Live-In House Flips: How to Own Your Home Free & Clear in Only 6 Years
Completely revised and updated on 5/19/2021.
One of the best ways to build wealth in real estate is the Live-In House Flip (aka Live-In Flip), which means living in a house, improving it, and reselling it later for a large, tax-free profit.
You can use this strategy in many different ways, including shortening the time until you own your residence free and clear from any debt – sometimes as soon as 6 years!
In the rest of this article, I’ll show you how this could work for you.
The Tax Law You Should Love
You might think the tax code is only exciting for IRS agents and accountants, but there is one section of the tax code you should get VERY excited about.
This particular section lets you sell your residence and pay no tax on gains (i.e. profits) up to $500,000 for a couple ($250,000 for an individual). You have to own and live in the residence for at least 2 out of the last 5 years to qualify.
Once you earn your profit, you can do anything you want with the money. You can just leave it in the bank, or you can invest it. But as I’ll talk about in this article, you can also use 100% of your profits to reinvest in another property.
Compared to selling a typical rental property, this is a huge tax saving. With the sale of a rental, you have to pay capital gains tax on your profit from the sale. This means you lose some of your profits to taxes.
This tax law makes live-in house flips the best deal in the tax code, and it sets you up to quickly build a lot of wealth without the drag of a big tax bill.
Now I’ll show you how this can help you get a free and clear residence fast if you’re willing to do a little moving for a short period of your life.
Getting Started With Live-in House Flips
Here’s the basic concept of a live-in house flip:
- Buy a house below market value (or where you can do repairs that increase the value)
- Move into it
- Fix-it up
- Resell it after the required two-year waiting period.
It’s very possible that you could do this one time, earn $50,000 to $100,000 tax-free, and then settle down and never use the strategy again. If that’s what you choose, no problem! It would take most people 2-4 years of working to earn that much money after-tax. So, just doing this one deal will put you way ahead of the game.
But you could also take the strategy a step further by repeating it several times, as I’ll explain next.
Repeating Live-In House Flips (aka the “3-and-Out”)
Instead of just doing one live-in flip, what if you did several. Then after selling your 3rd or 4th house, you could have enough profits to purchase the next house free and clear of all debt!
You’ve now eliminated your house payment for the rest of your life!
Two friends of mine in Wilmington, NC used to call this their “3-and-Out” plan. After just 3 house flips (possibly in as short as 6 years), they were out of the home debt game on their house forever.
As with any plan, you have to make some assumptions. In some examples below, I’ll use values from my own housing market and interest rates from the date I’m writing this article. Feel free to convert the values and rates to your own time and place.
But the concept is flexible and will work even with different price ranges or in different markets. Variations of this plan have worked very well for many people. And these people are now living happily with no debt payment on their residence well before their friends who plod along for 30 years paying a mortgage!
Let’s get started with an example.
Step #1 – The First Live-in House Flip
Let’s say you know how to find good deals on real estate in your local market. Once you learn how to hustle and where to hunt, you’ll be able to find these deals too.
You find a 3 bedroom, 2 bath, median-priced home in a decent neighborhood. With $30,000 of upgrades, you estimate this brick, 1-story ranch will be worth about $250,000 in 2 years.
Here are the numbers:
You move into this house for 2 years, spend $30,000 on the kitchen, baths, and landscaping to make it pretty, and then sell it for $250,000 right at the 2-year mark.
Your net numbers from the sale might look like this:
After the sale is done, here’s how much cash you have:
You now use this $96,175 for the next house, which you find and buy right after you sell house #1.
Step #2 – The Second Live-in House Flip
You have to pay a little more this time and the numbers for your second purchase are:
Notice that because you made a bigger down payment, you were able to get a 15-year mortgage instead of a 30-year, and the payment only increased by $134/month. This will help get to your goal even faster.
Again you move into this house for 2 years, make it pretty using $36,000 of your extra cash (or you could do some of the work yourself), and then sell it for $275,000 right at the end of another 2-year mark.
Your net numbers from the sale of House #2 might look like this:
After the sale is done, here’s how much cash you have:
Once again, you use your $155,500 cash to purchase another house, which you find and buy right after you sell house #2.
Step #3 – The Third Live-in House Flip
Once again you have to pay a little more than before and the numbers for your third purchase are:
I again bumped up the mortgage payment a little from $822 to $1,000 in order to amortize the loan faster for the final 2 years. This gives you a little extra cushion if you can afford it.
Just like Houses #1 and #2, you move into this house for 2 years, make it pretty using $30,500 of your extra cash (or you could do some of the work yourself), and then sell it for $300,000 right at the end of another 2-year mark.
Your net numbers from the sale of House #3 might look like this:
After the sale is done, here’s how much cash you have:
SCORE!! $226,993 cash to spend on House #4! Congratulations!!
Your Options For Using This Big Wad of Tax-Free Cash?
You have a few options at this point:
Option #1: Complete the plan, buy another house for $226,993 or less, and enjoy it free and clear. Since you’ll have no more mortgage, be sure to use that $1,000/month savings for additional investments or to pay down the debt on some of your rental properties.
Option #2: Move up to a little nicer house, stay long-term for a change, borrow a small mortgage, and pay it off asap.
For example, you could find a nicer house or a house in a better location that’s worth $400,000. You’re good at finding deals by now, so you buy it for $310,000.
The numbers:
$310,000 = purchase price
($225,000) = cash for a down payment
$85,000 = mortgage, 3.5% interest, $1,000/mo, just 8 more years to free and clear on this one!
Option #3 (My favorite!): Forget homeownership for a while. Invest the money. Live off dividends or rental income. Be a flexible renter. Take a mini-retirement. Have some fun and buy another home later!
You Can Do This
I hope this little live-in house flipping exercise gets you excited and thinking about the possibilities.
As with any tool, nothing is perfect. It might be uncomfortable living in a house with construction dust for a few years. It might be difficult to search for houses that you can buy below value.
But you know what? It’s MORE uncomfortable and difficult being in debt and making a dying to pay a mortgage our whole lives!
If you are perfectly happy with your current financial state, then by all means stay comfortable. But if you’re willing to step out of your comfort zone in order to grow financially, this is a great opportunity! And it’s only a relatively short period of your life.
Live-in house flips can help you make progress towards your financial goals, and you never have to own or manage a rental property. This is one of the most approachable and easy-to-execute methods to make money in real estate.
I hope you’ll try it out, and I hope to hear about your success story soon!
If you have questions, comments, or if you have a story about using a live-in flip to make money, I’d love to hear them in the comments section below.
