The Strategy Lenders Don't Want You to Know (But Can't Stop)
TLDRFlipping pays you in months. Rentals pay you in years. You need grocery money today. The fix is four separate entities inside your operation: real estate agent, wholesaler, GC, and laborer. Each one bills the flip, you collect today, and the companies get paid off the loan while you are working.
Table of Contents
- The Three Horizons of Real Estate Money
- The Four Entities That Get Paid Today
- How the Wholesaler Entity Actually Works
- The GC and Laborer Plays
- Why Separating the Entities Matters
The Three Horizons of Real Estate Money
The problem with real estate investing is that the money arrives on three different timelines.
| Horizon | What pays you | When it arrives |
|---|---|---|
| Short term | Services billed to the flip | Today, off the loan |
| Medium term | [[house flipping | House flipping]] profits |
| Long term | Rental cash flow | Years into the hold |
If you only rely on the medium term, you cannot pay for groceries while the flip is running. If you only rely on the long term, you cannot pay for anything for five years. The short term horizon is what keeps the lights on while the wealth is being built underneath.
Eventually medium term flip chunks replace short term service income. Eventually long term rental income replaces the flips. You stack the horizons until you are mostly living on rent and paying very little in taxes. That is the model.
Until the long term kicks in, you need a way to make money today.
The Four Entities That Get Paid Today
Here are the four companies you can stack on top of a flip to collect money today instead of waiting for the sale.
| Entity | What it does | License needed |
|---|---|---|
| Real estate agent | Commissions on the buy and the sell | Real estate license |
| Wholesaler | Assignment fee on deals you find and sell to yourself | No license in most states, check your state |
| GC | Project management fees billed to the flip | GC license usually required |
| Laborer | Hourly wages for construction labor | None |
Not every investor has all four. You might run two or three. The idea is that the loan you take for the flip pays these entities as the work happens, and you collect paychecks while you are still building the flip.
Do not freak out on the word “company.” An entity is just an LLC and a bank account. You go online, set up the LLC, open a bank account, and you have a separate legal entity. This is not legal advice. If you are freaked out about entity setup, go talk to a professional.
A separate entity is a bank account with legal paperwork around it. That is it.
How the Wholesaler Entity Actually Works
The real estate agent play is the simplest. You find a house on the MLS. You buy it through your investment entity. Your real estate agent entity gets paid the buy side commission. When you sell, the agent entity gets paid again.
The wholesaler play is the one most people miss. Here is the math.
A seasoned wholesaler gets a house for $160,000 and sells it to you at $180,000. They pocket the $20,000 difference. First time you see that at closing, it makes you sick.
Now flip that picture. You go find the same $160,000 deal yourself. You route it through your own wholesaler entity. That entity assigns the deal to your investment entity at $180,000. You take a hard money loan to buy at $180,000. Your hard money lender is used to wholesale fees. At closing, the $20,000 assignment fee gets paid to your wholesaler entity.
You just paid yourself $20,000 today for finding the deal. Then you still get to flip the house.
Last time I paid a wholesaler a $100,000 fee was on an apartment complex. It hurt. It happens to all of us. The fix is to be the wholesaler the next time, not to cry about it.
Pro TipThe wholesaler entity lets you capture your own deal flow work as income instead of giving it away to somebody else’s LLC. Every flip you do after that pays you on the front end and the back end.
The GC and Laborer Plays
General contractor income is where construction becomes the power in this whole model. Not DIY. MIY. Managing it yourself.
If you have your GC license, your GC entity can bill project management fees to the flip. Usually a percentage of the construction budget. The loan pays it. You collect today instead of waiting for the sale.
Without a GC license you can still get some of this, but you have to play it honestly. If you are not actually functioning as a GC, do not bill GC fees. Cross lenders the wrong way and the whole thing unravels. You also want general liability insurance and probably a workers comp exemption on your GC entity. Basic business stuff, but necessary.
The laborer play is the simplest of all. The GC you hire is going to hire subcontractors to actually do the work. Pull up floors. Paint. Install doors. Do landscaping. Put on hardware. A lot of that work can be done by you or anybody you hire, even with no construction experience.
If you are the GC, you pay yourself an hourly rate for hours you actually work. If you are not the GC and you are working with one, you can arrange for them to pay you for labor. It gets a little more complex on that version. You have to be the GC for it to be clean.
Every dollar a sub would have charged is a dollar you can pay yourself for doing the same work.
Why Separating the Entities Matters
The reason the entities have to be separate is that the lender, the insurance, and the IRS treat each one as its own party.
You set up your investment entity to own the flip. That entity borrows the money. Every other entity bills the investment entity for services. Each one gets paid off the loan or at closing.
If you try to collapse all of this into one LLC, the lender sees it as the borrower paying themselves, which in most cases is not allowed. You might not be doing anything wrong, but the structure reads wrong.
Separate LLCs with separate bank accounts make the flow clean. Invoice comes from the real estate agent LLC. The investment LLC pays. Easy to audit. Easy to justify. Each LLC has its own tax treatment, which matters for self employment tax, for insurance, and for bookkeeping.
You do not need all four LLCs on day one. You might start with just the real estate agent. Or just the GC. Add the others as the deal volume grows. But understand that the goal is to get those hands out of your pocket.
When I first started, it felt like everybody had their hands in my pocket. The fix was not to work harder. The fix was to replace each of those hands with one of my own entities.
FAQ
I am brand new. Which entity should I set up first?
Either the real estate agent or the wholesaler. The agent requires a license but pays on both the buy and the sell. The wholesaler has no license barrier in most states and pays as soon as you find your first deal. Start with whichever matches your skill set.
Do I need a lawyer to set up these LLCs?
No, but it helps on the first one to understand your state’s rules. Many investors set up LLCs themselves through the state’s online portal. Check with a CPA on how to handle inter-entity billing so it stays clean.
What if the hard money lender flags the wholesaler fee I am paying to my own entity?
Most hard money lenders are used to wholesale fees on deals. As long as the assignment is documented properly and the entity is truly separate, they will close it. If a specific lender balks, they are probably not the right lender for this model.
Is this legal?
The structure itself is legal when done with real, separate entities and real services provided. This article is not legal advice. Talk to a CPA and an attorney in your state before you set this up for real.
How do I pay myself without crossing a line?
Keep every entity real. The real estate agent actually functions as a real estate agent. The GC actually manages the project. The laborer actually does the labor. Bill for work that was actually done. Do not bill fake hours. That is what keeps the structure defensible.