- Hi, Clint Coons here with Anderson Business Advisors,
and in this video we are going to discuss
wholesaling real estate and the proper entity setup
for that particular type of activity.
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All right, let's get started.
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Okay, so when it comes to wholesaling property,
many of you have probably been to some courses before
you've read it online some different ways you can structure
your wholesaling activity.
But first and foremost,
the thing that you need to be aware of is that,
wholesaling itself is an actual business.
And what I mean by that is that
the assignment of a contract for a fee,
so when you tie a property up,
you get it under contract,
then you assign that agreement over to another individual
who's going to ultimately close on that property
and they pay you a set amount of money.
That is active income.
That should fall onto your Schedule C,
if you're doing it in your own name.
But most assuredly you do not want to wholesale in your own,
Because A, negative tax ramifications
just like I talked about there with Schedule C income,
which is subject to employment taxes
in and of itself that can be a problem.
Number two, when you see a Schedule C income on a return,
it's gonna make it more difficult for you
to take down other larger deals
where you actually may want to hold those properties
and you have to apply for financing.
'Cause let's face it,
banks do not like people who are in business for themselves,
they scrutinize them much more.
So that's a problem right there.
The other issue you have in wholesaling
in your own name is liability.
'Cause let's face it,
you're tying up a property with your name.
So you're going to the seller
and you're saying I want to buy your property,
here's some earnest money,
and then you have to go out
and find someone to sell that agreement to
to step into your shoes,
because most likely you don't have the financial resources
to close on that property.
You don't have the credit where you can obtain a loan
to finance that property.
So you're relying upon someone else to step into your shoes,
make sure that they can close on the property
and you get your earnest money back.
Now, the issue that comes up, of course,
for individuals who do not close
'cause they can't find a buyer,
is that the seller has other remedies.
It's not just keeping your earnest money,
the seller could actually sue you for damages.
Now if you're wondering what the damages might be,
well think on this.
You tie up a property under contract,
you have it for 60 days,
and you cannot close.
Well that seller has taken that property off the market.
So during that intervening time,
did that property increase or decrease in value?
Well if it decreased in value,
then the seller could hold you potentially liable
for that difference in the decrease in purchase price
from what he tied the contract,
what you tied the property up for
under that original agreement.
So, we have two issues.
We have taxes,
and we have asset protection.
So we want to make sure that we're covering both those bases
when we're structuring our wholesaling business,
but there's more to it than that as well.
As I'm about to show you,
we're also concerned about perception.
That is, we don't necessarily want the seller to know
of course, what we're doing
because when you're wholesaling property I mean,
you're actually picking up deals
where there's a lot of meat left on that bone
and the seller doesn't know it.
And so you're tying up a deal that has,
you know, a lotta upside for the potential buyer
who's gonna come in and purchase that property
and it leaves enough there for you to make some money.
So how do I like to set these deals up?
Well number one, what I want to do
is I'll typically start with a corporation.
All right, this could be an LLC taxed as a corporation here,
the only distinction between the two
if you go LLC or traditional corporation,
is gonna have to do with whether or not
you have some educational expenses.
That is, did you take some training to learn how to go out
and wholesale real estate?
If so, and you want to deduct those expenses
and get the best structure in place
so you can write it off into the future,
than the C corporation, traditional corporation,
is the preferred route.
I could talk about that in another video,
but here what I'm looking at is either LLC or corp.
Okay, that's the entity formation.
But what's key, is how you're gonna have it taxed.
Now my preference for this deal
is to have 'em set up as C-corps.
I know a lot of people watch my videos,
CPAs and they'll say,
"C-corps, no one sets up C corporations,
"why would you want to set up a C corporation
"that has double taxation?"
I get it, you put double in front of taxes
and that makes people get really nervous.
I mean, hell I don't blame you.
Double in taxes, I don't want to pay taxes twice.
But you're missing the larger picture here.
Where do you want to take your investing?
For many people wholesaling just a means to an end.
To generate income now
so they can start building a portfolio of real estate
with the profits from their wholesaling activity.
Whatever your motivation is for engaging in wholesaling,
what I would recommend you do is set up a C-corp
so you have ultimate control over your receipt of income.
You see with an S-corp it's a flow through,
and I have plenty of videos that discuss this
if you watch them.
I don't necessarily have one on point
but I talk about this concept throughout.
Now with an S-corp, everything flows down onto your 1040.
And a lot of CPAs, they really like that structure,
because you're able to minimize employment taxes.
And there are strong reasons to do that,
but in this particular situation,
as a real estate investor who is wholesaling,
I would rather have the control.
That is, I don't want that income flowing onto my 1040
unless I want to take it out.
And if I choose to take it out of my C corporation,
it's gonna come out as a salary, which means W-2,
which makes me look better to lenders, number one,
because they don't know I'm in business for myself.
But number two,
if I'm going to move from wholesaling to flipping,
and I want to have more after tax income,
with a C corporation it's taxed at a flat 21%
on any of the gains that are inside of there.
So you know, think about your own personal tax bracket.
State, federal, where are you at?
Are you at a 35% overall bracket?
Well heck, I'm just gonna save you now 14% in taxes,
that's 14% more money you have to invest with.
So I like the C-corp for the control aspect.
So now, when you're gonna enter
into your wholesale agreements,
there's two things you have to consider here.
Do you have an agreement that allows you to assign it?
So if you're using your own wholesale,
or own purchase and sale agreement
that permits assignability,
then feel free to enter in
directly in the name of the corporation
with the seller of this property.
So you'll just contract with them between your corp
and the seller.
Now if the agreement you're using
or the seller objects to the agreement you present them,
they want to ensure that you can't assign it
or it makes 'em a little nervous
seeing your short form purchase and sale agreement
with that ability to assign,
then put together an LLC
to make the title offer on the property.
So oftentimes what people will do
is they'll create an LLC right up here
that's owned by the corporation,
and that will make the offer
to tie up the property with the seller.
So it's the LLC that's gonna do it.
And the reason why, is that ultimately
we're going to sell this LLC over here to my investor
that I'm working with.
So I'm gonna move them the LLC,
and then they'll close in the name
of the limited liability company.
So that's one way to do it.
The other benefit of using the LLC
is gonna be that asset protection benefit
that comes from that.
So if something happens,
the deal doesn't go through,
the sellers disgruntled,
they want to sue.
Well, they're gonna sue an LLC that really has no capital,
so there's nothing for them to recover against.
So that can be a plus.
But really, I use the LLC's in this scenario
just to create flexibility for the assignments.
And if you live in Texas don't worry about this,
because in Texas all real estate contracts
are assignable by their very nature.
Now, this is how I would structure the deal, right?
Either using the corp,
you're using the corp that owns an LLC
to tie up the property.
Now this is next part is something you ought to consider
in structuring your wholesale business.
Okay, so you've got your wholesale business,
you've got some properties now that you you've tied up
and you're looking for buyers.
Maybe you don't have a buyers list yet established
and you're just getting started in this business,
then you need to market these deals to other individuals.
And so how are you gonna perform your marketing?
Is it going to be on Craigslist, Facebook,
one of the other social media platforms?
And so as you go out there
and you begin marketing these deals,
"Hey, here's a property you can pick it up for $130,000,
"FMB is 170."
You know, "Contact me for details."
Whatever that is,
when you're out there marketing,
the risk you run in doing your marketing
is that the seller up here
finds out that you're wholesaling,
that you're flipping this property to someone else.
I mean they could see it on Craigslist and like,
"What the heck I entered into sell you a piece of property,
"you're out there trying to sell it to someone else,
"you don't even own it yet.
"Something seems a little shady
"with this whole deal with what you're trying to do,
"and it makes you feel uncomfortable."
And they try to back out of the deal
and so you potentially lose it.
So I would not
go out there and market the property
under the name of my company.
I just would not do that.
I would keep something private.
And this is where the little other entity
that you need comes in.
And that entity is going to be an entity
that offers anonymity,
and what I would do is I'd create
a Wyoming limited liability company here.
It's owned 100% by your corporation,
and this is my marketing entity,
marketing entity.
And its sole job is to go out there
and throw those properties onto Craigslist
to market them to find the buyers to come in.
And by doing so, what you're doing is
you're keeping seller up here out of the loop.
So let's assume that the seller does find out about it,
or somebody contacts the seller and says,
"Hey, Frank, I saw that your property now
"is being listed on Craigslist."
Of course Frank's gonna contact you and say,
"How are you selling the property you don't even own?"
You can sit back and say what are you talking about?
And he said, "Well, I saw that properties for sale."
Well, who's doing that?
"There's this LLC that's representing it."
Oh, that's interesting, have you looked into see who owns
that limited liability company who manages it?
Well, nothing's gonna tie back to you
because the LLC offers privacy.
That is when you set it up in Wyoming,
no information is collected about you
if you set it up the right way.
And if someone was looking at that,
they wouldn't see that you're the actual one involved,
and so it gives you this additional layer.
And so I call it my marketing arm,
it's not gonna sell the property at all.
That means no money's gonna run into it
when you actually not sell the property,
sell the contract.
It's just there to provide an anonymity shield.
So you can go out there, engage in your marketing activities
without anything coming back to your parent company,
and alerting the seller to the fact that
you're actually on both sides of these transaction,
you're doing a wholesale.
Maybe you have a realtor as well that you've engaged in.
You don't want the realtor to know that you're wholesaling.
Don't market these yourselves,
market 'em through a separate entity.
So this is my wholesaling structure
that I like to use for the clients
that we're working with here at Anderson.
We want to set up a corporation here,
an LLC taxed as a corp,
that's going to engage in the actual marketing
of the property, or setting up the deals,
and then you're gonna use that LLC on the side
to go out there and market them.
Be sure to catch my next video
where I talk about wholetailing.
Now if you're not sure what that term means,
it means how do you move from a wholesale into a flip?
And how would that be structured
in this type of arrangement?
My name is Clint Coons with Anderson Business Advisors.
Thank you for watching.
Be sure to check out the show notes
to gain access to our three day
Real Estate Tax and Asset Protection workshop
that we teach all over the country.
Take care everyone.
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