The short answer is NO. You don’t need a business license to flip houses. It is entirely possible to find and flip a house as an individual. However, if you choose this route, you could be leaving money on the table in the form of tax-deductible expenses. You could also run the risk of losing your personal assets if the flip goes wrong.
So while you can flip a house without a business license, doing so has major disadvantages. In contrast, using a business to flip houses has major advantages that can save you money and reduce your personal liability if things take a turn for the worst.
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Best Type of Business License for Flipping Houses
There are many different types of businesses that you can choose when starting a house flipping business. Generally speaking, it is most common for individual property investors to select an LLC because they are relatively simple to structure and they have several tax benefits. The list below contains just some of the many benefits when opting for an LLC.
LLC’s Are Popular With House Flippers Because They Are:
- Easy to register online
- Numerous tax benefits
- Well-suited to real estate
- Protection of personal assets
- Flexible structure allows the business to adapt over time
It is worth mentioning that S-corporations, C-corporations, and Sole Proprietorships are also commonly used by real estate investors. LLC’s are the most popular option because they are so flexible, allowing house flippers to fine-tune the business structure to meet their particular needs. You can learn more about the best business entity for flipping houses here.
Why You Should Use An LLC Business License To Flip Houses
Tax-deductible expenses
This is arguably the biggest benefit when opting to use a business to flip houses rather than flipping houses in a personal capacity. The list below contains the most common tax deductible expenses:
- Cost of purchase (only deductible after the house is sold)
- Cost of materials during renovation (only deductible after the house is sold)
- Cost of labor during renovation (only deductible after the house is sold)
- Vehicle or travel expenses (gas used when traveling to and from property + wear and tear on vehicle)
- Office expenses (rent, utilities, and stationery supplies)
- Cost of building permits
- Loan interest
- Commission paid to a real estate agent to find the property (if applicable)
- Business expenses
- Legal fees
- Accounting fees
You can find a more complete explanation of tax-deductible expenses when flipping a house here. The net result of being able to deduct these expenses is that the final profit that you make during the flip will be significantly higher.
Personal Liability
The simple truth is that there are risks involved when flipping a house. If things go pear-shaped during the deal, setting up a business can prevent your personal assets from being used as collateral to pay back whatever debts may be owed.
Even though this represents the worst-case scenario, it makes perfect sense to be safe rather than sorry when dealing with personally owned assets. This alone should be a compelling enough reason to overcome the minor administrative hurdles involved in starting a business.
Easy To Add Partners
When you first get started with property flipping, you might not be ready to bring on a partner (or multiple partners). Fortunately, LLC’s can accommodate the inclusion of a new partner at a later stage. In other words, you can start your business without a partner, and then add a partner in future, without having to set up an entirely new business.
Easy To Sell
If your house flipping business becomes highly profitable, there may come a time when you decide to sell the business outright. This would not be a viable option if you choose to flip houses as an individual.
While it may seem strange to consider selling a profitable house flipping business at first, if you have solid systems setup, you could potentially fetch a very lucrative multiple (your annual business earnings multiplied). In this case, the business structure would help facilitate the sale, and potentially help fund an early retirement in the process.
Flipping Houses As An Individual vs Flipping Houses Using A Business
Flipping Houses As An Individual
Pros
- If you live in the house that you buy, there are unique tax benefits that you can utilize
- Requires far less administration
- You can save on minor expenses like business bank accounts and registration fees
Cons
- Limited tax benefits
- Little or no personal asset protection
- Less profitable, especially if you flip several houses
Flipping Houses Using A Business
Pros
- Major tax benefits
- Personal asset protection
- Easy to add partners
- You can make more money in each and every successful deal
- You can sell the business for a profit if you ever choose to exit
Cons
- There are more expenses involved
- Can be complex for inexperienced investors to set up
- There are some administrative challenges that could slow your progress initially
How Do You Register An LLC For Flipping Houses?
The owners of howtostartanllc.com have broken this process into a series of simple steps, namely:
- Step 1: Plan your business
- Step 2: Form a legal entity
- Step 3: Register for taxes
- Step 4: Open a business bank account and credit card
- Step 5: Setup your accounting procedures
- Step 6: Obtain necessary permits and licenses
- Step 7: Get Business Insurance
You can view a full explanation of each step here.
Ultimately, the process of starting an LLC is not as complex as you might think. There are hundreds of online businesses that provide this exact service while guiding you through each and every step of the journey.
Final Thoughts
At this point, it should be clear that there are major benefits to starting a business to flip houses. It reduces your personal liability and increases the profit that you can make on each and every deal. Of course, you can still choose to flip a house as an individual, but when you file your tax return, you may wish you hadn’t.
Frequently Asked Questions (FAQ)
Do you need an LLC to flip houses?
Strictly speaking, no. You could flip houses as an individual, or you could select a different type of business such as an S-Corp or sole proprietorship. That being said, LLC’s are very popular with house flippers because they offer almost all of the most important tax benefits while being very adaptable.
Can you really flip houses with no money?
Despite what many gurus say, you need access to some capital in order to flip houses. When flipping a house for the first time, most investors will make use of a hard money loan, which can cover up to 90% of the home’s value. This means the investor has to cover 10% (or more) of the property’s value. It’s hard to imagine how you would do this without using your own capital, or borrowing from an alternate source.
More importantly, when you take out a loan (be it a hard money loan or a standard home loan) you have to be able to pay the monthly installments. This is why your current earnings and credit score are analyzed by most reputable lenders. Loan providers are unlikely to lend money to people with low credit scores and unstable income. Anyone who tells you otherwise is promoting false information.
Do you need your real estate license to flip houses?
No. A real estate license is not necessary to flip houses. You can make use of a real estate agent in the flipping process, but they aren’t absolutely necessary, and you don’t need to hold your own real estate license to successfully flip a house.
With that being said, the main benefit of acquiring a real estate license is that you can save on real estate agent fees when the property is bought and when the property is sold. This can make the deal more profitable and open up additional funds for renovations. So while there are benefits to having a real estate license, it is not a requirement and you can definitely flip houses without one.
Is flipping houses still a viable business?
It most certainly is. In 2018 and 2019, the average house flip generated a gross profit of more than $60,000. While the total number of flips has decreased in 2020 due to the impact of coronavirus, the real estate market is still very healthy.
Provided you research each and every deal thoroughly and learn how to find undervalued properties, there is still every reason to invest in the house flipping business model. You can also gain a better understanding of all the numbers involved in a typical house flipping deal, by using our fix and flip deal analyzer.
Do you need a contractor's license to flip houses?
The short answer is No. However there are a number of benefits to having a contractor’s license. This article explores if you need a contractor’s license to flip houses in more detail.