How would you like to own your residence free and clear from any debt in just 6 years? Live-in house flips are a way to make that happen. You’ll learn how in the rest of this article.
The Tax Law You Should Love
You probably think the tax code is only exciting for IRS agents and accountants (and you’d be right), 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 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.
This means you can use 100% of your profits to reinvest in the next deal. Compare this with a rental property, where you have to pay capital gains tax on the entire gain.
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
The basic concept of live-in house flips is to buy a house below market value, move into it, spruce it up, and then resell it after the required two-year waiting period. After selling your 3rd house, your 4th house can be purchased free and clear of all debt.
Two friends of mine in Wilmington, NC call this their “3 And Out” plan because after 3 houses they are out of the debt game on their house.
As with any plan, I have to make some assumptions. I’m going to 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 time and place.
But the concept will work even with different figures or in different markets, so just know that variations on this plan have worked very well for many people. These people now live happily with no debt payment on their residence well before their friends who plod along for 30 years!
Let’s get started!
Step #1 – Live-in House Flips
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. In my town, this would be a brick, 1-story ranch and it’d be worth about $145,000 today.
Here are the numbers:
You move into this house for 2 years, make it pretty, and then sell it for $145,000 right at the 2-year mark.
Your net numbers from the sale might look like this:
Either at the same time or even before this sale, you find another house to buy with the same numbers as House #1.
Step #2 – Live-in House Flips
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 $64/month. This will help get to your goal even faster.
Again you move into this house for 2 years, make it pretty, and then sell it for $145,000 right at the end of another 2-year mark.
Your net numbers from the sale of House #2 might look like this:
You will again find a new house that you can buy at or below market value, either before or right after this sale.
Step #3 – Live-in House Flips
The numbers for your third purchase are:
Once again I bumped up the payment a little from $589 to $646 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 sell #3 for $145,000 right at the end of another 2-year mark.
Your net numbers from the sale of House #3 might look like this:
SCORE!! $115,000 cash to spend on House #4! Congratulations!!
You have a few options at this point:
Option #1: Complete the plan, buy another house for $115,000, and enjoy it free and clear. Be sure to use that $600+/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, get comfortable for a change, borrow a small mortgage, and pay it off asap.
For example, you could find a 4 bed, 2 bath bigger house or the same type house in a better location that’s worth $200,000. You buy it for $160,000.
The numbers:
Option #3 (My favorite!): Forget home ownership for a while. Invest the money. Live off dividends or rental income. Be a flexible renter. Take a mini-retirement. Have some fun!
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 searching for houses that you can buy below value.
But you know what? It’s also 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!
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’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?