Fix and Flip Advice

[maritalbliss86]

Hello ENA'ers, 

I have already created and set up with the IRS an LLC for our fix and flip properties we'll be acquiring, but even though an LLC is great for protecting one's personal assets, I think I still need more business insurance, correct? 

Does anyone here have knowledge or experience with running a small fix and flip side business?  

Do you have extra insurance on top of the LLC I'm assuming you created to protect your personal assets?

Thank you in advance!

MB

[Batya33]

I would call someone at your local real estate broker association or real estate-related or check the FAQ to find out all the requirements. My sense is it varies by location as far as the risk level you might be taking on.

[maritalbliss86]

2 hours ago, Batya33 said:

I would call someone at your local real estate broker association or real estate-related or check the FAQ to find out all the requirements. My sense is it varies by location as far as the risk level you might be taking on.

Hmm... well we do have friends (husband and wife) that are a realtor team that are giving us access to their MLS (for wholesaling purposes) and lots of advice, guidance, and basically mentorship.  I can ask them if we need more for sure.  Is that what you mean though?  

Unfortunately I think anyone can wholesale or fix and flip - there aren't many legal, requirements in Texas... but it still seems wise to have that LLC and then maybe another insurance on top of that (since creating the LLC is easy and free!).  

A man that had 9 properties that I met at the courthouse auction recently told me he had what's called an, "Umbrella Insurance," and that was all he needed.  So it seems like there are different types to choose from...  ?

Legally, my husband has access to a lawyer group for free that handled selling our house (the legal real estate contracts, making sure it was a good deal legally, etc), so we do have legal representation.  It's just probably not an official real estate attorney though, which I don't know if we should bother paying for extra 😕 .

Thank you, Batya, that helped me realize the different options we have to at least search out this answer.

[Wiseman2]

Check with your CPA about shelters and how to report income from this.

[Batya33]

I would see if there are any local facebook groups where people share info about what level of insurance and types are advisable.  I'm also on a site called Nextdoor where you are connected to people in your neighborhood (or you can choose the mileage radius) - and that's the sort of question that would be posted there.

[maritalbliss86]

I don't have a Facebook, but I could try our old nextdoor account.  Thanks Batya.

There really is a lot of Facebook I've realized I'm missing out on as far as support groups go.  Homeschool stuff, goat and farming groups for selling or trading animals... and probably fix and flip groups for regular people and realtors who do it.

Maybe I'll get back on at some point hmm....

[Batya33]

4 hours ago, maritalbliss86 said:

I don't have a Facebook, but I could try our old nextdoor account.  Thanks Batya.

There really is a lot of Facebook I've realized I'm missing out on as far as support groups go.  Homeschool stuff, goat and farming groups for selling or trading animals... and probably fix and flip groups for regular people and realtors who do it.

Maybe I'll get back on at some point hmm....

I find it so very helpful in so many ways even though it can be quite annoying too.

[sadchick83]

First, you do not set up LLCs with the IRS.  You set up an LLC with your state.  You will eventually file taxes with the IRS based on the entity you selected.  An LLC can be a SMLLC - a single member which you will file on Schedule C of your individual tax return. Or and LLC can be a partnership(must have 2 or more people with the intention to set up a business for profit.  Generally LLCs do not pay taxes and the income from the partnership flow up to its members.

In order to provide asset protection, you should have a separate bank account for you LLC business - do not commingle with anything other than the business.

Insurance is good to have (not my area of expertise.  The LLC does not allow you to be gross negligent, so good to look into insurance.

 

With a single member LLC you will not file a K-1,  one partnerships do this

[maritalbliss86]

2 hours ago, sadchick83 said:

First, you do not set up LLCs with the IRS.  You set up an LLC with your state.  You will eventually file taxes with the IRS based on the entity you selected.  An LLC can be a SMLLC - a single member which you will file on Schedule C of your individual tax return. Or and LLC can be a partnership(must have 2 or more people with the intention to set up a business for profit.  Generally LLCs do not pay taxes and the income from the partnership flow up to its members.

In order to provide asset protection, you should have a separate bank account for you LLC business - do not commingle with anything other than the business.

Insurance is good to have (not my area of expertise.  The LLC does not allow you to be gross negligent, so good to look into insurance.

 

With a single member LLC you will not file a K-1,  one partnerships do this

Great advice!  And yes thank you, I learned that about needing to set up a separate bank account and not comingle funds, do payouts to yourself instead, etc, but so good to hear it repeated.

Plus the tax filing info 👍 thanks!

[indea08]

Just reach out to any insurance company, tell them what you’re doing (short term rehab, unoccupied SFH, etc.) and they will know what you need. That’s all I did. It was about $300 for 3 months.
 

Definitely pay for insurance, unoccupied homes are already higher risk for break in. Add on top of that there’s construction work (expensive tools) going on?? You’ll have busted windows or copper plumbing stolen. 
 

I’ll add…if you don’t already have an excellent accountant, set up a meeting with one prior to spending any $$. They’ll help you set up an Scorp so you get to keep as much of your $$ as possible.

[Jibralta]

4 hours ago, indea08 said:

Scorp

I was actually thinking about this and wondering if it would be a good route to go!

[maritalbliss86]

5 hours ago, indea08 said:

They’ll help you set up an Scorp so you get to keep as much of your $$ as possible.

This is something I've never heard of... Thank you

[moodindigo91]

I would double check whether you actually have an LLC - because as someone has mentioned already, those are created only through the state, usually the Secretary of State handles business entity formations. LLCs provide protection of your personal assets. Insurance is an entirely separate matter. You should consult with a local business & tax attorney to determine what you'll need to set up a valid LLC (including an operating agreement, which is the standard foundation document of an LLC, and which you should have even if your LLC consists of only you, since you may expand in the future). This even includes things like naming your business, since many states have naming conventions or rules you must follow when naming your business. 

Insurance being an entirely separate matter, you should have least have some form of professional liability insurance - do some research into what types of liability insurance is available for someone in the real estate fix/flip industry and consult with providers. While the LLC protects your personal bank account from being tapped into, professional liability insurance can help protect your business's assets from being tapped into as well, at least to a certain extent. 

Also, please be sure to keep your personal and business assets completely separate. There should be NO commingling. You must have separate banking/asset accounts for your business, otherwise, courts may be able to "pierce the veil" and use your personal assets for company liabilities, even if you have a valid LLC. Hope this helps. 

[Cherylyn]

Definitely get insurance.  It's best to contact a real estate attorney.  He or she would know.  Always protect yourself in this litigious society.

[sadchick83]

On 5/17/2022 at 5:48 PM, Jibralta said:

I was actually thinking about this and wondering if it would be a good route to go!

Generally S-corps never hold property because they have to come out of the S-corp at market value.  Partnerships hold property.

[wealthydior]

Insurance is really important. To be honest you should talk to a real estate attorney. Real estate attornies would be useful for you.