Introduction
Are you curious about real estate investing and ready to get started on your journey toward financial independence? How does making $250,000 tax-free sound to you? Then consider doing a live in flip house as one of your first investments. This blog post is going to talk about what a living flip is, the tactical steps to achieve this, and some things to consider along the way. The live in flip is one of the most powerful strategies in real estate investing.
What is a live in house flip?
Flipping houses generally refers to the process of buying a house, potentially doing some work to it, and then selling it for profit in a relatively short period of time.
With a live in flip, You actually live in the home that you’re flipping and you purchase this as a primary residence.
Benefits of a live in flip
A normal house flip can take between 3 to 6 months to complete but a live in flip is a little slower taking at least 2 years. You actually wanted to take this long in order to get the tax advantages that we’re going to discuss. The slower pace allows you to manage your money in smaller increments. You can also take your time selecting and working with the right contractors. It can really take the pressure off, especially when you just figuring things out on your first investment.
Another advantage is that you get direct hands-on experience in real estate. There isn’t much difference between a regular flip versus a live in flip process-wise. But because you’re going to be in the house almost every day, you will be able to see things immediately and get firsthand experience with the construction process.
The last benefit of doing a live in house flip is that you can actually make money living in your house. Most people spend a considerable amount of money owning their home. Sometimes the market does you a favor and rapidly appreciates within a couple of years. But this is not really in anybody’s control. With a live in flip, you can force hundreds of thousands of dollars of value which can offset your entire cost of ownership of the home.
How a live in flip differs from traditional house flipping
We already talked about how you will be on site during the construction and management of the property. We also discussed how it’s going to take a lot longer to do a live in flip for tax reasons. But one other important point is that traditional house flipping takes a lot of money and you usually need to use commercial-grade loans with high down payments. With a live in house flip. You can get the best loans at the cheapest rates. Putting you at a huge advantage.
Steps to a successful live in house flip
Research and market analysis
Choosing the market should be relatively easy since you’re going to be living in the home. Your marketplace is the city and which you are already living most likely. You’ll want to make sure that, just like any big purchase, you can comfortably afford to make the monthly payments. That being said, you should choose the best area you can afford within your market. The live in flip is going to take a couple of years and you want to make sure that there is strong buyer demand when you go to sell the home. It may be tempting to buy a house where it’s cheapest, but as long as you can work out the financing, remember that you’re going to be making money on this house in the long run. So don’t cheap out.
Financing options
Here’s where things really start to get good. A traditional investor loan will require you to put at minimum 20 and usually 25% down. The rates are also much higher. With a live in flip, You can purchase a home for as little as 3% down with conventional financing, 3.5% down with FHA, and 0% down with the VA.
You approach financing the purchase just like you would any normal home. You’ll also need to consider where you’re going to get the money for the renovations.
The best advice I can give you is to reach out to no less than three mortgage brokers. Talk to other real estate investors and find out who they use as mortgage brokers. These brokers will be familiar with the loan options that are available to you. Many don’t know this but there are loan options that allow you to include the purchase cost and the renovation cost into one loan product. For the FHA, ask your lender about a 203k loan. And for conventional loans ask your lender about a HomeStyle renovation loan.
Property Acquisition
This can be a challenge for newer investors. There is a saying in real estate investing that you make money when you buy. What this means is that no amount of creative work is going to save a deal if you overpay for the home initially. Again, I recommend that you reach out to somebody that you know who already has a few deals under their belt. You don’t want somebody who’s massively successful as they probably don’t have the time to walk you through all of this, but a person who’s a few steps ahead of you will probably gladly take the time to show you how to find a good deal or help you underwrite a deal that you find.
One tip that I have for you is to go onto redfin.com and set up property alerts. Draw an area around the region that you’d like to live in and then have it. Send you all of the single-family homes within your price range that come on the market every single day. Most of these will not be good deals, but you will know when you see one. As you start reviewing all the properties in the neighborhood, you will get an understanding of where values are at and what the potential of a given house can be.
We are going to be doing renovations on this property. If this is your first or second home, I recommend that you stay away from fire-damaged properties and homes that need extensive foundation work. What you’re looking for is something that needs a bit of cosmetic work. Basically look for Grandma’s house: homes that haven’t been updated in 50 years. Also, look for homes that just look kind of gross. These things will deter a lot of buyers but are easy things to fix.
Renovation and Improvement
You’ll want to create a budget for how you’re going to manage the cash flows. In this property, you’ll need to pay the mortgage and utilities as well as any additional loans you have to find the renovations. Make sure you set a budget upfront and stick to it. When you are going to purchase the property, make sure that you get an inspection period. During this time send over three general contractors to give you bids on the work. If the bids are coming in higher than you want, you can cancel the contract without penalty.
And house flipping there’s a rule called the 70% rule. This rule states that you want to purchase the property for 70% of the after-repaired value minus the repair costs. Your real estate agent should be able to help you out in getting these numbers together.
DIY versus hiring professionals
In my first live in house flip, I did most of the work myself. I did end up hiring out the underground plumbing, the drywall mudding and taping, and the hanging of door jambs. But I did all of the other work myself. This did save quite a bit of money, however, it took a lot of time. I really enjoyed the work and the learning process so was happy to do it. But if you’re strapped for time and have a little extra money, I recommend going the professional route. The quality of work will be much higher and it will get done much faster. You also learn valuable lessons in working and dealing with contractors.
Living in the property
Managing renovation process while living on-site
When I did my first live in flip I purchased a home that was a two-bed, two-bath townhouse with an unfinished basement. I lived on the top floor that was finished while I worked on finishing the basement. This allowed me to not have to deal directly with the construction mess.
If you are renovating your entire house I strongly suggest hiring a contractor. The order in which you do things is important in terms of renovations. But the sooner that you can get the kitchen and bathrooms back in working order, the better your life will be. The kitchen and bath are also the rooms where you get the most bang for your buck in terms of renovation expenses. So focusing on these early is not only good for your sanity but also for your wallet.
Tax Benefits of Live in House Flipping
Capital Gains Tax Exemption
Most people get a tightness in their chest when they hear about taxes or the IRS. But in this case, the IRS is your friend. Topic number 701, sale of your home. That is an IRS publication detailing the tax rules for selling your personal house. Sounds really exciting right? But this is the greatest secret in real estate.
Basically, this tax law says that as long as you’ve lived in a property for two out of the last 5 years, you are able to exclude up to $250,000 per person ($500,000 per couple) of the gain on your house’s value from any taxes.
So if you buy a house for 500,000 live in it for 2 years while you do the renovations and then sell it for $1 million, you don’t pay any taxes on that $500,000 gain!
Normally you would owe the IRS somewhere around 150,000 in taxes for this on a normal flip. Do you see now how a live in flip can massively accelerate your journey towards financial independence?
Tips for Success
Many of the normal guidelines for house flipping apply here.
Don’t over-renovate the property for the area. No one is going to pay for granite countertops in the ghetto.
Get multiple bids from professionals including general contractors, lenders, insurance professionals, etc.
Make sure that you get contracts with your contractors and get lien waivers once the work has been completed.
Don’t pay your contractors until they’ve completed the work. A small amount up front is fine but do not let them get ahead of the money. There’s always an excuse but if they won’t do the work first, find someone that will.
Here are four additional tips to help you out in your living flipping:
- Create a budget and renovation plan, then stick to it.
- Don’t try to do everything yourself. Rely on general contractors, real estate agents, and other investors to guide you in this process.
- Real estate is all about the location so make sure you’re buying an area that will continue to be desirable.
- Don’t overextend yourself financially. It may work out but the stress is not worth it.
Case Studies
The best case study I have for live in house flipping is myself. Check out this article I wrote detailing my journey!
Conclusion
Live in flipping allows you to get your feet wet with real estate investing. You learned so much about the industry and the process by getting hands-on and doing the work yourself. You also de-risk the activity by being there to oversee things directly. And lastly, the tax benefits are enormous for live in flips.
I recommend that one of your first properties is a live in flip if you have any interest in house flipping. You may fall in love with the strategy and use it to propel yourself quickly to great wealth.
If there’s anything in this article you don’t understand, or you need more clarification or guidance, shoot me a comment. Here to help!
