping, but there is also much risk. You have to know what you are doing and the proper sequence to do it in. Flipping properties is something you might have been mulling for a long time. It takes a while to become comfortable with a new idea, especially a risky one that requires time, money and hard work. The prospects of home flipping and/or landlording can seem pretty exciting, especially when you concentrate on the income potential. However, home flipping is a business, not a hobby. Success or failure can have a huge impact on your wealth, so it’s not a commitment you want to take lightly. If you do decide to make the commitment, it must be a total one, and will require a lot of learning.

You never stop learning, but if you’ve never flipped a home before, you must start learning all about it before jumping into action. Some folks get sucked into expensive guru training camps that reveal all the secrets to obtaining real estate riches. These camps can cost a small fortune, and we think the money should instead be used for buying your first property.

There are many low-cost ways to learn about home flipping. In addition to reading this e-book, check the library, Internet and book stores for books and videos that address home flipping. Three good starter books packed with flipping knowledge are:

• Flipping Houses for Dummies
• FLIP: How to Find, Fix, and Sell Houses for Profit
• The Book on Flipping Houses

If you are going to have help from family members or friends, teach them what you’ve learned, since that’s often the best way to assimilate knowledge. You want to find out why things work the ways they do, so you have to delve below the surface of obvious knowledge. For example, you’ll want to research local zoning laws to see how they affect the decisions you make.

You don’t have to be paralyzed from the fear of not knowing everything before you get started, because you can get stuck in education mode forever. Learn the basics, recruit some expert help, and move on.

The universe of real estate provides many roads to profit, through both active and passive investing.

Active Investing

When you actively invest in real estate, you have hands-on involvement in building, buying and/or managing properties. You can rent out your properties for income, build new properties for sale, or flip existing properties after buying and renovating them.

Active investing requires time, knowledge, money and often sweat. Building or flipping a property is very intensive. Flipping usually requires a lot of sweat equity, as there is often little budget to hire out the work. Renting is less time-consuming, and you can farm out a lot of the work to rental agents who collect rents, maintain the property and sign leases. But if you have only a few rental properties, you might perform all these tasks yourself and minimize your costs.

Active investing gives you control over the selection of properties, based on your views about location, type of real estate, budget, time-frame and other considerations. Your choice of properties includes apartments, single- or multi-family homes, mixed-use and commercial properties, or a combination of several types. Unless you have a large budget, you might be able to invest in only one or a few actively-managed properties at a time. Physical proximity to your properties might be a factor, especially if you personally take care maintenance issues. The downside of active control is the active headache factor, especially if you have demanding tenants or difficult building/flipping conditions.

Passive Investing

If active investing isn’t for you, passive real estate investing allows you to participate in this important asset class without working up a sweat. There are several vehicles for passive real estate investing, most notably real estate investment trusts, or REITs. These are like mutual funds for properties and are available as public or private securities. In a REIT, the investment manager selects which properties to buy and sell and is responsible for all decisions – your only involvement is deciding when to buy or sell your shares, and how many shares to own. REITS provide instant diversification, allowing you to allocate a set amount of your portfolio all at once. Wealthier individuals can invest in private syndicate deals or real estate hedge funds. The common thread is that another entity is doing all the work, while you are collecting your share of profits (or losses).

Many REITS require a modest initial investment, often in the $2,500 to $5,000 range. Some REITs specialize in residential or commercial properties, but others contain a mix. Other real-estate-related investments include property liens, mortgage-backed securities, homebuilders’ shares, and mineral rights. You can also buy shares in a real estate project through crowdfunding, in which you buy shares exempt from SEC registration via an online portal, subject to certain restrictions based upon your income. The new rules allow everyone to participate in crowdfunding, not just accredited (i.e., wealthy) investors. Crowdfunding is normally a form of passive investing, as the stock you purchase give you a share of profits generated by the project.

Here are the house-flipping stats from 2015, courtesy of RealtyTrac:

• The number of house flippers was highest since 2007
• The number of flips per investor was the lowest since 2008
• Almost 180,000 single-family homes and condos were flipped during the year
• Average profit per flip was $55,000, a 10-year high

Flipping is back in a big way, and many small-time and beginning flippers have entered the market. But the stats can be a little a misleading, in that they don’t reveal how many flippers lost money last year. Here are five tips to help you earn good returns on your flips:

1. Run the numbers: Set up your spreadsheet and project what you will need to spend to acquire and renovate the property. Price in the cost of taxes, maintenance, utilities and financing. A hard money loan from Specialty Lending Group is convenient and competitive. You’ll need to price out your costs for labor and materials and compare your investment to comp sales in your neighborhood – consider those a firm lid on your selling price. Finally, factor in your tolerance for risk – how much shortfall can you sustain?
2. Understand you market: [See attached document from Delta Associates] For example, if you are in the Washington D.C. market, you need to know that homes in the Outer Suburbs are selling faster than those in the Urban Core, although both have experienced a drop in days-on-market in 2016. It took 47 days on average to sell a D.C. home in Q3 2016, a year-over-year four day drop. The point is to know each neighborhood’s potential, demographics, and not-to-exceed price. Be familiar with recent sales and average days on market. Consider renting out the home until prices rise.
3. Renovate to buyers’ tastes: Know your buyers. For example, if the neighborhood has good schools, your buyers are young families who will need space for kids. They often demand open floorplans, finished basements and multiple bathrooms (including one only for the parents). Conversely, a retirement community begs for ranch-style houses, easy accessibility and low-maintenance grounds. Choose wisely and renovate according to what your potential buyers will prefer – your personal tastes are secondary.
4. Brag: Make a detailed list of all the improvements you’ve made, from a new HVAC system to structural repairs. A new roof is always a big positive. Put together a binder with information about all appliances, including warranties. If you’ve put in “smart home” features such as a remote home controller, display instructions right next to each feature.
5. Set a reasonable price: Don’t get too greedy or emotionally invested in all the wonderful improvements you’ve made. Potential buyers only see the end product, not what you started with (although a picture album of the work you’ve done is not a bad idea). Buyers won’t pay you for the stress, long hours and aggravation you had to survive. They have seen the competition and know how much they should spend. Underprice just a little and elicit multiple offers – a bidding frenzy might erupt, to your benefit.

Specialty Lending Group can help you not only with financing your real estate project, but we can also furnish invaluable and hard-won advice to help make your project a success. Contact us today!