You want to flip a home but not sure where to start. I started flipping by buying a house to live in and doing some repairs over six years before selling for a profit. Warning this may not be for everyone so if you do not like a little chaos and things in repair status the live in house flips are not for you. The good thing is you can go as fast or slow as you want when you live in the house as you rehab it.
Buying a home to live in
You are going to look for a home that needs more cosmetic repairs then a full rehab project. It would be really tough to do a full rehab on a house while you lived in it.
Look for homes that just need below $20,000 repairs. This would be ideal if you can find one like that. You also want the home to be ready to live in when you buy it. You can live in a home without an AC unit but if all the plumbing was gone that would be tough.
Cosmetic renovations include:
- Carpeting replace or do hardwood floors
- Kitchen flooring needs new tile or laminate
- Bathrooms need flooring
- Replace hot water tank
- Replace furnace
- Paint inside of home
- Landscaping outside and add flowers plus bushes
- New blinds
- Repair rotted wood
You would not have all these repairs when you move into a home to rehab. Maybe you only have 5 repairs that need done this year. If you do have all the repairs above just do a few each year with the critical repairs first.
This type of rehab requires more work and expenses than the cosmetic rehab. You will have more rehab work to manage while you live there. Make sure the price you pay for the home accounts for you doing rehab and making a profit once you finished the work. Here are some of the things you may need to rehab with a medium renovation.
- Plumbing bathroom renovation maybe not a gut job but needs an upgrade
- Electrical and panel may need replaces
- Landscaping needs done right
- Furnace cannot fix so replace
- Air conditioner if it does not work fix it
- Hot water tank may need replaced
- Pools in back yard you may have to fix or replace
- New wood flooring kitchen
- New flooring in bathrooms
- Gutters replace
- Windows it depends on if you can get more money at selling
- Fireplace may need a make over
- Deck in the back of house may need repaired or replaced
- Driveway may need repaired or replaced
- Sub floor replacement if there are issues
- Rotted wood needs replaced
My first live in rehab
My first home I had my parents help me buy the house when I was in my mid-twenties. The house was livable with no major repairs needed at that time. It was in downtown and we bout it for $55,000 just before the real estate boom hit this area. I will tell you I was lucky when I found and bought this house. Thank goodness my parents believed in me when we bought it. I had a few friends live with me to help pay the mortgage for about 5 years. I then got married and my wife moved in with me for one year. We decided to sell it and move to a better area to start a family. I started major renovations on it so I could re-sell for prime dollar. I had an investor stop by and offer me $126,000 as is with no rehab so I took the deal and saved myself the work of rehabbing it.
The 6 years I lived there we replaced the roof and the furnace. I took all the carpet out of the home and was refinishing the hardwood floor before selling to the other investor. You can see I made some great money with my parents on this house by living in it and doing some work on it before selling. I got lucky by buying in an area that skyrocketed in value over the 6 years I lived there.
I also used equity from this property in the second year I owned it to buy a double unit just down the street. I only owned that rental for two years but made $44,000 dollars when I sold it. I wish I bought more properties in that area back then but I was still new to investing so I was not sure and money was not always easy to get to buy in your 20’s. The house I bought as a rental was not a live in and then flip house. I tell you the story to show you I used equity from the house I did live in to buy a rental to hold for two years to then sell to make money.
There are many creative ways to do real estate deals.
The pros for flipping a home while you live in it
- Build equity – You have to live somewhere so why not live in a home you can make some money off of in two or more years. You are not wasting rent because with a mortgage some of the money goes to principal which is more money you can make when selling. If you do a 15 year mortgage you will make much more money when selling than a thirty year mortgage. Check out a mortgage calculator to see the difference in how fast you can pay the home down.
- One cost – Living in the home means you do not have to pay for two properties. If you rent currently or own a home and you go buy a house to flip. There are holding costs, taxes, insurance, utilities and property taxes that you would need to pay on top of the home you live in or the rent you pay if you are renting. You live in a house you are flipping you only have to worry about the one house expenses.
- Save on taxes – Living in a home for two of the past five years will save you on capital gains tax. You can look up the law on this at IRS Gov.
- Save money repairs – Not all people are mechanically inclined or can do repairs on homes. If you can do the repairs while you live there the two or more years this will save you a ton of money which will equate to more profit when you sell. You will not be able to do it all because some work will need to be done by a licensed contractor. Many cities require work when doing major work to a home so make sure you file the permits or your contractors do it.
The cons for flipping a home while you live in it
- Renovations take forever – You may live in it and have no real reason to move quickly on doing the renovations. The rehab may take 4 years when you wanted it done in 2 years. It is easy to procrastinate when you are the one doing the work and you have no financial pressure since you have no holding costs.
- Design for your taste – You start doing rehab and making the home for you to live in which may not be all bad. The problem is you need to rehab the home for mass appeal. You may also over spend with what you want in a home when you could have spent less and made more profit. The cherry cabinets would have been half the cost and look just as great as the oak cabinets you put in.
- Life in a home you are rehabbing – This may not be all that fun since it may take 3 month to a year to renovate the kitchen so cooking when everything is torn up becomes hard. Using the bathroom the 3 to 5 months you have it torn up can be difficult. Once things are complete it’s no big deal but living there while the renovations are happening can be harder than you think.
- Taxes – You have to live in the home for two of the past five years before selling to avoid capital gains on the profit. If you sell before two years then you will be paying a bunch of taxes. The flexibility to sell when you want becomes limited. The house must be your primary residence two of the past five years.
- Moving – If you are going to flip the house you are living in then sooner or later you will have to sell and move. I know I don’t like moving because of all the work involved. If you have this as your plan then you are probably ready for it when it happens. You may want to limit the amount of stuff you pack your home with since you will not be there too long. That will make moving easier when you have to do it.
- Hot real estate market – When you buy and start your 2 year rehab project the real estate market is hot. There is a lot that can happen in two years like the market cools down and your profit is not as much as when the market was hot. Holding two years has some risk but worst case you can just stay in the house longer until the market rebounds.
How to do the rehab
There should be a set way that you should lay out when you start the rehab process on a home you are living in and flipping. You should not go in and tear apart everything in the home when you first move in and start the rehab. You need to lay out a plan on which rooms you will do first. If the home has 2 or 3 bathrooms then you do one at a time. Once one is done then you rehab the next bathroom. Since you are living there you want to split the rehab into areas so you are limiting the mess and still keeping the rest of the home functional for living.
The kitchen will be the hardest so when you do that have everything ready. You can order the cabinets and counter tops so they are sitting in the basement or garage ready for install. When you pull the trigger to start rehabbing the kitchen you do not have to wait 4 weeks for custom or ordered cabinets. Ordering products take time so you do not want to demo then order what you need because now you have a longer period of the kitchen being unusable.
Selling after rehab and two years
Hopefully when you sell the market is good for you to get top dollar.
$150,000 you bought home
$20,000 rehab cost over two years rehabbing
$4,500 3% down payment cost in below estimate you get that back it’s not really profit
$235,000 ARV or after repair value
$14,133 principal pay down on 2 year loan set for 15 years
$14,100 realtor fees to sell
$4,700 closing cost to sell
($150,000 – $4,500) + $20,000 = $165,500
($165,500 + $14,100 + $4,700) – $235,000 = $50,700 + $14,133 = $64,833
$64,833 is your profit you can roll into next home you buy
If you did a 30 year loan you would not have as much profit since principal pay down is much less. This is why we suggest a 15 year loan to make more money in the end.
This should give you a really good idea of how you can buy, live in, rehab and flip a house. The information provided can be a good guideline when flipping a house you live in. The numbers we provide are an example and you can decide to buy a home that may make you more or less money when selling. You can see our posts on the financial formula for flipping houses. This is the rule if you are not living in the home you are rehabbing but does give you good insight on buying discounted homes.