Outsourcing is one of the key problems, it needs to be addressed now!

If you are also planning on flipping and buying real estate you will have little excess cash, at least in the begining, to go investing in tax liens.

I believe in renting as my path to solid returns, the houses in my market just aren’t worth enough to fix them up and flip to make a huge profit. (if the fixed up value and the basement pricing level are too close it is hard to fix them up and have any room for profit.) It is hard to have anything over 15% left after the entire process is done. For my area 15% of the houses I am looking at is betweeen $15k and $20k. Since this is the top it just isn’t worth all the work to only be able to do it 4-6 times a year once you take everything into account with time delays. I would rather have the $200-400 a month as income for all that hard work.

The key to renting is being able to see what will happen ahead of time with an ugly house. You go in, see the bottom basement pricing because it needs work, then estimate accurately what it will take to fix up to rent for how much. Then you determine the end value once fixed up that it will appraise for. You figure out your financing for the two stages, fixing up and then renting. It doesn’t take a lot of skill, you just need to know what things will cost and what things are worth. You can get help from contractors and your real estate agent on most of this. Look through the rental section of your paper as a rule every sunday to get a feel for the market over the year.

Once you have the house in rental mode you should have a positive cash flow. That is financing and all expenses cost X and your rent it for X + Profit. This profit should be somewhere between 10% and 20% per year of your total investment in cash. I do some work myself and dole out other work if I can get a good price. You will have your strengths and weaknesses, do not go against them just to make a buck, make sure you are doing what you love. I love to do some work and always buy other work (I will never install carpet for example).

Now once in rental mode it doesn’t matter what the market does with your house value, only thing that matters is if the rental value drops for some reason. If it stays the same or goes up you will never ever have a problem. This is a likely outcome.

Just make sure your expenses include fixing things. I add anywhere from $25 to $75 per month as an expense here based on what will need work and how old things are. I don’t spend anything usually, but then I replace a water heater or put on a new roof. This must be included and can be done on a case by case basis. Be extra careful in the begining to estimate everything. Later when you have lots of cash coming in from multiple houses you can use estimates based on your experience like I do.

Keep the fix up period as short as you can as money is going out. Also have your first financing and second financing planned. What I do now is buy a house for cash, fix it, refinance it to get most if not all my cash back (sweat equity makes the difference there usually but it is still hard to get it all), and rent it. In the begining I didn’t have that much cash so I would first finance it and then refinance it. This adds a couple grand to closing costs that I now don’t have to pay and qualify for and wait around for. The first close is usually within a week and I get started right away once I find the deal. The old method took more like a month and finnancing was always a battle.

So what are my returns? Well the cash on cash is 10% to 20%, or about 15% average when I first started. I was putting 20% down to avoid PMI and had a very healthy monthly profit to bring in this rate. I believe this is the ideal way to go if you can afford it. The PMI is just wasted money and so are all of the other rediculous ways to finance for higher rates just to not put money down. If you have it put it down and earn the high rates yourself. Also rememebr that appreciation and the fact that the tenant is paying your loan off (both building your equity) are a part of the return you look forward to later but don’t even consider for now until the amount is over $30,000 for a particular house. (This won’t take longer than a few years). Then you can refinance it to get cash out, I guarantee after it happens once you won’t want to sell it!

Get a good contractor and a good real estate agent and get started estimating things. If you think you can put together a project that works go get qualified for a loan and make offers. There is nothing hard about it, it just takes some hard work. You will easily become a millionairre by doing this hard work for just a few years. Even if you have to then sit and wait patiently for ten years while everything goes up, you will become one. By why in the world will you want to stop?

Buy some books on the various steps and read them too. They will help you get a better idea and become more confident. Make sure you start to think in your mind that you are going to do this, and you are going to figure out how. Don’t just think: “boy it would be nice if I could”. Read books like this one and get a plan of action together:

The ordinary business income from the LLC (reported to you on K-1) would go on back of schedule E. Other types of income would go where appropriate (net rental income (Sch E), interest (Sch B), dividends (Sch B), capital gains (Sch D), etc.) on the tax return. In general you would allocate the interest on your purchase loan among the various activities of the partnership in some reasonable way. You would be allowed to deduct on the back of schedule E that part of the interest on the purchase loans allocated to the ordinary business activities of the LLC. Whether you would be able to take advantage of a net loss (interest exceeds profits from the LLC) would depend upon basis and at-risk limitations. The part of the loans allocated to LLC investments would generate investment interest expense, the part of the loans allocated to rental real estate activities would generate interest deductible against the rental real estate income, the part of the loan allocated to tax-exempt investments would be non-deductible, etc. and we be reported in the corresponding place on the tax return.

This caclulation and allocation could become very complicated depending upon how many difference activities the LLC is involved in.

Richard K
Master Tax Advisor

This advice was based upon my understanding the tax aw in effect at the time it was written as it applies to the facts provided by you. See my profile for more information.