target="_blank" rel="nofollow" href="#fb3_img_img_6e2c3b52-8f88-5690-bc2c-ee32c3868c3f.png" alt="Warning"/> To protect your own and your investor’s assets when you purchase a foreclosure property, be sure you’re getting a mortgage in the first position — not a second mortgage or a junior lien. The person who owns the first mortgage gets the property — anyone else who has a claim to the property gets the crumbs if anything. In Chapter 9, I explain how to do your homework so that you know exactly what you’re buying.
If you contact everyone you know and you’re still short on cash, consider approaching a hard-money lender. Hard money is typically a short-term, high-interest loan. In Chapter 4, I discuss various types of loans, including hard money, and I provide more information on securing the financing needed to flip properties.
Hiring an accountant
Most of the accounting that applies to house flipping consists of simple addition and subtraction. Add up the total cost of buying, renovating, and selling the house, and then subtract it from the amount you receive when you sell the house. If you come up with a positive number, you made money.
Unfortunately, reality is a little more complex, and having a professional accountant on call can help you avoid unnecessary expenses and legal woes. This person can take all your money and receipts out of your shoebox, sort them, and figure out whether you made any money. If you did make money, the accountant can calculate the amount of tax you owe. An experienced accountant also delivers the following services:
Saves you money on income tax while remaining in compliance with complex IRS tax laws. Section 179 of the IRS tax law is a good example: It states that if you qualify, you can expense as much as $25,000 of a vehicle if it weighs between 6,000 and 14,000 pounds. I did this in 2015 to take advantage of Section 179. I was able to write off and depreciate $25,000 of the total cost of the vehicle in the first year, giving me a large savings on taxes. These opportunities are out there for you to take advantage of if you are (or your accountant is) savvy enough to catch them. (See Chapter 23 for more about tax issues.)
Reminds you to pay your property taxes on time.
Evaluates your house flipping activity to determine whether you’re considered an investor or a self-employed dealer.
Makes sure you pay your quarterly estimated taxes if you’re considered a self-employed dealer.
Ensures that you pay your quarterly estimated taxes on your capital gains if you’re considered an investor.
Offers a sanity check to make sure your grand vision for the house doesn’t blow your budget.
My first two CPAs didn’t work out when I was first starting out. My third CPA came through a mutual friend of mine who was a CPA and CFO of a successful company. He had a friend with an independent CPA practice. The rest is history. I’ve been using this CPA ever since — for the past 30 years.
Obtaining sound investment advice
When the money starts rolling in, your first impulse may be to roll your profits into your next flip, but that’s not always the savviest approach. You may want to sock away some money in tax deferred accounts to save on taxes and protect your gains. A knowledgeable financial advisor can provide the advice you need to make the best use of your profits.
Covering Your Back with Title and Homeowner’s Insurance
When you sign on the dotted line to purchase a property, you own not only the property but also all the problems associated with it. Buy a property from someone who’s facing foreclosure, and you may just own a property that has one or more liens against it — legal claims against the property to secure a debt. (See Chapter 7 for more information about foreclosures and Chapter 9 for guidance on how to research a property.)
To avoid unforeseen problems associated with the title of a property you’re about to purchase, carefully research the title history, as explained in Chapter 9. Researching the title history ensures that
The property you think you’re buying is the property you’re actually buying.
The person selling the property is the person who owns it.
You’re aware of any liens against the property or taxes due.
Any rights, such as mineral rights, are transferred to you.
Your deed or title is in recordable form.
You’re aware of any restrictions on the property; for example, if you’re buying a home in a historical area, the renovations may have restrictions.
If you have any questions or concerns about a property’s title, consider consulting a title company in your area that has a reputation for smooth closings. Establishing a relationship with a reputable title company is good practice even if you don’t have concerns over a specific property’s title history. In exchange for your business (hiring them to handle your closings), a title company may be willing to do free title searches. A reputable title company can also expedite closings to ensure that you don’t miss out on good deals.
Speaking of insurance, you should always obtain a homeowner’s insurance policy for any property you purchase. In fact, consult an insurance agent before purchasing a property, to make sure the policy is in effect as soon as
