Keeping the governments paws off your hard earned money!

Posted by capitalhomeslp on Nov 2, 2011 in Blog, Brandon McDonald | 0 comments

***In this entry Id like to talk about something that may seem a bit boring… Business plans.

It sounds boring, however, It’s the time when you get to plan out how rich you’re going to become!  That’s seems exciting to me!!

When I started out in this business almost five years ago I had a plan in mind “more, more, more!!” not a bad plan, kind of.  As I developed and grew over time I found holes in the “more, more, more” plan.

Hole number one, taxes… There are few things people hate more than paying taxes.  I’ve never met anyone that was soooo happy with the way the government distributed money that they were excited about April 15.

The more money I made the more taxes I paid.   This makes sense to me, but I still don’t like it so I wanted to find another way around it.

Hole number two, Resources (time, labor and money) became harder to keep under control.  Jobs were going over budget because I wasn’t riding herd on my workers backs every second of the work day.  People don’t seem to perform as well when you’re not breathing down their necks, Imagine that!!

When you work for yourself you actually have to write a check to the government every year.  My father says “if everyone had to actually write a check to the government instead of it coming out of their checks automatically, there would be a revolution!!”   Its true, At the height of my “More, more, more” plan I could have purchased a very nice car with the check I wrote… yuck!!

This year in Nashville the prices have leveled off and people are coming back out of their shells to buy homes.  Flipping is still a very viable option right now, however we’ve changed.  In the last two months we have purchased homes for $11,600,  $18,000, and $15,000.  The after repaired values are relevant, however, Im going to tell you about a new way to look at house prices.    Let’s do an example.

The home we purchased in Madison for $11,600 is a 2 bed 1 bath around 900 square feet.  It needed a bit of work, so we spent about $10,000 on paint, carpet, a roof etc.  So we are in the home for about $22,000.  The home is now worth around $70,000!!  Not bad!!  If we list the house now and sell it we will probably net out at $40,000 profit and pay 25% in taxes on that gain that we take as regular income, plus both sides of Social security and unemployment tax, over $10,000 in taxes!! Once again, YUCK!!  So instead, we are going to do this.  Rent it!!

Here’s how it breaks down.   We take out a mortgage for $30,000 on the property and put a few thousand dollars in our pockets right now (this money is not taxed since it is a loan, not Income.  But it spends the same!!!)  We have a note at 7% which is $175 a month (less than most car notes!)  Plus taxes and insurance the total payment is around $275 per month.  We have it rented at $650.  This means we have positive cash flow of $375 per month.   The house is in great shape since we just updated everything and we know it will remain that way because we have a very strong system of checking tenants out.

After one year we’ve made $4500 in cash flow by renting out the property.  After one year the tax rate goes to 15% for long term Capital gains  $6000 (15% of $40,000= $6,000).  How much did we make over the year in cash flow? $4500 right? We should send the renters a thank you note for paying us 75% of the tax bill!!  After their lease is up, we touchup any problems and list the house for sale after the one year mark.

This is one little trick that we are going to pull this year, and its 100% legal!!  It might not seem to be a big difference with that one house, we only saved about $8500 in taxes, however… we’ve done this 15 times this year so far!!  Do the math that’s over $125000!! I also did the numbers on the smallest deal we’ve ever done with those numbers!! We will save hundreds of thousands in taxes this way!!  It takes a bit of planning, but its worth it.  Now im supposed to tell you, Im not an accountant and I do not offer tax or legal advice.  This is just one of the things we do!

Do NOT go over budget on your rehab!! How not to lose your shirt… and mind

Posted by capitalhomeslp on Nov 2, 2011 in Blog, Brandon McDonald | 0 comments

BIG MISTAKE!!! Number 3.  Spending too much on your rehab!!

One of the questions I had starting out was, “How do you know how much it will cost to do… that?”

The more work the house needs the more your budget can get out of whack.  Out of whack means broke broke broke!!  When you walk into a house the first time, think to yourself “how close to livable is this house right now?”  If the answer is carpet, paint and a new roof, then that is a good one to start with.   If the answer is demo to the studs, new electric, plumbing, roof, air conditioning, add a bath, add a dormer ADD A NIGHTMARE!!  An easy rule of thumb is to start with a house built after 1978.  Save the 1900’s craftsman for after you’ve built up a bit of a financial pad, you’ll need it!!   Crawl first, then walk, then run.

My second flip was a great Stone Tudor in East Nashville built in 1910 (RUUUUNNNNN).  It was almost perfect on the outside!! New roof, Stone had been re tuck pointed (new mortar in the joints between the stone.  You’re learning already!!) The inside was another story… The previous owner had redone windows downstairs and redone all the drywall.  Trim, Carpet and paint and it would be looking good! Except, they decided to put all the new drywall over

1. Old electric (old is when the plugs only have two holes instead of three, can be a hazard)

2. Old plaster that was caving in (plaster feels like cement, if you knock on it, like you would a door, it will hurt your hand.  It doesn’t sound hollow, and its usually a bit bumpy)

3. Paneling that was like the duct tape holding the walls together.  Lots of paneling was used in the 50,s and 60’s to remodel the older houses.  I consider this a sin!

It all had to be torn out!!! Big bucks!! To make a long story short, this was just the start of what turned out to be a money pit.  I spent twice what I had originally budgeted!! Luckily, since I had purchased the home well, I still made a little bit of money.  A very little bit… I could have made more flipping burgers instead of houses.

You do not tell a house what it needs to be redone.  It tells you!  It is your job to ask the house the right questions.  If you cant, then it is your job to hire someone that can.  Get 3 General contractor bids and average them.   This should be done when you have the house under contract WITH AN INSPECTION CONTINGENY.

Ill be more in depth on specifics of what we pay for things in 2011 later on in the blog.  This should be enough to scare you away from the money pits!!!