|LM says:Kareem, this cake can be sliced several ways and I have seen several investors do it differently. First I will tell you what I do. |
Since I am always so budget minded with every rehab I have done I have bought more and more of my materials. This gives me several advantages:
-I get to pick the finish I want. I pick the light and bath fixtures, floors, appliances and so on. That way I get to find the finish I want and I know I am getting the best price possible
- I get the contractors discount at Lowes/Home Depot. Both of these give a discount when you are registered with them as a contractor and are making a purchase of $2,500 or more
- I get the points on my credit card that in turn gives me cash back
- I can keep close track of my expenses
- I deduct all of those purchases from my profit come tax time
Having said that I will tell you that I do not buy all my materials. I let the roofer buy the shingles as he can get better price than I can. I let the painter buy the paint for the same reason. I also don’t buy carpet, windows, hardwood floors, some landscaping supplies and some lumber.
I buy my own cabinets only if they are the basic kind. If I need more "fancy" cabinets then I go through a cabinet installer.
Now, the one thing you have to watch out for is the tax implications of this. IRS has guidelines to distinguish between contractors and employees and one of them says that if you buy the materials for them they could be considered employees and therefore you might have to pay taxes and social security for them…yikes!
However, I have considered this and still buy my own materials. I do the other things that allow me to consider them contractors instead of employees like sending them a 1099 at the end of the year, having them fill out a W9, have them sign independent contractor agreements, let them work their own hours, etc.
I think that I have enough controls in place to be able to show they are contractors and therefore buying my own materials will not hurt me.
Also, buying your own materials helps you create business credit with the different suppliers and more importantly relationships with all these suppliers that you will need in this business.
If you are using a general contractor you can let him buy all the materials but expect to pay more in exchange for him handling all the purchases.
Hope this helps.