Live-in flipping is a great way to make large amounts of money tax-free. You have to live somewhere, so why not live in a home that will help make you rich?
In this post, I’ll share:
- How I got started with home flipping
- My deals including my numbers
- My best tips for live-in flipping
Learning How To Get My Hands Dirty
I never planned to be a DIY home flipper. I just didn’t like the work. My dad was an electrician and as a child, he would try to teach me how to work with my hands. I was an insolent little sh*t:
I don’t like this work! I’m going to college!
The irony is that now that I’m 47 years old and have a healthy nest egg, I spend more time than ever doing manual labor. I spent a recent morning digging out a spot for a slab for an upcoming shed project:
I did end up going to college and earned degrees that I never used; biology and chemistry. Fortunately, I found computers and made a good career for myself. However, I built the core of my nest egg flipping homes. Today, I’ll share some stories, the juicy numbers, and my favorite tips.
How I Unintentionally Became A Live-In Flipper (And Discovered Tax-Free Capital Gains)
Live-in flip: Fixing up a home that you’re living in to sell for profit.
Out of college, I had almost no home improvement skills. I was a white-collar human with a nice computer job. Yay! I felt much more comfortable around a keyboard than a table saw. Then, a crappy tile job sent my life (and my net worth) on a new course.
Tile Setting For The Win
Before marriage, Mindy and I each had our own homes. Mine had a better location, so we decided to sell hers. However, there was one problem, the kitchen floor.
The previous owners had done a very poor job of installing linoleum tile. The floor was peeling up all over. We knew that we’d have to replace the floor before the home went on the market. My future father-in-law knew how to set ceramic tile and offered to help.
Over the course of a weekend, we yanked up the old linoleum and put down a beautiful ceramic tile floor. I was terrified when it came time to set the first tile. By the end of the weekend though, I was fairly confident in my new skill and felt on top of the DIY world.
A month later, I went to work on the bathrooms in my home. I replaced the dated, pink tile on the floor and in the showers. The job looked great, but much more importantly, I was gaining confidence and my mindset was changing.
This isn’t that hard!
I was a changed human. I wasn’t afraid to try anymore. When something broke, I tried to fix it. My toilet started leaking and I installed a new flapper valve. My bathtub faucet dripped, so I ordered a cartridge kit and repaired it. I replaced the hot water heater when it quit.
I knew that I could always just call a pro if my job went bad, but it never did.
Flip 2: $100,000 Profit (Tax Free)
Bookkeeping note: The “before” numbers in all of these deals reflect the purchase price of the home and the money we put into the rehab. They don’t reflect the transaction fees, but I address that below in the summary.
Our path of flipping houses was set when we decided to move. With our improvements and a healthy real estate market, we ended up selling the home for $100,000 in profit. Because of the 2 out of 5 year IRS rule, the $100,000 was completely ours.
It’s critical to understand and appreciate the value of tax-free profits. If you’ve lived in a home for 2 of the past 5 years and owned the home for 2 of the past 5 years, you’ll probably sell tax-free:
- Single filing status: You may exclude $250,000 in gains
- Married filing status: You may exclude $500,000 in gains
This is incredible! What other investment allows you to do this?
We were over the moon and decided we’d try it again. First, we set some basic requirements for our next flip:
- We would buy into the nicest neighborhood we could afford.
- We would buy the ugliest home in that nice neighborhood. We defined our ideal home as:
- Structurally sound with good mechanicals: I didn’t know how to replace a furnace or fix a foundation, so we’d inspect the home thoroughly to make sure the issues were compatible with our skills.
- Cosmetically ugly was beautiful to us: Pink toilets? Blue bathtubs? Dark brown cabinets that were falling apart? Yellow tile from the 1970s? Yes to all of the above. We already knew how to tile. Surely it wouldn’t be too hard to replace cabinets and tear out old fixtures.
I’ll talk more about strategy later.
Flip 2: $375,000 -> $405,000
This home was in a close suburb of Chicago. The neighborhood was great, but the home had an awful bathroom and an atrocious kitchen. We didn’t get rich off this one, but it didn’t need that much work either.
Flip 3: $300,000 -> $360,000
This home fit our requirements perfectly. One bathroom actually did have a pink toilet (the other bathroom had a blue one). We remodeled both bathrooms and the kitchen. We also remodeled the foyer with new railings and tile.
Flip 4: $700,000 -> $730,000
This was going to be the flip that set us financially free. It had a wonderful location on a lake in Wisconsin. I knew that we’d sell it for a million. Until we didn’t.
Queue the scary music.
We bought it in 2006. Over the next couple of years, the Great Recession would play out. Real estate was hit hard. Luxury real estate was hit even harder. We didn’t lose money because we did the work ourselves, but it didn’t put us over the top either. I would take this one back if I could.
Flip 5: $300,000 -> $590,000
We purchased this home in June of 2013 with the intention of turning it into a rental. However, we liked the street, so decided to stay a bit longer. I added a small, second-story addition and rehabbed the existing space.
Flip 6: $465,000 -> $700,000 (estimated numbers)
This is our current home. We’re still working on it, so the $700,000 number is an estimate of what I think we’ll be able to sell for in a couple of years when the home is in perfect condition.
This home is well on its way. I have already:
- Finished 90% of the basement. I just have to finish the bathroom.
- Remodeled the guest bathroom.
- Replaced the windows.
- Built a fancy deck and pergola.
- Installed flooring on 3 levels.
- Tiled the foyer.
You can view some of our flipping adventures here on YouTube: https://www.youtube.com/1500days
I still have to:
- Build a storage shed. This is my current project.
- Solar panels: September
- Remodel the kitchen: October
- Finish the basement bathroom: 2022, spring
- Install a new railing system: 2022, fall
- Remodel the master bathroom: 2022, fall
- Remodel the girls’ bathroom: 2023, spring
The Big Numbers
If you add up all of the transactions above, you come up with the following profit:
However, I didn’t include the transaction fees that we had to pay agents. I totaled these up and they came to:
That hurts and there is a lesson here. Facilitating transactions can be very lucrative.
So, our actual profits are:
We minimized transaction fees whenever possible by:
- Negotiating with agents: An MLS listing is all it takes to sell most homes which isn’t much work on the part of the listing agent. You must offer the buyer’s agent a market-rate commission, but we often worked with listing agents that would list for 1%.
- Using a flat-fee MLS service: These are services that put your home on the MLS for a small fee.
- Getting an agent license: More on this below.
Money means different things at different parts of your life. When we made $100,000 from the first flip, my day job was paying me $37,000/year. So after taxes, this flip earned us more than triple what I made at my job. That money invested in the S&P 500 would be $433,000 today! That’s a lot of money for doing a little tile work on the weekends.
My Best Flip Tips
Real estate may be the best builder of wealth, but it’s not easy like an index fund (set it and forget it!). If you want to make money in any kind of real estate, you’re going to have to put your time in. Here are my best tips.
Embrace the live-in flip: It can be difficult living in a construction zone, but if you can stay in the home for 2 years, you pay nothing in capital gains. Clean laundry covered in drywall dust sucks. So do puncture wounds (Pro-tip: get a tetanus shot)! However, the sweet profits at the closing table make the chaos easy to forget.
Don’t be afraid of the work: Nail guns aren’t hard to operate. Neither are tile saws. You’ll be slow at first, but that’s OK. Take your time and do a great job. You have the best teacher in the world in YouTube.
Finding a good candidate for a live-in flip is the most important part of the process. Mindy and I spent almost 2 years before we closed on our current project. It’s better to wait for a great deal than to rush into an OK one.
Find a great state to invest in: I live in Colorado and lots of people are moving here. The state is business-friendly and has a lot to offer. Even if I bought a home here and did nothing to it, I’d probably have above-average appreciation.
Find a great region to invest in: I like to buy into areas with thriving economies. My home of Boulder County has lots of great jobs in tech.
Find a great city to invest in: I don’t like a perfect town. A town that’s a little rough around the edges has more potential for price appreciation. Longmont fit the bill nicely here. It’s also surrounded by more expensive cities. A rising tide lifts all boats. Another consideration is the local building department. Some towns l( *cough cough* Boulder!) are difficult to deal with. Longmont has a friendly building department and the permitting process is easy.
Find a great neighborhood to invest in: I like to buy homes that are 30-50 years old and in their original state. They’ll be dated and cosmetically ugly, but have more modern systems.
Dumpsters are your friend: I love to walk a neighborhood and look for dumpsters. They are a sign that people are putting money into their homes.
Time To Zero In
Study the market like it’s the most important exam of your life: Sign up for listings and review every new home that comes on the market. If it looks even mildly interesting, go see the house (you can do this yourself if you have your license).
Your goal is to get so familiar with the market that you can decide in under 30 seconds whether a home is worthy of further investigation. Once you’ve identified a good flip candidate and your offer has been accepted, hire a decent home inspector who really looks under the hood at the mechanical systems and structure.
Look for off-market deals: Walk around the potential neighborhood and chat the neighbors up! Tell them who you are and let them know you’re in the market. Look at obituaries. This one is morbid, but if someone died, you could be saving the heirs a lot of hassle. Just be sensitive so you don’t come across as an opportunistic vulture!
Funding Your Flip
Make A Cash Offer: You want to get the best deal, so you should make your offer as attractive as possible. If you can, make a cash offer and tell the sellers you can close in 2 weeks. This will set you apart. We bought our current home partially with a line of credit from our previous home. It was technically borrowed money, but we didn’t have a mortgage contingency in our offer, so it looked like cash to the seller.
Margin Loan: Mr. Money Mustache wrote about this one recently and I love the strategy. Money is cheap and the process is simple:
- Borrow money against your post-tax portfolio.
- Pay cash for your flip.
- Refi and pay back your margin loan.
Get a real estate license: Agent transaction fees will eat into your profits when you go to sell. Mindy got her license through an online course that cost $700. Remember that you also get a commission on the buy side when purchasing your flip property.
Another bonus of being an agent is that you can help friends with their real estate deals. Mindy has helped many friends buy homes.
Join BiggerPockets: BiggerPockets is a real estate investing website full of friendly people waiting to answer your questions. There’s also a podcast and a blog, full of information about all aspects of real estate.
Don’t do this while your kids are young: Children need your time more than a home does. Children also aren’t very good at swinging a hammer. If at all possible, flip homes when young kids aren’t in the picture.
It’s OK to hire out too, but be careful: Contractors can be a pain to deal with. In a healthy housing market, finding a good contractor is an infuriating task. Most won’t even return your call.
YouTube is your friend: Any home improvement skill that you’ll ever want to learn is explained in detail on YouTube. You’ll be nervous laying your first tile or hanging your first cabinet, but just take your time and follow the instructions. You’ll do just fine.
Will Your Next Home Be A Flip?
Flipping is a great strategy to build wealth. Some of my flips worked out better than others, but I’m financially decades ahead because of my sweat equity.
If you’re OK with a little work on the weekends or you’re an early retiree, why not buy an ugly duckling and make it into a beautiful swan?
I love the live-in flip:
- Cheaper price: Most people will choose a perfect, turn-key property over one that needs some work. You’ll get a much better price on an ugly duck.
- Killer skills: Why pay a plumber $200 for a house call when you can fix the toilet in 30 minutes after spending $10 at Home Depot? The skills you acquire through the live-in flip will serve you well for as long as you live. Just watch out; once the neighbors know about your mad skills, they’ll be asking you for help on a regular basis.
- Great strategy when rentals don’t work: In high priced markets, you probably won’t be able to get a good return on purchasing rental property. A flip can work in any market.
- Make a home work for you: Home ownership isn’t all it’s made out to be. Homes are usually not good investments. But, with a live in flip, you trade a little sweat for a lot of dollars. You need a place to live. Why not make your home work for you?
- Money, sweet money: Don’t forget about those beautiful, tax free capital gains.
I’ve saved one of my favorite parts of the live-in flip for last. The work can be tremendously rewarding. On a nice summer evening, there is nothing like sitting with friends on a beautiful deck that you’ve designed and built.
More 1500 Days!!!
You can also find me (and the dinosaurs) at:
Mile High FI podcast:
- EconoMe: Hey look, I’m speaking at EconoMe later this year!
- Facebook: Facebook group and page
- YouTube: My channel is mostly devoted to home improvement, but I have some other material coming up soon too.
- Instagram: Pretty pictures of dinosaurs, sunsets, and nail guns!
- Twitter: Spontaneous, often insane, ramblings
- Coworking space: On the surface, MMM HQ is a coworking space. Look a little deeper and you’ll see that we’re really building community. The members of MMM HQ are some of the finest people I know.
Other resources I like:
- Camp FIs are amazingly fun! I hope to attend Rocky Mountain and Joshua Tree this year. See you there?
- Need to learn how to invest? The Simple Path to Wealth is all you need.
- New to FIRE? Need some FIREy guidance? Check out Fiology and the accompanying workbook!
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