First Flip Idea and Question

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I am starting to explore the idea of buying a house, living in it and flipping it a year later.  I have a friend who said he would be willing to live in a construction zone and pay a small amount of rent.  This would help with my holding costs, which are lessened even more since I would be living in the house as well.

I would self perform a large amount of work (I have residential construction experience), and would hire out anything I am not comfortable with. This scheme allows me to get into a house with less cash out of pocket and gets me started in REI.

I have a couple concerns with this scheme. One would be finding a property that has profit potential while being currently habitable, do able just going to be harder to find the right deal. My other concern and question for Bigger Pockets is the one year time frame. Is one year too far out to be predicting ARV? Should I just be amply conservative?

If anyone has ever done anything like this I would love to hear from you!

If you're going to do this plan on two years.  That way you can avoid taxes on the gain.

Predicting ARV is always hard. A year or two out is harder still.

Are you paying cash or getting a loan.  A challenge may be finding a house that's habitable enough to qualify for lending but needs enough work to do a fix and flip.  A "dated" house with a bad floor plan might work.

If there is significant renovation, get permits.  Savvy buyers will look for them.  Most areas let you get them yourself and do the work yourself if you're living in it.  My city does, though they then have a one year limit after the work is done before you can sell.  No idea what the penalties are if you sell quicker.

@Colby Litzenberger  

That is exactly what my husband and I did and are doing! It took me a little over 6 months and many houses to find the right place because we were going to live in it. However we used a 203k rehab loan with a FHA to purchase the property, which enabled us to purchase a foreclosure that had some code issues, but was still livable. In fact, we were fortunate in the fact that the bank fixed the foundation and painted the interior along with some minor updates and still gave us our asking price.

As for ARV, as Jon said, can be difficult, however where we are located the housing market is making a decent comeback. In order to gain some knowledge of our farm area, I would drive around town, write down houses for sale and then save them through Zillow, which in turn would tell me when they sold. So they gave me a good measure on how long properties stayed on the market and what they were being sold for. Then to figure out purchase price, my realtor pulled all comps in the area and I did the numbers(using the flip formula and referencing J Scotts rehab cost book). And then we made an offer based on those numbers and the bank said yes! Sometimes I think being an owner/occupant helps as well.

In my opinion if you use the flip formula and are able to negotiate to your asking price and have some sweat equity, you will make a good profit. It might not be as big as if you did a true flip in 3 months, but it still should be decent.

Big key factors are patience and research. I seriously would just drive around the good neighborhoods and look for the bad house and then research it to see what was going on, also I spent a lot of time on the MLS and zillow and realtor.com and so on. Basically I used every tool I could to find our property.

So don't get discouraged, its doable and you will find that property! It just might take you a little while. But stay focused!

Thanks for the feed back guys.

@Jon Holdman  At this point I would be taking a loan for at least the mortgage.  Depending on the scope of the rehab either loan or cash for that portion.  This might be a dumb question, but when you say "significant" renovation are you talking if I am adding bathrooms and moving walls in the basement, for example.  Or does a kitchen gut and rebuild count as significant?

@Nicole Pettis  Thanks Nicole! It is encouraging to hear someone else doing the same thing.  I can understand about having to have patience and do a ton of research.  Especially in my area.  The decent deals get snatched up real quick.  One thing I am looking to take advantage of is the Homepath program's first look period.  I will have 15 days access to a property before investors get a chance.  There are some decent houses that come through that program in my area.  Are you looking to stay two years as @Jon Holdman suggested?  That is definitely something I will be considering.

@Colby Litzenberger that's a good program, I was looking at homes with that option as well, but most of the those were in the worst disrepair. A good place to look is on bank websites under their REO's. Each bank should have them, if not, you might be able to go in the office and talk to someone. Sometimes, these aren't on the MLS and they might have a hidden gem here and there.

No, we are looking to put the house on the market by next May. So we would be in it a total of 1.5 years. As for capital gains, we definitely would not profit enough to get taxed at that rate. It used to be $500k for couples, but they have now lowered it to $450k. If that was what Jon was speaking of.

If you have any other questions, feel free to reach out.

Have a great day!

A kitchen or bath gut and rebuild is significant.  Moving walls is significant. In some jurisdictions, changing a faucet or light fixture is significant.  

OTOH, painting or replacing carpets is usually not significant and doesn't require permits.

The best way to figure this out is to talk to the building department.  Ask questions, be cooperative and I've found they are usually helpful.

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