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.
Rental Property Analysis
A course by Coach Carson that teaches you how to run the numbers so that you can confidently analyze and buy profitable rental properties. It also includes Coach’s rental analysis spreadsheet. Get the CourseOnce 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.
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While I was still in high school a guy in small home town did similarly to your example, but he had new homes built each time and did some sweat equity. His third new house was debt free. I followed his example by applying the principal to buying used cars while I was still in high school and years later here in Greenville with houses (used and new) and it worked. Thanks for communicating the value of living debt free.
Thanks Stan. Great to hear it works with used cars and houses!
How do you get your down payment back during your resaleof the property?
hi George,
Thanks for the question. The net cash you receive at the resale closing would include your down payment. The net cash would look like this in the first example:
$145,000 = sales price
($7,000) = commissions to sell
($100,000) = payoff of loan
= $38,000 cash
$11,500 of that $38,000 cash is return of down payment.
$3,500 is recouping equity from paydown of loan principal during 2 years
$23,000 is profit and/or recouping some of expenses from remodeling.
It seems that you are missing the cost of “make it pretty” in your numbers.
How much are you estimating each of the remodels would cost in this analysis? That would surely be additional cash infusions to consider in this progression. Although of course, you do get that cash and then some back when you sell. But it definitely makes the numbers less rosey.
Kyle,
You make a good point. I kept it simple in this case and assumed you’d put in sweat equity. But there are certainly materials costs even in the best case scenario. So, some of the “profit” in my examples above would actually be reimbursement of costs. Thanks for reading and commenting.
I couldn’t believe you didn’t include this in your calculation. Huge oversight, you must have actually done any of these deals yourself.
I’m currently doing this. We bought are first flip for $140,000 put $8,000 down and spent approximately $15,000 on the house. We sold it for $185,000 and owed $125,000 on the mortgage at time of sale. So we walked away with $60,000. Bought current house for $205,000 put $41,000 down on it ( no CMHC fee) used the remaining$19,000 for lawyer and land transfer fees and to start flip ($13,500 left over to flip.) We’re about a week from finishing this house and have spent about $30,000 overall on this place. Our mortgage is at $156,000 and we should sell it for $300,000 letting us walk away with $144,000. We’ll put at least $100,000 on the next house and keep the rest for flipping and lawyer fees. Looking at a house for $220,000 currently. Also we sell on our own so no real estate fees and do all the work ourselves. My husband also has a career and we have three active children. It’s very doable we take 2-3 years per flip.
Wow! Love your story! Thank you for sharing the details and for showing others that it is possible to do this (and with 3 active children no less!!).
Best of luck with your next purchase and flip. What a smart series of financial moves for your family!
Hey Chad, enjoyed listening to you on Mad Fientist. What would happen if we down-sized in order to start this process? For instance, live in a $500k house w/ $300k remaining. Sell and take the $200k profit. Can you take the $200k earnings and roll that into a home of lesser value tax free?
Enjoy Ecuador!
Hey Jared! thanks for stopping by. Great question. The answer is that yes, you can downsize and roll your profits with the live-in flip. That’s one of the big advantages of this exception to the tax code as opposed to a 1031-exchange. A 1031-exchange also lets investors roll their equity tax free, but you typically have to go up in value to avoid tax as opposed to down.
Best of luck! I’d love to hear how your own live-in flip goes.
Hi Coach Carson. What if you flip a house with gains over $500k (like in CA where housing prices have gone up a lot in recent years)? Will you pay tax on the gains over $500k, or on the whole gain amount?
TimTim, I assume you could exempt the $500,000 and pay capital gains tax on the portion above that. But I’ve never seen that in action, so a CPA or tax lawyer could help give a better answer.
Here is the exact language from the law (found here: https://www.law.cornell.edu/uscode/text/26/121):
(1) In general
The amount of gain excluded from gross income under subsection (a) with respect to any sale or exchange shall not exceed $250,000.
(2) Special rules for joint returnsIn the case of a husband and wife who make a joint return for the taxable year of the sale or exchange of the property—
(A) $500,000 Limitation for certain joint returnsParagraph (1) shall be applied by substituting “$500,000” for “$250,000” if—
(i) either spouse meets the ownership requirements of subsection (a) with respect to such property;
(ii) both spouses meet the use requirements of subsection (a) with respect to such property; and
(iii) neither spouse is ineligible for the benefits of subsection (a) with respect to such property by reason of paragraph (3).
My wife and I are doing the same live and flip thing now but we got into the game on my 0% down no mortgage insurance VA loan benefit. This benefit from the military really jump started the process for us and we made $45k from the first home and we’ll walk away from our 2nd home in 6 months with between $150j-$200k. It also helps that we are careful buyers and purchase fixer houses in areas we know will be on the rise within a year due to local development.
Awesome! The VA loans are such a great program for veterans. And as you’ve shown with much success, it’s a great way to do Live-in Flips. Congrats!
What about closing costs? Are those a factor to consider ? Also, I see commissions to sell are $7k this assumes a ~2.5% commission (for each realtor). Many realtors say they will accept no less then 3%. Could you share any advice on negotiating realtor commissions and how that could impact the sale price? As a seller I assume you want to have lower commissions, but at the same time, you don’t want to deter other realtors from showing potential buyers your house. Thanks!
Hey Ben,
Yes – closing costs would be a factor in most cases. I kept it simple in the example, but in a future update I’m going to add those in for extra clarity.
On commissions, it’s definitely possible to negotiate a 5% commission (2% for listing agent, 3% for buyer’s agent is my preference). You could also do flat fee listings for an even lower commission.
I definitely agree you don’t want to deter any buyer’s agents from showing your house. That’s why I always try to keep their commission at 3% – whatever kind of listing I do.
Thanks for the questions!
Hi Chad,
I like this strategy and am considering doing it. I am currently purchasing a discounted property for $201k. It appraised for 230k. I am planning on moving into it as my primary residence and then selling the house that I live in now. I should clear 60k on equity and profit on that house. My question about this strategy is do you put off buying rental property until after you have completed this method or do you buy rental property simultaneously while doing it?
Hey Deadrick,
Congrats on moving forward with your live-in flip strategy. I think the answer to your question depends upon your available resources of time and money. If you had enough time and money to do the live-in flip and a rental, it could certainly make sense. You’ll have two years or more in your new residence anyway. So that’s plenty of time. But I’d always be careful of spreading myself too thin. If you’re having to borrow or overextend yourself to make the extra rental deal happen, there’s nothing wrong with focusing on one strategy for a couple of years. If you can make a chunk of tax-free profit and learn a lot, that is time well spent.
Good luck with your next steps!
Hi! Thank you for this article. It’s a wonderful thing to read blog posts written a while ago that are still relevant today.
I have some questions about this method:
1. The gains is based on the assumption that the house has appreciated over 2 years. Is this correct? Therefore, it seems like a huge risk to take every 2 years considering the current climate post-GFC.
2. If we assume houses have appreciated in value, then wouldn’t you expect your sell price two years later to be greater than the market value 2 years prior? In your calculations, you had sold it at the market value price two years prior.
3. I am a big fan of cashflow. Is it possible to combine house hacking with live-in house flips? So, I would buy a duplex, for instance, “make it pretty”, live in one room and rent the other out on a two-year lease, perhaps. Then, two years later, I would resell, rinse and repeat rather than refinance. Is this possible?
This is a very informative blog ! Thanks for sharing!
My family and I are planning a move within the next year. We have been thinking about Live in Flip as possibility. Our current house has increased in value quite a bit since we bought it a few years ago and we were planning to use the proceeds for a live in flip and to get started in rentals. I’m excited about what I’ve been learning and I’m ready to get started.
Sounds like a good opportunity, David! You can benefit from the equity growth in the house and keep it growing.
If you rent 3 out of the last five years and live there the other two years do you pay any tax on the gain?
Hey Chad! I remember skimming some of your real estate advice long ago when MMM made mention of your book. It’s *nearly* had us thinking of owning a duplex 🙂
Anyway, just wanted to say—thanks for yet another good reminder of a way to get into real estate investing without going “whole hog” with a full, separate rental property. Live-in flips seem like a great way to get started without quite as much risk.
I really enjoyed reading this! Thank you so much for sharing! Great tips!
Glad you liked it! Thanks for reading.