- Hey guys, Clint Coons here.
And in this video, we're going to talk about
(loud whoosh) flipping real estate
and the proper structures for it.
Okay, (loud whoosh)
let's get started.
(upbeat rock music)
All right, so, when it comes to flipping real estate,
what are your concerns?
Well, you may not be realizing it,
I always go back to that three-legged stool analogy.
You've probably heard me use in multiple videos.
That is, you're going to flip real estate,
you have three main issues.
Number one,
taxation.
So, if you're flipping real estate,
you can run the risk of being tagged as a dealer.
And what that means is the IRS is going to
take an ounce of flesh out of every deal that you do.
That is, if you're a dealer, everything that you make,
if you're doing this activity in your own name,
is going to be subject to employment taxes.
You can't do any 1031 exchanges,
and you might not even be able to
engage in an installment sale on your investment side
in the future.
And you can't depreciate the property as well.
So,
those are problems for a lot of us because,
we just don't flip, we're also investors.
So, we've got the tax leg that's a concern for us.
And then you've got the asset protection leg,
which means,
hey, there's liability when you flip property.
Many flippers that I've worked with over the years,
they do value adds themselves.
They get in there and they're doing some of the work.
And so, when you sell that property to a buyer,
you have disclosures.
And if you did any of that work
and it wasn't up to their standards,
or maybe they felt that they overpaid,
and they want to come back against you.
Now you've opened the door a crack for them.
So, they could potentially sue you personally
if you are flipping, let's say, in your own name.
So, we don't want to do that.
We want to use a specific entity
that I'm going to talk about here in a moment.
And the last aspect of it is that business planning leg.
So, here's the issue if you're flipping real estate.
If you also want to buy property long-term,
banks don't want to work with you.
It just comes down to that
because when they find out what you're doing on the side,
how you make your money, you're high risk.
They've been through this downturn before,
where people who are flipping real estate got burned
and they filed for bankruptcy.
I know, we probably had several hundred clients
that were actively flipping real estate
back in 2004, 2005, 2006, 2007.
And then they were out of the game altogether in 2008,
and they lost it all.
So, you want to make sure that you're protecting
against all three.
The ability to borrow,
you want to make sure you have liability protection,
and you want to have protection from the IRS.
What is the entity that's going to provide that to you?
Well, its either a limited liability company
or a corporation.
Doesn't matter which.
They're going to do that,
but, it's how you set it up,
that's going to be key for someone
who wants to flip real estate.
Let me show you.
So, if you're going to flip real estate,
what I suggest you do, is you set up an entity,
and it's going to be an LLC
or traditional court, all right?
Either one is going to work.
But what's key is how you choose to set it up
from a tax standpoint.
What I would recommend you do is choose
to have it taxed as a corporation,
that is either treated as an S or C.
Now,
my preference
is always going to be C corporation,
not S. And I know that you're going to talk to your
tax preparers and you're going to say,
no, you want to go with the S corporation.
Well, let me just show you real quick
why I like the C over the S for people who flip real estate.
So, if you went with the S selection
and you own this entity,
then what it means is that
any income that's generated through an S corporation
flows down to the owner of the company.
So, if I had $50,000 and I'm an owner in this company,
be it an LLC or traditional corporations treated as an S,
then that $50K is going to show up on my 1040,
okay, via what's called, they call a K-1.
So, you've prepared a tax return 1120-S,
and it says, all right, this guy, he owns 100%.
So, he gets 100% of the income
that's generated out of this activity.
Now, from a tax standpoint,
your CP is going to be completely on point
when they tell you you're going to save money this way.
Because they're going to explain to you
the benefits of flow-through treatment.
You avoid employment taxes.
Well, there's more to real estate investing than just
shaving a few dollars off some employment taxes
that you're pulling out of your corporation.
It's looking good to lenders, right?
So, these guys over here who loan us money
that we want to gain access to,
to build the other side of our business.
Because this is all income.
We want to build wealth through long-term appreciation
of assets that produce income for us.
We're gonna go out there and leverage.
Well, when you go to the banker and you say,
"Hey, I flip real estate for a living."
What does that do?
That takes you out of the ability to borrow
in many instances
because they see that you're a real estate flipper.
Now, you can say, well I'm not going to tell them.
It doesn't matter.
Because what they'll find is that
they'll see this income hit your 1040 via the K-1,
and that's going to clue them into the
type of activity you're engaged in.
So, this is why I recommend C corporations,
to make sure
that with a C corporation,
none of this is flowing down to you.
All right?
There's no income.
You make $50K inside of your corporation,
it stays in your corporation,
unless you choose to take it out as a W-2 or a dividend.
It's up to you how you want to take it out.
And there's reasons to go heavy on the W-2.
I like to do W-2 income.
Yeah, pay a little more in employment taxes
but look great to these lenders over here.
Because they think you're making gobs of money in your job.
They don't know you're involved in flipping
because this information stays contained
with that corporate return.
Nothing flows down to you personally.
Now from a dealer standpoint.
Okay? So this is all about business, okay,
we just talked about.
This is what I want to protect against the business.
Let's talk about taxation as well.
So, when you flip properties,
I said you get taxed as a dealer.
So, that means everything, if you're doing it in own name,
is going to be taxed to you, and it's all active income.
That's what W-2 is.
But again, people know you're in business for yourself.
Whereas, a lot of flippers that I work with,
they're flipping through corporations.
And the reason why they're doing it is,
if they make $50K, they may not need all that money out.
They may leave a good portion of it in there.
Let's say we leave in, we take out $15K,
we leave $35K in there.
Why am I leaving that money in there?
Well, current tax rates are at 21%.
So, at 21% on $35,000, may be lower
than what you would pay taxes on,
if you were to take all that income out.
One of my clients generates over a million dollars a year
in flipping real estate.
And for him, the difference is this,
it's either pay $210,000 in taxes on the million,
or pay close to $415,000,
cause he has state taxes there as well,
on the personal side.
So, he's saving $200,000.
What does that mean?
Well, he's going to roll that money
back into his other deals and generate more cash
from the flip activity that he has going on
inside of his corporation.
So, from a tax standpoint, you've got ultimate control here.
Leave it in the C corp, have it tax at a flat 21%,
or take it out, pay W-2, or treat it as W-2.
Look better to lenders.
Now you've got options.
With an S corp, you don't have these options.
Everything flows down to you. Okay.
The last aspect I want to talk about is
setting up the flips from an asset protection standpoint.
So, here's the problem.
A lot of people who flip real estate initially,
they hear me talk about using an entity like this.
And then they're going to go out there,
and they're going to set up their entity,
and they're going to start flipping through their companies.
So, let's say we set up an LLC tax as a C corp here.
And you buy a property.
There's your first deal.
And you rehab it and you sell it.
And boom! This property gets sold to this individual.
Now you make some good money off that deal.
And so that becomes the down on the next two deals
that you're working with.
Because now you've found a hard money lender,
for instance, right?
This property is gone.
You got this hard money lender you're working with.
And so he's helping you get these other deals going.
And of course, when you sell them
they're going to get paid off.
But this buyer over here, on that first property.
Well, the buyer finds something wrong with the property
that he doesn't like.
Maybe felt the overpaid for it.
So, what does he do?
He's going to sue your corporation.
Now, if he sues your corporation or the entity
you've set up to flip properties through,
and you have these other two deals going on,
(makes cracking sound)
they're coming to a stop just like that.
Why? Because the attorney's going to threaten you.
They're going to say, "Hey, pay my client off".
"Settle with my client",
"or we're going to lien your properties."
File, what is called, a lis pendens on them.
And we're going to screw this up for you,
to make it really difficult to sell your property.
And your hard money lender is going to foreclose on it.
Your life's done as a flipper.
Why did this happen?
Because you sold property out of this entity,
which I call an active entity.
So, you actually set this up. You put this cart in motion.
You wrote the ending to the story,
the day you did more than one deal in this corporation.
It was eventually gonna happen.
But the way you minimize that,
is you set up this business that I was talking about,
from a tax standpoint, for business planning standpoint.
And it's your business
but it doesn't flip the properties itself.
It's never going to flip a property
in the name of this entity.
Because the do so invites disgruntled buyers,
and disgruntled buyers become problems
for ongoing operations.
The way we minimize that
for flippers,
is we create limited liability companies up here.
Yeah. Just like I do on hold.
I set up LLCs that are
single-member disregarded limited liability companies,
all owned by this business here.
And here's where I conduct my flips.
Set these LLCs up,
just right up there.
Sell the property out of the LLC to this buyer down here.
And get this,
once that property is sold,
take that LLC,
and let's just send it away.
It's time to send it to the boneyard.
This one's done, all right?
We no longer have that limited liability company.
We shut it down, dissolved it.
Now, why would I tell you to do this?
Because if you have a disgruntled buyer over here,
and they approach an attorney and they say,
"I want to sue the guy who sold me this property."
"I want to go after that business."
Attorney's going to be all on board
until they do some searching,
and they find that that LLC
that they bought their property from,
is now out of business.
So, you're able now to control
what the other parties perceived to be
what's going on, with respect to that property deal.
Oh, that developer went out of business.
Now, no one wants to sue an out-of-business company.
So, by setting it up in this manner,
you're able to give yourself
some additional asset protection.
Let's say you have this deal going on over here,
not a disgruntled buyer,
but somebody gets hurt on the property. Right?
They're hurt. They fell off a ladder.
And it's a wrongful death action,
maybe your GC wasn't even licensed, let his license lapse.
And so you have all these other problems.
Well, now they stay isolated.
So, the most I stand to lose is the one property,
the equity in that one deal that I have,
and nothing else.
So, when you're flipping real estate,
I would strongly encourage you to set up
different LLCs for each flip.
Treat them as a one and done.
Flip the property, shut it down, set up another one.
In fact, what you should do is have a few setup.
So, when those opportunities come along,
you're ready to take the title,
make the offer in the name of the LLC.
And the way the LLCs are typically set up
is that their owned 100% by this corporation.
And they're set up as disregarded entities.
Okay? Disregarded LLCs is the way you're going
to create them.
And if you want to use some anonymity,
I like to use Wyoming LLCs here.
So, there's no information available on the public records.
Now, that doesn't work if you're flipping a lot
in one particular state
Then you're going to have to register those LLCs
in that state. But that's the way to go.
You could possibly even throw a series LLC
on top of this as well.
If you live in a series limited liability company state.
But for flippers, disregarded LLCs,
bring it down to a C corp,
take your money out as a W-2,
cover three legs of the stool,
asset protection, tax planning, and business planning.
Hey guys, give me a "like" if you enjoyed this video.
If you know some people that are flipping real estate,
refer the channel out to them.
Let them know they can come here
and find great information on how to set this up.
And hey, thanks for watching. Take care.
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