Can You Live in a House While Flipping It?

Some of the intimidating aspects of flipping houses is dealing with a short term like 6 months to complete the flip and produce a profit. There is another way to get into flipping. With a standard 30 year fixed rate loan and a distressed home, you can flip the house in 2-3 years, show a profit and benefit from not paying capital gains taxes.

Can you live in a house while flipping it? Yes, There are advantages like time and no income tax when improving a house and flipping it in 2 – 3 years. During a flip you can save on labor costs by learning new skills such as drywall, painting, tiling, plumbing and kitchen & bathroom remodeling then sell the house for a profit minus capital gains tax 2-3 years later.

One of the concerns with live-in flipping is the traditional initial down payment and the loan process where income requests and credit reports required. With this type of investment the beginning flipper will probably be getting a standard 30 year fixed rate mortgage from the local bank to purchase the home. They would live there as their primary residence until ready to sell. That means that income, down payments and your credit rating will be a part of the process.

What Is A Live-In Flip?

Buying a house below market value, move in and fix and paint and resell it after the required two-year waiting period. This can be a great way to build a nest egg or to pay cash for the dream home you really want. Resulting profit will be rolled into the next flip so the home sizes and profit margins will grow as capital grows.

The materials cost can be stretched as needed since there will be years between purchase and sale of the home. After buying the property this cost will be consumed as needed and will end up being spread out across the 2-3 years.

An additional perspective is that the flipper can acquire new skills and apply them to the house. During the 2 years the flipper can learn things like kitchen and bathroom remodeling, laying hardwood floors and tiles, replacing windows, hanging drywall & painting, basic plumbing and much more. The idea is to save on the labor charges by learning at your own pace and doing it yourself. At the same time giving yourself enough time to learn and perform the repairs without an investor pushing their 6-12 month timeline on you.

Create a spreadsheet in the beginning and keep track of the work, materials and how long the work takes to complete. This will help later with quotes from contractors when your ready. Eventually a portion of the 2 or so years can be mapped out so as to prepare the house for sale. This will help with scheduling what needs to be done and at what time to get the house on the market after the 2 year mark.

How To Save Taxes (2-3 Years)

When investing in real estate the mortgage interest, maintenance and management fees can be tax-deductible. When accomplishing a live-in flip you can also benefit from a tax relief on capital gains. Live-in flipping exempts the owners from capital gains tax when the house is sold (up to $250,000 for individual and $500,000 for couples). The owners need to have lived in the home for two of the last five years.

Disclaimer: this site does not provide tax advice. Consult your tax pro to get details in your area.

There is a less aggressive time limit when doing things this way as most flips are targeted to be complete in months to a year. According to the IRS, profits on flipped houses are treated as ordinary income so they could be axed as high as 30%. In this case the property is considered the flippers primary residence during the “flip” and the sale will avoid the capital gains tax.

When using hard money loans it is expected that the loan is paid back in under 12 months and usually at a higher interest rate. This is great for the real estate investor with financial and contractor resources as they can flip multiple properties per year.

The live-in flipper plan may be geared more towards the new investor with few resources or someone who is interested in funding longer term plans like their retirement or a larger home purchase. They can work a full time job and spend 2 years on the house rehab then roll the profit into the next live-in flip.

Can You Learn On The Job?

The live-in flipper may be a beginner at owning a home and performing contractor like work tasks. Luckily there are plenty of online resources to get someone started on just about any basic rehab project. The modern flipper will use youtube and other online training sites to learn the basics and save on labor costs that would be needed at this stage.

I look at this as an on the job training opportunity where you can learn and do in your own home. These skills can open up doors to areas that were not available before such as side work or contracting of your own. You can also opt to take more advanced training courses or get certified as an electrician or HVAC technician.

The real estate investor will consider this useful experience and knowledge for later when they negotiate contracts for the same work. A family with children can teach the children the same skills as they move from house investment to house investment.

Skills you can easily research online:

Learn to rehab a bathroom
Learn to tile bathrooms and kitchens
Learn cabinet refacing
Learn plumbing basics for bathroom and kitchen remodels
Learn to lay down flooring, refinish hardwood floors or carpet
Learn to hang drywall and painting
Learn basic repairs for windows and doors
Learn to rough in and install a 2nd bathroom

What Is The Downside?

As with any investment there is a downside to flipping a house while living in it. For instance the process is much slower than just flipping the house in 4-6 months and selling. You will be living in an environment where rooms may be plastic sheet covered and the house is always dusty.

While fixing drywall, trim and painting entire rooms may be unavailable for days or weeks depending on how the work is scheduled. Every few months you may need to move someone and the furniture to another location until that room is complete.

Retaining a day job while you are working on the house can be stressful and there is an expense to the materials needed for repairs. This includes tools that you might not have and need to buy before starting work.

You may need to spend more time searching for property and neighborhoods you are willing to live in for the next few years while the house is fixed and prepared for sale. Timing this might get complicated as you may need the profit from the same for a down payment on the next property. Staying small and mobile can help with this but its tough to do so over multiple years.

Example Of Live-In Flip

Value in Market: 100,000 (to be sold for)
Purchase price: 72,000
10% down: 7200
30 Yr Mortgage: 64,800 + closing 3,000 = $67,800
4% Interest Payments: $324/Month + Tax ($200) + Ins. ($50) = $574/month

2 Years Balance: 62,138 ($5662 on principal)
SELL for $100,000
$100,000 – 62,138 = $37,862 (to be used for next flip)
Subtract Cost: 574 x 24 months = $13,776
Actual Profit: 37,862 – 13776 = $24,086

Learn, Rinse & Repeat

This example may be different in reality but its a simple example of a live-in flip where the initial cost is good credit and about $7200 for down payment. The remaining cost is for tools, materials and labor which will supplied by the flipper primarily.

The live in flip process is slow as you go. After researching this topic I have found that this option is best for couples with decent credit. The team effort is great for motivating each other to get each task done as opposed to the individual who may get bored or slack over 2-3 year time. Also the down payment, if needed, is easier to save if there are 2 salaries involved.

Experienced real estate investors will say that the first house flip is the toughest since this is when you learn the ropes. In the case of a live in flip, the first one is where so much education can happen but there are other concerns like tools and materials. There will be an accumulation of tools as work is completed so this cost will not pass to the next flip.