Well, here we are! 2 days until closing on our next rehab!
We are so excited to be starting this venture and it has been a long time coming. During this “long time coming” period, what were we doing? Well, we were appraising homes and watching marathons of Rehab Addict! We were imagining laughing with our contractors and doing demolition and twirling in the beautiful bathroom that we custom designed – what we weren’t doing is preparing for the eventual amount of paperwork that goes into doing a rehab. So, once a “long time coming” turned into a “now it’s happening”, I began the rigorous task of preparation that can be overwhelming if you don’t know what to do next. So, to all of you rehabbers who are starting up, here’s a gift from me to you:
Setting Up Your Rehab
1. Do you have a partner? YOU NEED A BUSINESS PLAN! When you’re starting a business, everything sounds great in the beginning – You’re energized, you’re positive, and it’s you guys against the world. That’s why you’re starting the business, right? Sometimes that energy maintains. Sometimes it doesn’t. If it doesn’t, it can quickly become you guys against each other. Setting up an operating agreement can be expensive ($4-5k). You need state your intentions, your stakes of ownership, and your exit strategy…and put a signature line at the bottom. You need something in writing to protect each of you. The operating agreement is not there to reference daily, it is merely there as a safety blanket for both of you. In fact, if you’re referencing your operating agreement in order to work together on a daily basis – then your partnership is nearing its end.
2. You need lawyers. Yep, it stinks. Get over it – this is not the place to cut corners. Lawyers are an investment in themselves. If you only have to pay them retainer fees during the year, then you know they are doing their job. If you have to pay more than retainer fees in a year for any given reason, you will find them priceless. They are also a great referral source for other contacts that you need. On each transaction, your lawyers should be reviewing your purchase contract, doing research on any easements associated with your property, ensuring that you receive a clear title, and coordinating the closing documents and date with the seller’s attorney.
3. You need an LLC. Name the LLC the address of your property. This is a business. Protect yourself from it. There are also tax benefits to be reaped. The deed needs to be transferred via quit-claim into the LLC.
4. You need a bank account. It sounds obvious, I know. Don’t forget it. You need a bank account that is the same name as your LLC. You will need your Articles of Incorporation from your LLC to open the bank account. You need to keep all funds associated with your rehab within this bank account. This is preventative maintenance – should you ever get sued or audited, there is only one place to refer.
5. You need insurance. If you have a mortgage, you need Rent Loss Insurance unless your lender makes an exception. In addition to that, you need Builders Risk Insurance and Commercial General Liability. Anticipate $300-500 per month in insurance and be prepared to pay the premium up front regardless of how quickly the property sells. This means that you pay for 12 months even if you sell in 6 months. Builders Risk is generally property to property meaning that you have to purchase a new insurance policy for each property. General Liability can usually be transferred.
6. You need paperwork from your contractors. We are using a general contractor for our project. You may opt to be your own general contractor, I believe in you! Here’s the truth: everyone wants to make the most money with the least risk. Keep that in mind as you draft your contracts. This is not a negative “everyone is out to get you” statement, it’s just a fact. So, follow the same mantra. If you are using a general contractor, you need to have the company add you to their insurance. Meaning you are listed, in writing, on their insurance. Regardless of whether or not you have a general contractor, you need proof of insurance for each and every sub-contractor proving that their company has insurance AND EVERY EMPLOYEE is insured. It is important that the employees are insured because John Doe roofer may want to finish your job 2 days early (yay!) and so he brings in Jack Black and May White to help in uniform. Unfortunately, Jack Black isn’t an official employee of John Doe roofer and slips, poking his eye out on a shingle. If you don’t have proof of insurance for him, then John Doe is not liable for a new glass eye. You are.
7. You need brokers. Regardless of whether you can buy or sell the property on your own for certain reasons – you need many, many brokers. You need people who need to make money on your property! They are your clients as much as you are their client. They need to be excited about your property and sell it to their network of potential buyers. Don’t cut corners on commissions – it will cost you more in the end. Pay people what they’re worth because they’re worth it.
8. You need an accountant. There is a lot of money flowing and a lot of tax associated with that money. A good accountant will check your books, make sure everything is legal, and make sure all of your finances for the property are operating in the most beneficial way for you that they can.
9. You need a bookkeeper. You have a plan, you have a lawyer, you have an LLC, you have a bank account, insurance bills, contractor paperwork, contractor bills, receipts, expense reports, commissions, and an accountant who wants all of it neatly bound in a uniform package for him to review. You’re the business owner- your job is to make the most money on every single deal. You are not focusing on making money when you are managing it every day. Delegate this work so you can market to brokers and manage your contractors.
10. You need money. I’m saving the obvious for last. You need money to pay for all of these things up front. Don’t rely on future profits to pay today’s bills. All of these items are budgets that you can determine before your first offer. However long you think you need to renovate and sell your property, double it and have those holding costs in the bank.