Launching a New House Flipping Business In 2023
As a follow up to my post on investing with other people’s money, one way I’ve invested with other people’s money this year is by partnering with another investor. Specifically, at the beginning of this year, I created an entirely new house flipping business with my new business partner. In this post, I will describe how we structured the business, why we decided to structure it that way, and some of the flips we’ve already undertaken!
Establishing a business
My business partner and I wanted to flip houses in Texas together. We also wanted to protect our personal assets from our business, in case anything bad happened to the business. So we knew we had to establish a proper business entity to separate business transactions from our personal ones.
Since both of us have experience owning and running companies before, we both knew that if we created a single business that flipped multiple houses, if any one of those homes were to be involved in litigation, all the other homes would be at risk. So we had to find a way to create a business per house flip to completely separate liability, not only to protect our personal assets, but to separate each companies’ assets from one another.
But creating a business per house flip was going to be too tedious and costly. Was there a better, cheaper way? It just so happens that in just a few states, Texas included, there’s a special type of LLC called a series LLC. Since we only planned on doing business in Texas, a series LLC would work out well for us.
What’s a series LLC?
A series LLC is a special kind of LLC that allows us to create a hierarchy of LLCs very easily with minimal paperwork that can be done by us without hiring a real estate attorney for every LLC we create. So this would enable us to quickly, easily, and cheaply (free actually) create many LLCs, one per house flip.
To keep things simply, you can think of a series LLC as a parent LLC that owns all of the child LLCs underneath it. We hired a real estate attorney to create the parent company for us, but they taught us how to create all the child LLCs for each of our future house flips.
The parent LLC has a separate bank account for all administrative transactions, like accounting. Each child LLC has their own bank accounts to separate each flip’s transactions, too. They all technically share the same EIN, employee identification number, that’s assigned to the parent LLC, but each child LLC has a distinct name. A properly named child LLC will be named in the format “1234 address of property, a series of parent LLC name.” Sticking to this format, allows us to easily identify the name of the child LLC, its bank account, and that it belongs to a parent LLC.
Now that we created our business entity together, let’s dive into some of the flips we’ve already undertaken as a newly formed team!
Frisco, TX deal
On 1/19/23, we purchased our very first property in Frisco, TX. The terms of the deal included a 2-week leaseback period, where we would let the seller live in the home rent-free 2 weeks after we purchased the home. Ultimately, we let them stay in the home a couple extra days because the Dallas area was hit by a bad snow storm, but they moved out on 2/4/23. Rehab began promptly on 2/6/23 and completed on 3/30/23, an 8-week project, just in time for spring selling!
I’m sure most of you are more curious to see what the profit looks like, so here’s the rough math on the deal:
Purchase price: $469,550
Down payment: $70,000
Purchase costs: $13,852
Rehab costs: $70,000
Hard money mortgage (3 months): $9,477
ARV (after repair value): $660,000
Sale costs (6%): $39,600
Profit: $57,521
3-month ROI: 35.22%
This is a really rough, conservative estimate. We’re actually planning on listing the home around the $700K mark and not at the $660K ARV price point. But as an investor, it’s best to keep my expectations low and estimates conservative.
Plano, TX deal
About 3 weeks after the Frisco deal began, we scooped up a 2nd property in Plano, TX on 2/10/23. Just like the Frisco property, our contractor promptly began working on the home on 2/13/23. The numbers on this home aren’t as juicy as the Frisco one, but the rehab should be simpler, faster, and result in a quick sale.
Purchase price: $282,500
Down payment: $36,000
Purchase costs: $10,950
Rehab costs: $36,000
Hard money mortgage (3 months): $5,063
ARV (after repair value): $380,000
Sale costs (6%): $22,800
Profit: $22,687
3-month ROI: 25.78%
This home is slated to finish a week after the Frisco home, which would result in a 9-week rehab project. Since the price point is around the $400K mark, there should be more buyers in this range.
Takeaways
2023 has really started off with a bang! Not only have I embarked on a new business venture that’s undertaken 2 flips already, but we’re about to begin the final phase of the house flipping: selling the homes! With the recent bank failures at the forefront of the Fed’s mind, I am hoping they will keep interest rates from rising any further. This would be a really positive change of events for the housing market and hopefully just in time for our home sales. I’ll keep my fingers crossed and keep you all posted on how things turn out!
