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Please Evaluate My Plan to Get Into REI

kaebr

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May 6, 2012
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Hi there, I have been kicking around the idea of real estate investing for a couple of years now, reading different books off and on and finally decided to take the leap within the last few weeks. I did place an offer on a bank repo but the deal fell through after getting a quote from a contractor which was well above the budgeted amount. I have got myself set up with a broker who specializes in private lending so I think things are good on that front.



My plan as it stands now is to move my family from our current home into a new home. Our current home is owned free and clear and probably worth about $110,000. We are planning to take a private equity loan out on this property and put 20% down on our new house with the remaining 80% being financed with a traditional mortgage, use about $30,000 to do some much needed updating on our current house and than list it around the $150-$160k mark. Once that sells the profits will be invested into future flips with multi units being snagged up whenever the right deal presents itself.



I truly appreciate any and all input!
 
Before taking any action talk to an accountant

Depending on specifics of your situation you might be better off waiting to purchase until you have sold your home, then purchase your new home outright, then take a heloc out on your new home
 
Based on the information/numbers you have provided I suspect renovating/updating your present home will result in a loss at sale. If it is presently worth $110000 it is very unlikely "updating" to the tune of $30,000 will increase the value even up to 140,000.

My guess would be that once you include all carrying costs, cost over runs and real estate fees you will be better off selling as is and moving on. Your projected profit margin is too tight to warrant the headaches in my personal opinion.

Do some serious research on the local market and confirm that the present value is well below market and confirm the comps for the area. Ignore the fact that you own the home and remove the emotion from the equation. Home owners always think there homes are worth more that they sell for.



Talk to a realtor familiar with your area.
 
Another reason to begin by talking to an accountant: money made from flips is taxed as income and not capital gains. Your personal residence would be exempt (unless you ended up renting it out for a while before selling it). Otherwise the entire gain is taxed as income, so be sure to take that into account when analyzing deals.
 
Thank you all very much for your input and suggestions. I have checked comparable in the neighborhood and feel the house could list at around $170,000, but I want it to move quick. In fact there is house directly behind my house, which is about 75% the size of my house which went on the market for $159,900 and sold within a month. This house also has a crawl space basement whereas mine has a full basement, which would be finished before listing. I also should have mentioned the $30,000 reno budget includes myself doing the majority of the work, taking that into account it would otherwise be a $50,000 reno.



That being said, I will definitely talk with an accountant prior to doing anything and possibly establish an LLC to conduct my endeavors under.



Does anyone have any suggestions on how I should have the accountant structure everything? For example, I plan to do flips, as well as buy and hold rental units. I have seen a few places where it was suggested you should have a holding LLC, an LLC to conduct the flips, as well as another LLC to manage the rental units.



Thanks again!
 
One regret I have is selling my first home. I should have refinanced, pulled out equity, bought a new principal residence, and rented out the old home. It would have been a great renter and it would have doubled in value since I purchased it. You may want to consider the same.



Nik
 
I suspect you have been reading American sources of information regarding the need for a LLC.

It is not generally of much point as you will only be taxed at a higher rate, they do not provide much personal protection and are unnecessary unless you have 5 or more employees.



A LLC may also make it more difficult to obtain mortgages.



Again I strongly suggest you contact a real estate agent with some back ground in your area to assess your property before moving forward. If you intend to do this as a business engage the help of professionals. You will need a agent at time of sale anyway and they will be invaluable in locating future investment properties.
 
Good post above from Greg re talk to professionals

If you are in Ontario give George Dube a call for accounting services BEFORE you do anything more
 
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