Thinking of changing my focus . . .

[BSH]

Hi. I'm thinking of changing my focus in real estate investing, and I thought I'd ask you all here first because I think this is a really great group of people who truly just want to help. So here goes.

I've been investing in real estate for about 8 years now. Started out buying one SFH in a great little town. It took my husband and me a year to repair all by ourselves because we both worked full-time and could work on the house only nights and weekends. Anyway, it turned out fabulous and makes us great rent money. Since then, we have acquired several more rentals and have bought-and-sold a few others to give us cash infusions now and then.

I'm really good at finding the right deals, negotiating the contracts, making sure they get through closing, etc. I really enjoy doing this, and I've finally found something I'm really good at. So you may ask, what's the problem?

The problem is that it takes us forever to renovate these places. Although I quit my J.O.B. 2-1/2 years ago, 'life' does not let me put in the time I need to get the houses renovated. Every time I turn around, there is some personal crisis or other high priority issue that needs to be taken care of, and another month (or two or three) goes by, while my investment waits for me to come fix it up.

I've tried so many times to find and keep good subs to do the work for me, and it just never works. One recent frustrating experience is that I called a local contractor (whom I use for my roofing--he's great), and he quoted me $40K to renovate a little 1000sf house we have. Although that price includes materials, and the place is in rough shape, it's much more than I paid for the place, and would cost me only about $20K to do it myself (including materials). So, once again, we'll end up doing everything ourselves, and we're physically worn out from it.

Every day, I find great deals I would love to jump on. It kills me to walk away from these potential deals just because I have my hands full right now.

So, I was thinking, why not grab the deals up and wholesale them to other investors? That way, I would not have to go through the hassle of renovation. Yeah, here and there, I'd keep one or two for myself as a rental property or something. But for the most part, I'd just flip them to an investor. I know how to find the deals, make it happen and get the deal closed. I also know how to market a property. So what do you think?

The only thing I've never bothered to learn is how to assign and contract and some other things wholesalers do. Usually, we just outright buy our places, put 20% down and do fixed-rate financing on the rest (of the properties we keep anyway). I can still do that. Actually, we have massive equity lines already set up on our existing properties--I can usually just write a check at closing these days, and cut out financing altogether, at least if I'm going to sell the property.

Am I over-simplifying this? Or am I over-thinking this? Am I wrong to jump ship and focus on a different tactic? I'm really eager to hear your thoughts on this.

Thanks.

[brianb_cobbres]

You are getting good deals but not good enough to pay a contractor to do the repair work? I have to ask if that really is a good deal?

If you cant afford to pay a contractor then are the deals good enough to assign off to another investor who is probably also using a contractor?

I am not trying to be snarky, just asking a question to maybe get things started.

[BSH]

I think the numbers work well for me. Usually, I buy my properties between 50% and 65% (sometimes less) of market value in as is condition. Yeah, there's enough equity to justify paying a contractor, but it really frosts me when they quote me at least twice what it would cost me to do it myself. And trying to find decent contractors around here is a real job in and of itself. I had one guy tell me he charges $500 per day for three guys to do whatever I need them to do. This doesn't include any materials. I know it would take about 6 weeks to do the work. That's a crazy amount of money. I don't know, maybe my ideas about contractor costs are out of whack. I'd certainly be interested to hear what others are paying contractors in my area (greater Charlotte, NC). Maybe that would make a difference.

I've already wholesaled two properties, and it was the fastest, easiest money I've ever made. No renovations, no inspections, no contractors, no hauling materials, no big vendor bills--nothing but a check. I know most deals are not as simple as mine were, but there's gotta be something to the wholesale side of things or else everyone would carry the house through renovation and full market sale.

I don't know. I just thought I'd see what others have to say. I even welcome the 'snarky' comments! :-)

[brianb_cobbres]

The rule of thumb is 1/3 materials, 2/3 labor. So yeah, it gets expensive.

As to why wholesale instead of rehab? I guess its a lot less headaches, a much quicker turn time, and you can do many more wholesale deal in the same time it takes to do a single rehab. You said it took a year to rehab one of your houses. Think how many wholesale deals you could have done in the same year.


You may want to check out some of Steve Cooks stuff. He really takes it to the next level.

[Dan Auito]

I would mix and match the deals as they come your way. Looking to either keep it and fix or acquire and wholesale.

Find an individual local to you that does wholesales and work the first find with him or her to learn the tricks and get the proper paperwork for your NC location.

Once you have the paperwork and the idea you can use options or cash to keep it simple.

Just ensure you can get a buyer and the margins are really there without expensive hidden defects.

I would do both, rehab and keep, wholesale and flip as the deals and your available time dictate.

Ceres a member here could send you all the paperwork you need to do options in conjuction with the flip.

[lpittenger]

Hey Tim, what exactly is a Dealer? What is the IRS explaination of a Dealer? Are you saying a wholesaler is considered a dealer not an investor? Sorry new at this side of the business!

thanks,

Linda

[mike_mn]

A wholesaler can be thought of in the same way as a day trader in the stock market.

Anyone who buys something for the purpose of reselling it for profit is a dealer. This includes real estate. Dealers are subject to income tax at his or her income tax bracket for the amount he or she makes over the calender year on the transactions closed. This means you must pay FICA/Medicare, Fed and State(where applicable) on any and all profits if you do business in your own name. Certain entity structures can alleviate the amount of tax burden you would otherwise face.

The IRS doesn't use 1yr holding as a way to get away from the dealer status. To be considered an investment you must be trying to lease the property at market rate if you are trying to consider it as an investment and make its sale subject to capital gains treatment.

[BSH]

I'm learning a lot here--didn't know about the dealer classification for wholesale investors. I've actually sold few of my properties, some short term, some long term. Mostly I rent them out if the numbers work. So even if I resale only occasionally, I'd be considered a dealer, huh?

[waynelong]

I think he is saying whatever entity does the wholesale deals will be a dealer. It doesn't cost much to create a corporation. In my state it is really just about $100 if you go directly thru the State of Georgia. Then have your accountant make the best election for tax purposes and set up a bank account.

[ZNICK]

Personally, I think 3 men for $500 a day is a very good price, IF they show up, and work fast. I pay 2 guys $400 and consider it cheap.

One thing you have to consider when you say "they want double the amount it would cost for you to do it", is are you paying yourself for your labor, or just your cost of materials?

The time you put in should be paid for... to yourself.

If you work 40 hours a week for a month to do the job, you need to consider how much money you've lost in time/hours. In other words, if it cost you $5000 in materials and a month to do the job, and you did it yourself, you have to count the $ you should have been paid for that month of work. I would suggest that it cost you a total of $13,000.00 to do that job. (minimum)

I'm not sure I explained that well, lol... but in any case, don't forget to PAY yourself 1st! I did that for a long time in my business, and paid for it later...

Z

Z

[SPIVALAW]

I disagree somewhat.
A property is dealer property.
A person is not a dealer.

You can have investment (hold) property and Dealer property.

It is all based on your "intent".

You can actually buy a property with intent to flip and have to sit on it for a long time, yet it is still "dealer".

you can buy a property to rent and changed circumstance result in a sale and you can still treat it as investment property.

If you "flip" property as a business
it is not treated with same advantages as a buy and hold.
ie no capital gains,
no unearned income,
no 1031,
no depreciation...
its like buying and reselling a car...

[BSH]

Thanks for the info guys. I would say that right now, more than 75% of my business activity involves keeping properties and renting them out (and I keep those--they're providing monthly cash and they are my retirement fund). Just once in a while I decide to turn around and sell something, for an even bigger cash infusion. So maybe I'm safe from the dealer stuff.

Although, really, how horrible is it if I am declared a dealer? For example, if I'm not holding properties, depreciation is not important.

Anyway, I'm still in the decision-making phase. Really, I just always have my feelers out for the next deal, and each property I find presents a different opportunity. Some properties would be great to keep and rent out. The next property might be a great flip deal, and so forth.

I think for a while, I'm going to focus on properties that need the least repair. I'm sure that's what everyone else ultimately tries to do. We'll just see what comes down the pike, as it were.

Thanks a bunch for the input!:praise: