# Flipping full-time



## Jwkm55 (Mar 16, 2014)

Hi all,

Lately I have been considering flipping houses. Based on my interest and experience as a Construction Estimator (with project management experience) for a custom home builder, I believe it's something I now need to consider and explore in detail and doing this as a career. I have strong relationships/connections with just about every trade, designers, engineers, a realtor and an accountant which makes this endeavour even more attractive. 

Right now I have a couple of opportunities to either partner with my wife's boss (who has a boat load of money and will be doing this at some point this year in a very wealthy neighbourhood that's currently building custom homes all over, with or without me but prefers to do it with me), or my father in law (who doesn't have as much capital, doesn't take as much risk, also haven't discussed it with him yet, but I would trust him more). I'm curious/concerned in a few areas that I need assistance with:

1) I don't know my role if I invest with them, whether I would be a partner and split the profit or if they would simply hire me as a general contractor to build the house. I will find this out soon as I'm planning on talking to them in detail about it in the next coming weeks. I'm assuming I should push to partner with them if possible though as opposed to working for them as a general contractor, correct? 

2) Is it more profitable to pursue this as a business owner or a home owner? Meaning, as a business owner all of the profit would be taxed, I would need to open up my own business and incur the cost of that along with all required insurances, etc., however I could write off a lot as well. Or, as a home owner, I would pay capital gains tax which my understanding is half the profit is taxed @ 35% (or whatever the bracket is). How tricky/complicated is it to do this as the owner (or part owner) of the property? 

3) To accurately project my net profit, please let me know if I'm leaving anything out:
- Cost of loan
- Cost of property
- Carrying costs (hydro, water, property tax)
- Drawings/permits/engineering
- Construction cost
- Staging
- Realtor commission fees
- Lawyer fees
- Land transfer tax
- Capital gains tax (or income tax if I were to do this as a business)

To be clear, I'm not looking to purchase a property and renovate the kitchen/bathroom and sell it, I'm looking to purchase cheap properties, tear them down and build custom homes in a custom neighbourhood. There's a bunch of pockets within an hour of me that I've had my eye on. 

I would really appreciate some insight to those who have personal experience doing this.

Thank you in advance!


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## sags (May 15, 2010)

I doubt there are many "cheap" properties in good neighborhoods. 

You can buy cheap properties in a crappy neighborhood and build a custom house, but you will likely lose money on it.


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## Jwkm55 (Mar 16, 2014)

sags said:


> I doubt there are many "cheap" properties in good neighborhoods.
> 
> You can buy cheap properties in a crappy neighborhood and build a custom house, but you will likely lose money on it.


When I say cheap, I'm referring to one of the cheapest properties in that specific neighbourhood.


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## tygrus (Mar 13, 2012)

You will go to all that expense and trouble and all the costs will just widdle your gain down to zero in the end. You cant put up a better house than the area demands so your upside is limited. 

Usually flipping a house means valuing your labour at zero and hoping to gain that on sale. Usually at sale time whatever gains are left are eaten by fees commissions and taxes.


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## Just a Guy (Mar 27, 2012)

Technically this isn't flipping, this is developing. Flipping implies the original building stays, developing means you're building new. 

While there can be money in this, it can be fairly high risk. The contractors are the ones who usually make the money on any of these ventures.


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## OptsyEagle (Nov 29, 2009)

If you are doing this full time then I doubt you would be able to NOT call it an income as opposed to a capital gain, but I am not an expert.

In my opinion, most people that have success in buying a property, doing some improvements and then selling it for a good profit, usually believe that it is the result of their unique knowledge and hard work that generated it. In the lions share of cases, again in my opinion, the majority of the profit came from the general appreciation of real estate that took place over the time it took to develop the property. Change that upward curve to a downward curve. Add in a large amount of leverage with borrowed money and the picture can turn from rosy to nasty, quite quickly.

Of course there will be exceptions, but for those who do get caught in a general real estate price decline, it can not only result in reduced or no profit, but many times bankruptcy and legal partnership disputes etc. I won't even go into how those can then effect your family and marriage relationships.

Just something to think about. Be careful.


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## Mukhang pera (Feb 26, 2016)

Jwkm55 said:


> Hi all,
> 
> Right now I have a couple of opportunities to either partner with my wife's boss (who has a boat load of money and will be doing this at some point this year in a very wealthy neighbourhood that's currently building custom homes all over, with or without me but prefers to do it with me), or my father in law (who doesn't have as much capital, doesn't take as much risk, also haven't discussed it with him yet, but I would trust him more). I'm curious/concerned in a few areas that I need assistance with:


I agree with JAG in that you really seem to be talking about becoming a developer. I did a a half dozen or so flips in Vancouver over the years and, as JAG suggests, the original building remained _in situ_. It was more a matter of finding a place in which not many buyers showed interest because of being too rough looking. The idea was to buy wholesale, get in quick and transform the look of the place, inside and out, and put it back on the market, usually in about 30 days. 

Not sure where you are, but in this neck of the woods, a teardown house in a "very wealthy neighbourhood" will set you back at least $2 million. I would expect development costs on top to run in the range of $1 million to build a house that would appeal to buyers in that market. So, you (or your wife's boss) needs deep pockets going in. 




Jwkm55 said:


> 2) Is it more profitable to pursue this as a business owner or a home owner? Meaning, as a business owner all of the profit would be taxed, I would need to open up my own business and incur the cost of that along with all required insurances, etc., however I could write off a lot as well. Or, as a home owner, I would pay capital gains tax which my understanding is half the profit is taxed @ 35% (or whatever the bracket is). How tricky/complicated is it to do this as the owner (or part owner) of the property? !


I'll not purport to give you tax advice here (which, according to some, can only be taken with a grain of salt if this forum is the source of said advice) but your business owner/home owner idea might be misconceived. Others here might have more to share on the topic, but, in my experience, if the CRA gets the idea that you are building (or flipping) houses and selling them for profit, then the profit will generally be regarded as an income gain, not a capital gain, regardless of how you care to characterize it. I think it safe to say that any "homeowner" who sells a number of "homes" over a short period will be seen by the CRA as in business for profit and the tax boom will be lowered accordingly. 

That said, I know one couple (one a builder, the other an interior designer) who have done the occasional "slow flip" (my term) which means they would locate a property, move in and, over the next couple of years or so, they would completely make over the place and sell at a profit, claiming the profit as a tax exempt gain on the sale of a principal residence. So far as I am aware, the CRA never challenged them on that. They also did the same with one or two that they bulldozed and rebuilt, again, over a period of years. 

If you are going to be a "developer", you do not need to do all that much to "open up your own business". You can start up as a sole proprietor very simply. I would not recommend that for a developer, because of liability issues. It would be more prudent to incorporate a limited company so that you are not personally on the hook if, for example, a house you build collapses while a group of CMF members are having a meeting inside and they all come after you for damages.


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## Mukhang pera (Feb 26, 2016)

OptsyEagle's post got in there while I was typing and makes the same point about income/capital gains.

I'll concede his point that the handful of flips I have done in Vancouver were profitable in large measure because they were done in a rising market. In fact, I recall two that I sold without doing a doggone thing to them simply because the market was rising and someone else wanted them more than I did. I just decided not to turn down a profit, when offered.

Optsy is also right about the deadly "downward curve", the nemesis of all flippers. I saw many "investors" take a good beating in Vancouver in the 1980s when the prime rate doubled faster than you can say order nisi. The advice I gave myself, and followed, was don't get in unless you are prepared to batten down and stay in for the long haul. That means, if the market craps out, you can hold on to what you have quite easily. The ones who got clobbered were overextended and could not hang on. Some held multiple properties, purchased on a shoestring, with lines of credit at prime plus whatever. 

I got caught with a fourplex that I bought shortly before the market tanked. I could have sold at a loss and consoled myself by pointing to the profits I had already made, more than offsetting any loss. But I am a sore loser. To me, selling at a loss is to admit defeat. So I kept that place for five years, when the plan had been to cut and run in a couple of months. In the first year, it probably did no better than break even. Then, with refinancing at a lower rate, carrying out planned improvements, with increasing rents and with market recovery, the place eventually made a profit. It taught me a lot about being a landlord. I was a bit of an unwilling student, having it thrust upon me at a time not of my choosing, but, in hindsight, decidedly worth it.


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## Just a Guy (Mar 27, 2012)

There are many properties, even in a flat market, that can be increased in value. All the properties I buy are below market value (pay cash for it), I renovate them (it takes about a month) and then get them appraised for financing them. While I use the properties for rentals, the appraisals always come in so that the 80% LTV mortgage I get covers all the expences and usually even a bit more. For this to work, I need to get a gain of at least 40% in that month of renovations, I can't chalk that up to market increases. 

Of course, I've developed a system that I work with and I've got no interest in actually selling the properties, though I've been tempted at times. Also, there is a big difference between an appraisal and someone buying a house. It's also very easy to allow "feature creep" to eat away at your profits if you're not disciplined and experienced.


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## kcowan (Jul 1, 2010)

I think you need to sort out the roles of the partners. That should clarify what you are earning income from. Yes it will be income and if you also share a part of the capital gain, that will be determined as your share over and above any sweat equity contribution.

The slow flip described above might be something you can do in parallel while working on other homes for your partners.


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## tygrus (Mar 13, 2012)

My suggestion is to drop all the partnership stuff and go alone on the slow flip. Buy a place in a decent fixer upper that needs some cosmetic improvements, live in it as primary residence and fix it up slowly over time while maybe even working another job, then sell it capital gains tax free and move on. I knew a guy who did this every two years with a family and it was disruptive but he made out like a bandit.

But for the love of god dont do it in vancouver or toronto.


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## Mukhang pera (Feb 26, 2016)

Just a Guy said:


> There are many properties, even in a flat market, that can be increased in value.


I swear, JAG, that I have long recognized that fact. I beseech you to believe me. Yes, I admitted to having made money on flips in a rising market, but when I started, I did not know the market was rising or soon would be. So, in a sense, I did not in those times get to crow about how I had the savoir faire to make money on a flip in a flat market, thus displaying my flipping perspicacity. Not my fault (sniff) :dispirited:. I could not help it that the market was going up and that I was bound to make a profit regardless.


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## Berubeland (Sep 6, 2009)

Just a Guy said:


> There are many properties, even in a flat market, that can be increased in value. All the properties I buy are below market value (pay cash for it), I renovate them (it takes about a month) and then get them appraised for financing them. While I use the properties for rentals, the appraisals always come in so that the 80% LTV mortgage I get covers all the expences and usually even a bit more. For this to work, I need to get a gain of at least 40% in that month of renovations, I can't chalk that up to market increases.
> 
> Of course, I've developed a system that I work with and I've got no interest in actually selling the properties, though I've been tempted at times. Also, there is a big difference between an appraisal and someone buying a house. It's also very easy to allow "feature creep" to eat away at your profits if you're not disciplined and experienced.


Truly amazing, I found a unicorn right on CMF. :stupid:


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## Mukhang pera (Feb 26, 2016)

Further to my last post, I'll bet there are some experts who can turn profitable flips even in a _falling_ market.

I do not know if it's the case any longer, but there was a time when, the University of Toronto, inter alia, offered a degree: M.Sc.(F.) - Master of Science in Forestry. One can probably now pursue the a designation with the same letters, but now a Master of Science in Flipping. With that credential under one's belt, neither storm, nor sleet, nor dark of night can prevent one from making money even in the worst of markets.


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## Berubeland (Sep 6, 2009)

Talk to the stock market guys about the danger of catching a falling knife. In 2008 the Toronto market dropped 16% in three months. I'm not sure people understand how fast and furious this change can get. By the end of the year... the blip was gone. So no even an expert flipper can make money in a descending market, there are no buyers. In 2008 developers assaulted my phone and rented their houses.


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## sags (May 15, 2010)

A lot of those house flipping shows in the US were shown to be fake.

The homes weren't purchased or they weren't sold. It was all make believe entertainment.

http://www.huffingtonpost.com/2012/06/15/hgtv-house-hunters-fake_n_1600522.html

Some will be old enough to remember Tom Vu...........and the commercials of him cavorting around with beautiful women saying how much money he made flipping homes with no money down.

When another "no money down" guru was prosecuted and sentenced to prison, Tom Vu removed his commercials and faded away after the State of Florida opened an investigation on him.

Last heard........he was playing professional poker, which somehow seems an appropriate career change.

http://www.infomercial-hell.com/blog/2006/06/22/hard-time-in-prison-for-tom-vu/


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## Mukhang pera (Feb 26, 2016)

sags said:


> A lot of those house flipping shows in the US were shown to be fake.
> 
> The homes weren't purchased or they weren't sold. It was all make believe entertainment.
> 
> http://www.huffingtonpost.com/2012/06/15/hgtv-house-hunters-fake_n_1600522.html


Dadburnit! That's a grievous blow to my faith in humanity.

Then it's time for a class action lawsuit against the producers and broadcasters of those shows, and anyone connected with them. There must be many who embarked on a career of flipping, only to have their flips flop, having been led on by what they saw in those shows. Just a few potential causes of action would be negligent or fraudulent misrepresentation, deceit, intentional or negligent infliction of mental distress, etc.


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## Jwkm55 (Mar 16, 2014)

Just a Guy said:


> Technically this isn't flipping, this is developing. Flipping implies the original building stays, developing means you're building new.
> 
> While there can be money in this, it can be fairly high risk. The contractors are the ones who usually make the money on any of these ventures.


Yes, I guess this would be considered developing instead of flipping. In that case, I'm assuming I would have to enrol with Tarion Warranty as a new home builder which also makes me believe there's a hefty fee for this as well that I need to consider.

As conservative as I am, I'm quite comfortable with the risk involved because of my confidence in building. 



OptsyEagle said:


> If you are doing this full time then I doubt you would be able to NOT call it an income as opposed to a capital gain, but I am not an expert.
> 
> In my opinion, most people that have success in buying a property, doing some improvements and then selling it for a good profit, usually believe that it is the result of their unique knowledge and hard work that generated it. In the lions share of cases, again in my opinion, the majority of the profit came from the general appreciation of real estate that took place over the time it took to develop the property. Change that upward curve to a downward curve. Add in a large amount of leverage with borrowed money and the picture can turn from rosy to nasty, quite quickly.
> 
> ...


Thank you for the caution - very valid points to consider. I agree now and see that 100% of the profit would be taxed since it would be my main source of income, regardless if it was business income or personal. I'll ask the father in law to confirm this. 



Mukhang pera said:


> I agree with JAG in that you really seem to be talking about becoming a developer. I did a a half dozen or so flips in Vancouver over the years and, as JAG suggests, the original building remained _in situ_. It was more a matter of finding a place in which not many buyers showed interest because of being too rough looking. The idea was to buy wholesale, get in quick and transform the look of the place, inside and out, and put it back on the market, usually in about 30 days.
> 
> Not sure where you are, but in this neck of the woods, a teardown house in a "very wealthy neighbourhood" will set you back at least $2 million. I would expect development costs on top to run in the range of $1 million to build a house that would appeal to buyers in that market. So, you (or your wife's boss) needs deep pockets going in.
> 
> ...


As OptsyEagle also mentioned, yes I agree 100% of the profit would be taxable either way. In that case, I may as well incorporate a business so I can take advantage of writing off expenses. 

I'm certainly not interested in the slow flip as I love the area I'm in (surrounded by family) and have a family of my own so living in a construction house would NOT sit well with the wife, let alone the kids. But yes, I've heard owning a property for a minimum of 2 years would not qualify as an investment property, therefore, the profit wouldn't be taxed. Would this be true if I purchased a property, built it for 2 years then sold it? Or would that 2 year period commence once the building permit has been closed/final occupancy? 

Yes, I would incorporate the business for sure with that amount of dough being invested. 



Mukhang pera said:


> OptsyEagle's post got in there while I was typing and makes the same point about income/capital gains.
> 
> I'll concede his point that the handful of flips I have done in Vancouver were profitable in large measure because they were done in a rising market. In fact, I recall two that I sold without doing a doggone thing to them simply because the market was rising and someone else wanted them more than I did. I just decided not to turn down a profit, when offered.
> 
> ...


Since the money being invested would not be borrowed, I'm not overly concerned about the possibility of sitting on it for a while during a dip in the market. I know I would still incur the carrying costs (property tax being the largest), but during the interim, renting out would be a valid option as you mentioned. I've done this in the past and not against doing it again. 



tygrus said:


> My suggestion is to drop all the partnership stuff and go alone on the slow flip. Buy a place in a decent fixer upper that needs some cosmetic improvements, live in it as primary residence and fix it up slowly over time while maybe even working another job, then sell it capital gains tax free and move on. I knew a guy who did this every two years with a family and it was disruptive but he made out like a bandit.
> 
> But for the love of god dont do it in vancouver or toronto.


That is a method I'm definitely not interested in for multiple reasons. But why would you say don't do it in Toronto?? There are many attractive pockets in Toronto/GTA that are doing this...



Berubeland said:


> Talk to the stock market guys about the danger of catching a falling knife. In 2008 the Toronto market dropped 16% in three months. I'm not sure people understand how fast and furious this change can get. By the end of the year... the blip was gone. So no even an expert flipper can make money in a descending market, there are no buyers. In 2008 developers assaulted my phone and rented their houses.


Fluctuations in the market is my primary fear. Renting is not a terrible backup plan at that point though, I'm assuming, at least until things level out again.


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## Jwkm55 (Mar 16, 2014)

Let me give you all an example of some numbers I ran on a property that was purchased, torn down, rebuilt, and sold in an area I've been interested in for quite some time. Let me preface this by saying this was over the course of 2 years and 8 months (purchased-sold) so a good portion of this was good old appreciation. I'm going to outline all the expenses I presume I would incur so please let me know if anything strikes you or if I'm missing anything here:

Cost of loan: $0
Purchase price: $445,000 (actual)
Carrying costs (hydro, water, property tax): $6,200 (estimated)
Design/engineering/permits: $13,000 (estimated)
Construction costs: $650,000 (estimated based on SF)
Staging: $15,000 (estimated)
Sold for: $1,445,000 (actual)
Realtor commission fees: $65,025 (actual)
Lawyer fees: $1,500 (estimated)
Land transfer tax: $10,000 (actual)
Total cost: $1,205,725 (estimated)
Gross profit: $239,275 (estimated)
Capital gains tax: $41,873.13 (estimated)

Net profit: $197,401.88 (split with the investor 50% - $98,700.94)


Now, that net profit is estimated over the course of 2 years and 8 months which doesn't sound impressive, however, I could easily purchase that property, build a new house and sell it in 1 full year. The question is, how much of that $1,000,000 difference between the purchase price and what it sold for was appreciation? Who knows. 

The area that my wife's boss will flip/develop in has much larger figures and it happens to be in his own neighbourhood. I was at his house the past weekend discussing the idea briefly and he showed me the small bungalow directly across the street is currently listing for $1.8M, then he showed me the house beside it that was torn down last year and re built that sold for $4.2M. I'm fairly confident the construction cost to build that house is under $1.5M, so these are the numbers that has really sparked my interest and will need to discuss more in detail with him (and all the other necessary experts).


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## tygrus (Mar 13, 2012)

Jwkm55 said:


> ...please let me know if anything strikes you or if I'm missing anything here:


Yeah something strikes me, your numbers are pure speculation. You are building a home thats triple the value of comparables in the neighbor hood. Thats playing with fire.


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## Jwkm55 (Mar 16, 2014)

tygrus said:


> Yeah something strikes me, your numbers are pure speculation. You are building a home thats triple the value of comparables in the neighbor hood. Thats playing with fire.


Sure, those numbers may be speculated, but the largest figure by far is based on years of experience as a construction estimator. I can assure you those estimated numbers are not far off.

Also, that house is not triple the value of the vast majority of comparables, it was one of the cheapest properties at the time it was purchased. That neighbourhood has multiple properties well over $2M.


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## nobleea (Oct 11, 2013)

Jwkm55 said:


> Sure, those numbers may be speculated, but the largest figure by far is based on years of experience as a construction estimator. I can assure you those estimated numbers are not far off.
> 
> Also, that house is not triple the value of the vast majority of comparables, it was one of the cheapest properties at the time it was purchased. That neighbourhood has multiple properties well over $2M.


Your build side costs look reasonable. I'd say making 240K profit on costs of 1.2M is a bit low. The teardowns in desireable neighbourhoods around here make about 250-300K on costs of 800-1M.
Since you'd be paying full income tax rather than capital gains, your profit at the end of the day is 77K. If you're going to be doing many of these, then you'd be better off keeping the money in the corporation, paying corp taxes on it, then redeploying the capital to a new project. Then you can stream dividends to yourself when your bank of capital gets big enough.

Those realtor fees are atrocious. The standard realtor fees around here for a house that price would be around 47K, and at that price range you can easily negotiate a lower fee.


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## Jwkm55 (Mar 16, 2014)

nobleea said:


> Your build side costs look reasonable. I'd say making 240K profit on costs of 1.2M is a bit low. The teardowns in desireable neighbourhoods around here make about 250-300K on costs of 800-1M.
> Since you'd be paying full income tax rather than capital gains, your profit at the end of the day is 77K. If you're going to be doing many of these, then you'd be better off keeping the money in the corporation, paying corp taxes on it, then redeploying the capital to a new project. Then you can stream dividends to yourself when your bank of capital gets big enough.
> 
> Those realtor fees are atrocious. The standard realtor fees around here for a house that price would be around 47K, and at that price range you can easily negotiate a lower fee.


I estimated conservative numbers on that property just to play it safe. I've heard realtor fees are negotiable at that price point but wanted to bank on 4.5% (2% from my realtor that is a family member, and 2.5% from the purchaser). What would you say is realistic?

Would I personally need to open this business, would the investor need to, or would both of us need to together?


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## kcowan (Jul 1, 2010)

Jwkm55 said:


> Would I personally need to open this business, would the investor need to, or would both of us need to together?


You can open it yourself in less than an hour after filling out the forms. Other investors can be joint owners but need to sign before you line up. More important is The Shareholders Agreement. I would recommend a lawyer for that.


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## nobleea (Oct 11, 2013)

Jwkm55 said:


> I estimated conservative numbers on that property just to play it safe. I've heard realtor fees are negotiable at that price point but wanted to bank on 4.5% (2% from my realtor that is a family member, and 2.5% from the purchaser). What would you say is realistic?
> 
> Would I personally need to open this business, would the investor need to, or would both of us need to together?


What my friend does is have an overarching holding company that he and his wife own 100%. Then he opens individual corporations for each project with the ownership set up as per what ever you agree with whatever partner for that project. It makes the accounting much simpler. Then close up the company when the project is done. The home warranty is the responsibility of the builder, who in this case is not the developer.

Out here, it's 6% first 100K then 3% after that. That's combined. I don't know what is realistic. I know what is fair, and 60K, or even 40K is not it. In a sellers market like TO, I'd pay no more than 25K.


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## Jwkm55 (Mar 16, 2014)

nobleea said:


> What my friend does is have an overarching holding company that he and his wife own 100%. Then he opens individual corporations for each project with the ownership set up as per what ever you agree with whatever partner for that project. It makes the accounting much simpler. Then close up the company when the project is done. The home warranty is the responsibility of the builder, who in this case is not the developer.
> 
> Out here, it's 6% first 100K then 3% after that. That's combined. I don't know what is realistic. I know what is fair, and 60K, or even 40K is not it. In a sellers market like TO, I'd pay no more than 25K.


Interesting. What's an overarching company? And I would be the developer and the builder in my case, correct? Also, if I close the company, I technically wouldn't need to be concerned with warranty work, right?


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## nobleea (Oct 11, 2013)

Jwkm55 said:


> Interesting. What's an overarching company? And I would be the developer and the builder in my case, correct? Also, if I close the company, I technically wouldn't need to be concerned with warranty work, right?


A holding company that just holds shares in all the operating companies. Dividends are sprinkled from the holdco to him and his wife as needed or tax-efficient. They hold different classes of shares so they can optimize dividends for tax efficiency.

If you are applying for the home warranty, they yes, you'd be the builder. The home warranty will be expensive for someone who has no history - it's just like car insurance. You can get a home warranty if you are building your own home (or rather sub contracting it/acting as GC). So I'm sure anything's possible. Generally they want the home owner to contact the builder first for any issues. I think a for profit builder might have to put up a bond as well.
The only real benefit for closing the operating company after each project is done is to keep the accounting clean. On project A there's two partners, on project B, there's 3 partners (2 of them different from A). on project C there's 5 partners, on project D, it's just you. All with overlapping time schedules. With a standalone company it's clear on who put how much in and how it gets taken out and if you have a cash call, it's clear on how to handle that.


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## Just a Guy (Mar 27, 2012)

The idea is to set up a holding company that has all the money and assets. Then you set up a wholly owned subsidiary company which takes all the risk, but technically owns nothing. It leases the assets from the holding company for the money it collects from the public. If something goes wrong, the public can only sue the subsidiary company, which has nothing to lose (no assets) and can be easily pruned (shut down, bankrupted) if something goes wrong. Meanwhile the owner's assets and all the money is protected.


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## kcowan (Jul 1, 2010)

nobleea said:


> What my friend does is have an overarching holding company that he and his wife own 100%. Then he opens individual corporations for each project with the ownership set up as per what ever you agree with whatever partner for that project. It makes the accounting much simpler. Then close up the company when the project is done. The home warranty is the responsibility of the builder, who in this case is not the developer.


This is the way it works everywhere. The problem is that the developer is the one who makes the promises to the buyer when they sign. And when there are shortfalls, there is only the builder who is an innocent subcontractor. That is why pre-construction deals are always fraught with risk.


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## nobleea (Oct 11, 2013)

kcowan said:


> This is the way it works everywhere. The problem is that the developer is the one who makes the promises to the buyer when they sign. And when there are shortfalls, there is only the builder who is an innocent subcontractor. That is why pre-construction deals are always fraught with risk.


I can see how it might be a problem in larger projects like condos and such. But for small time development like a couple houses at a time, the buyer usually never meets or has any interaction with the seller. All they know is it's a new house and it comes with a industry standard warranty. Otherwise, it's a realtor deal like all others. In large developments, the developer might promise XX for common amenities or landscaping, or say that nothing will get build next door in their empty lot, and then renege on those deals. Or that the unit will be available in 2017 when really its 2019. But in a SFH, what you see is what you get and everything can be spelled out in the contract.


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## twa2w (Mar 5, 2016)

nobleea said:


> I can see how it might be a problem in larger projects like condos and such. But for small time development like a couple houses at a time, the buyer usually never meets or has any interaction with the seller. All they know is it's a new house and it comes with a industry standard warranty. Otherwise, it's a realtor deal like all others. In large developments, the developer might promise XX for common amenities or landscaping, or say that nothing will get build next door in their empty lot, and then renege on those deals. Or that the unit will be available in 2017 when really its 2019. But in a SFH, what you see is what you get and everything can be spelled out in the contract.


Actually on small deals like this there is usually more not less interaction between buyer and builder/ developer.
First, house like this are often listed for sale before or when construction starts. A propective buyer may first meet with realtor but at some point during construction will usually meet with builder or developer, to discuss possible minor dedign changes, finishes, colours etc. This may take place before or after a sales contract is in place. 
In a slow market, the house may be completely finished before a buyer comes forward but in a decent market, many homes are sold well before completion, esp in desireable neighbourhoods and if the plans are well designed.


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## nobleea (Oct 11, 2013)

Really depends on how it's done.
The ones I'm familiar with, the developer is the one who buys the lots, takes care of subdivisions, decides on plans, etc. Essentially the money man who takes on all the risk.

If they're one and the same, then there's more profit for the builder, but of course more risk.

I'd say the majority of spec infill homes here would not be sold until completion. Though the ones I have personal knowledge of all sell prior to completion given the location and design.


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## sags (May 15, 2010)

Just a Guy said:


> The idea is to set up a holding company that has all the money and assets. Then you set up a wholly owned subsidiary company which takes all the risk, but technically owns nothing. It leases the assets from the holding company for the money it collects from the public. If something goes wrong, the public can only sue the subsidiary company, which has nothing to lose (no assets) and can be easily pruned (shut down, bankrupted) if something goes wrong. Meanwhile the owner's assets and all the money is protected.


In that scenario, what prevents a plaintiff from suing the registered owners of the holding company ?


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## Just a Guy (Mar 27, 2012)

I'm no lawyer, but I gather the idea is only one "entity" may be held liable. So, in the case of people, you can sue a person (assuming they aren't a minor), but not his parents, and definitely not his grandparents as long as they are not directly involved. So, the goldmens couldn't sue OJ's parents, only OJ. 

Thus, the subsidiary company is the one at fault, not the parent company which technically did nothing wrong other than give birth to the subsidiary. Each corporation is a legal entity unto itself.

It would be difficult to prove "liability" for a company which only holds assets, as they had nothing to do with the "failure". 

I'm not saying I agree with this, but I believe this is they typical legal twisting that goes on...


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## Mukhang pera (Feb 26, 2016)

sags said:


> In that scenario, what prevents a plaintiff from suing the registered owners of the holding company ?


What prevents it is that basic principle of company law that a company is a separate legal entity from its shareholders.

sags, I am guessing that you are like 99% of the people on this forum and invest in shares of publicly-traded companies. If you do, you are one of the "owners" of those companies. 

Let's suppose you own 100 common shares of GM. Let's say you paid $1,000 for those shares. Let's say that GM starts producing a car that's very popular but, after many are on the road, a design flaw causes these cars to explode on a regular basis. Sure, they are all recalled, but many deaths have occurred in the interim. So, the lawsuits follow. The U.S.-style awards of damages are so huge they bankrupt the company. You would probably not be amused if _you_ were then sued for millions by aggrieved persons who claim the right to come after you because you, after all, are an owner of the company. In a sense, you are liable as owner, but your liability is limited to the extent of your shareholding. You stand to lose your $1,000 investment, but that is all.

For setup to which JAG refers, for it to work and truly limit the liability of the principals, there must be clear lines drawn between the holding company and the operating company. Holdco can own the assets used in the business and Opco will have to be the contracting party and the only contracting party. What lawyers call "privity of contract" matters. Parties to the contract can sue other parties to the contract, but no one else. Some real estate developers create a new "Opco" for each project. For example, let's say the developer buys a parcel of land with a plan to create building lots and build houses on them. It might form a new company - let’s say “Whispering Pines Estates Ltd. (WPE)” (you gotta’ love how subdivisions are frequently named after that which they destroy). So, the name WPE is the name put before the public. It will own the project until sold. All the purchase contracts will be between individual members of the public and WPE. If someone wants to sue because the house they bought failed to live up to expectations and was a shoddy piece of crap, they can only go after WPE. By that time, the project has been sold, the profits funneled to Holdco and Opco is an empty shell.

Like everything else in life, there are exceptions to the principle of limited liability. There are times when the law says one may “pierce the corporate veil” and get at the principals of a company. Fraud would be an example. Let’s go back to WPE and suppose that it never intended to complete a subdivision, but it suggested to the public that it would, in order to collect a lot of deposit monies. If it can be shown, for instance, that the owners of Holdco conceived of a plan to use WPE to cheat would-be purchasers out of deposits, then Holdco and its owners will probably be held liable. The law will then speak in terms of who was the “operating mind” behind the scheme and hold them to account.

Another obvious example of where using a limited liability company is less valuable than may appear, is in dealing with lenders and other creditors. In theory, it’s comforting to think that the bank that lends mortgage money to WPE will have to look to WPE alone for payment. But the bank was not born yesterday and it won’t lend until assured there is some deep pocket in the background. That might be the principal of Holdco, Mr. Big. So the bank will require the personal guarantee of Mr. Big. He might be asked to put up security for his guarantee, perhaps in the form of a mortgage of his $20 million house on High Point Road, Drummond Drive, or wherever. If his wife is on title, she’ll be sent out for independent legal advice and asked to sign. If she balks, the deal is off, unless some other avenue can be found, such as an “inter alia” mortgage of other lands under Mr. Big’s control. The building material supplier might also ask for a guarantee.


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## Jwkm55 (Mar 16, 2014)

So I ended up meeting with my wife's boss to discuss the details and our potential relationship.

Essentially, he wants to open a real estate development company, run it as legitimately as possible (without cutting corners for tax saving purposes) as he is envisioning this to be a long-term business. He would match my current salary as well as a 10% incentive on the profit of every sale. With every year of business, he would like me to buy into the company, then purchase it outright in ~10 years when he would like to retire. He's thinking of purchasing a couple of properties in the Leaside area and having me tear them down and manage the build. Based on our first conversation (one of many), he will fund 100% of it and I would manage 100% of the builds, which is my preference anyways. 

There's definitely more to discuss with him, but that first conversation definitely had my interest and left me feeling very excited about the opportunity. 

The down side that comes to mind immediately, is that I would need to move closer to the area. It would be about an hour and 15 minute commute each way and I would need to be on site everyday. My current job I work from home the majority of the time. I love my house and the area, but with a family, it will be a difficult transition. At the same time, I don't want to live a cushy life with minimal risk. It would be a dream to provide my family with anything they want (within reason, of course). 

Any additional thoughts?


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## tygrus (Mar 13, 2012)

Jwkm55 said:


> Any additional thoughts?


Hell yeah, but you probably dont want to hear them. You've spun up the numbers to look like a lotto win for every property you touch so go for it.

FWIW, a side deal with your wife's boss is asking for trouble let alone probably a conflict of interest somewhere in his company.


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## Jwkm55 (Mar 16, 2014)

tygrus said:


> Hell yeah, but you probably dont want to hear them. You've spun up the numbers to look like a lotto win for every property you touch so go for it.
> 
> FWIW, a side deal with your wife's boss is asking for trouble let alone probably a conflict of interest somewhere in his company.


I wouldn't spend my time on these forums asking for advice if I didn't want to hear them so I'm not entirely sure why you're suggesting that. How exactly did I spin the numbers? I posted the numbers that I've been provided with as well as the numbers that are based on my experience. At the same time, I asked if those numbers are unrealistic or incomplete. 

He owns multiple companies but I do understand the concern. My wife and I have discussed the risk of working under the same person.


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## tygrus (Mar 13, 2012)

Jwkm55 said:


> I wouldn't spend my time on these forums asking for advice if I didn't want to hear them so I'm not entirely sure why you're suggesting that. How exactly did I spin the numbers? I posted the numbers that I've been provided with as well as the numbers that are based on my experience. At the same time, I asked if those numbers are unrealistic or incomplete.
> 
> He owns multiple companies but I do understand the concern. My wife and I have discussed the risk of working under the same person.



Because, life seldom works out the same as it does on paper. Once you are actually in the thick of things you will see that. Your property is only worth what people are going to pay for it, nothing else. And its never as much as you think its going to be. 

I dont know your wife situation but at the places I have worked, it would be a severe conflict of interest if the boss started a side venture with one of his employees spouses. Now imagine one of these deals goes sour and you and him have a falling out. Its going to be pretty hard for your wife to go and work for this guy again. She might even lose her job in the process. You need more than a legal structure for this venture, you need some contract wording to protect yourselves.


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## OurBigFatWallet (Jan 20, 2014)

last week I had coffee with a guy who flips houses. He said he is going back to his full time job (construction) as there is barely any money to be made. Flipping is great when the market is going up, up and up but if it goes down (or even stalls) the profits disappear quickly. He mentioned the only ones who truly make a good living off flipping are realtors (commissions are huge relative to the amount of work involved and no risk).

This is in Calgary where the market is going down, but he is originally from Ontario and used to flip homes there and he said it's not profitable no matter where you are. I don't have any experience in construction so can't say if he's right or wrong but it was interesting to hear his opinion.


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## Jwkm55 (Mar 16, 2014)

tygrus said:


> Because, life seldom works out the same as it does on paper. Once you are actually in the thick of things you will see that. Your property is only worth what people are going to pay for it, nothing else. And its never as much as you think its going to be.
> 
> I dont know your wife situation but at the places I have worked, it would be a severe conflict of interest if the boss started a side venture with one of his employees spouses. Now imagine one of these deals goes sour and you and him have a falling out. Its going to be pretty hard for your wife to go and work for this guy again. She might even lose her job in the process. You need more than a legal structure for this venture, you need some contract wording to protect yourselves.


Agreed. Thank you.


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## Just a Guy (Mar 27, 2012)

I've sometimes been tempted by flipping. On paper, everything looks good. I recently bought two properties, one at 95k and the other at 70k. After our standard renovations, the 95k one appraised at $140 (which I thought was really low) and I expect the 70k one to come in about the same. We just finished working on the 70k one, so I just approached the bank about financing, I should know in a couple weeks.

Both places took less than a month to renovate, both cost less than 5k in materials. If this was truly a flip, instead of a rental, I probably would have done the renos differently, and maybe been able to squeak out 10-20k more in value...

However, when I factor in the labour, the realtor fees, the capital gains (or possibly income tax as there are rules to qualify for capital gains), then the leagal fees, closing costs, property taxes, utilities, etc. That 40k-60k one month "profit" quickly erodes.

But, let's say I have a quick sale and make 10-20k profit...what do I do with it, pop it in the bank? There certainly aren't a lot more properties waiting in the wings to take its place for another flip. If I can't find anything new, and the banks don't pay interest, how can I make money?

As a rental, the two places make 1400 and 1250 each month, they are financed 100% at an 80% LTV (I got my money back out including the renovation costs) and generate several hundred dollars each month. 

Whenever I get tempted to just flip the properties, I just go and look at the math and the urge goes away...


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## Causalien (Apr 4, 2009)

Who is the sucker in the room? If you do not know, then you are it.

The question is, why doesn't your boss just partner with a developer that has experince.

From your boss's side, of things, he can borrow that money at almost zero cost of 3%. While you are buying in and paying him 10%. You can skip the middle man and just borrow from the bank. Your wife's boss takes no risk, does not work and reaps a 7% difference in profit. Just because you cannot get as big of a loan than him.

Now picture this. Average home in Vancouver as tear down is close to 2 mil. 3000 square foot rebuild at $250 per squarefoot is 750k. You need to sell this house for 3 mil. If you checked the houses sold, very few are moving on the 3 mil range. some are moving on the 2 mil range and a lot are moving on the 1mil range.

This deal tempts you because you are getting free capital. But you can get almost free capital from the bank anyway.


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## Jwkm55 (Mar 16, 2014)

Causalien said:


> Who is the sucker in the room? If you do not know, then you are it.
> 
> The question is, why doesn't your boss just partner with a developer that has experince.
> 
> ...


My wife's boss values loyalty more than anything. He would rather lose a buck than lose someone's trust. He wants to partner and build the business with someone he can rely on and trust 100% considering he's the one funding the business 100%. I'm actually not taking any risk in the sense that I'm not buying into the company anytime soon, he's paying me a reasonable salary even though the money is tied into all the properties. 

What is tempting me are the numbers. Those numbers are not similar to the pockets I've been looking at in Toronto/GTA.


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## Jwkm55 (Mar 16, 2014)

Just a Guy said:


> I've sometimes been tempted by flipping. On paper, everything looks good. I recently bought two properties, one at 95k and the other at 70k. After our standard renovations, the 95k one appraised at $140 (which I thought was really low) and I expect the 70k one to come in about the same. We just finished working on the 70k one, so I just approached the bank about financing, I should know in a couple weeks.
> 
> Both places took less than a month to renovate, both cost less than 5k in materials. If this was truly a flip, instead of a rental, I probably would have done the renos differently, and maybe been able to squeak out 10-20k more in value...
> 
> ...


Ya, I hear you, but those are very small scale flips which I'm not interested in. I hear lots of success of renting out newly built houses but at the moment, that doesn't have my interest. I'm sure it will down the road once I build reasonable capital.


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## tygrus (Mar 13, 2012)

Jwkm55 said:


> Ya, I hear you, but those are very small scale flips which I'm not interested in. I hear lots of success of renting out newly built houses but at the moment, that doesn't have my interest. I'm sure it will down the road once I build reasonable capital.


You think that insanity in TO is going to last? To do your massive flip will take almost a year. The market could look very different at the end of that period. First rule when swimming with sharks, dont bite off more than you can chew. 

Personally I would try a smaller test flip first and see how it goes. You are construction estimator. Thats very different from being a project manager.


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## Just a Guy (Mar 27, 2012)

Take a look at Calgary to see what happens at the high end...the low end of the market always has buyers as the wealthy, when hit, buy cheaper...

Flipping always seems more like gambling than investing.


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## Jwkm55 (Mar 16, 2014)

tygrus said:


> You think that insanity in TO is going to last? To do your massive flip will take almost a year. The market could look very different at the end of that period. First rule when swimming with sharks, dont bite off more than you can chew.
> 
> Personally I would try a smaller test flip first and see how it goes. You are construction estimator. Thats very different from being a project manager.


No one knows if it will last. I have already discussed what would happen if the market stagnates or declines with him, and he would sit on the property until it rises again - he's not concerned about that because of how much capital he's putting into the business.

I have project management experience so I'm not overly concerned about making the transition.


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## nobleea (Oct 11, 2013)

He says he wants you to buy in 10% every year. 10% of what? Who determines FMV? If there's profit sharing, that means that some or all of the profit from each project is paid out. What does that leave in the corporation? Are you just buying in to a brand? If so, honestly how much is a small time house flip company brand worth? 50K total? What if you can't come up with the 10% in one or more years? What if things get busy and he needs to bring on a second project manager? And promises him/her the same things? If he decides to retire in 5 years (or gets in to a car crash or whatever), how will you get your money out? Is your salary based on projects on the go, or just a true salary? That is, if things get slow and no projets are done for a couple years, are you still getting paid?


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## Pluto (Sep 12, 2013)

My opinion is this can be immensely profitable during a rising market. When the music stops most of these guys get left holding the bag and go bust. I know numerous guys who start small with one house in a rising market, expand their operations with numerous houses on the go at the same time as profits roll in and the market rises. Then the market eventually goes dead and they have to sell maybe half a dozen houses at a loss. They end up back where they started as they were blind to cycles.


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## carverman (Nov 8, 2010)

Pluto said:


> My opinion is this can be immensely profitable during a rising market. When the music stops most of these guys get left holding the bag and go bust. I know numerous guys who start small with one house in a rising market, expand their operations with numerous houses on the go at the same time as profits roll in and the market rises. Then the market eventually goes dead and they have to sell maybe half a dozen houses at a loss. They end up back where they started as they were blind to cycles.


Howe does this work? is it similar to the curbsiders buying up used cars, fixing them up and trying to sell them on Kijiji?
How do these flip-floppers get around capital gains taxes without having to live in them for at least a year as a principle residence?


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## Causalien (Apr 4, 2009)

Jwkm55 said:


> My wife's boss values loyalty more than anything. He would rather lose a buck than lose someone's trust. He wants to partner and build the business with someone he can rely on and trust 100% considering he's the one funding the business 100%. I'm actually not taking any risk in the sense that I'm not buying into the company anytime soon, he's paying me a reasonable salary even though the money is tied into all the properties.
> 
> What is tempting me are the numbers. Those numbers are not similar to the pockets I've been looking at in Toronto/GTA.


If you do business for long enough, you will understand that honour and loyalty are forms of manipulation. People who touts it are the worst offenders. Honour and loyalty are to be determined through actions, not words.

It is uncharacteristic of someone to trust you with millions without testing you first.

Tests are done through crisis. For a person of his wealth, I assume the test is somewhere around 50k to 100k


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