I'm looking to buy a "live-in-flip" In which I move into owner occupant and then fix it up over the course of two years and then sell. I'm having a hard time deciding what the best way to analyze the flip would be though. The typical calculators don't account for the fact that I need to live somewhere, would be paying holding costs such as utilities anyways, or that I won't be paying taxes on the gain (Yay owner occupant!).
Would it be best to just analyze it like any other flip? Just make up a holding time of 90-180 days and then just stay longer? Or should I put in the 720 day holding period, remove holding costs from calculation and remove my "typical rental rate" from the mortgage cost as well as put the 2018 projected price? I am a bit lost on the best way, obviously it is a longer term strategy and has an element of "appreciation play" to it...
Lets break a flip down to its core elements, Cost and profit.
Like you said, you need to live somewhere and if you are living in your flip, then the cost of you living doesnt figure into your investment. You sill need to pay a mortgague, and pay for electric, gas, taxes, insurance, etc, just like any other house that you can live in. So those costs of you living are not part of the equation
Holding costs come into play when they are outside of your living costs. For you living costs are not a fictional cost, but because you are paying them as part of your flip, they dont need to be counted as your living cost and a holding cost.
A bi of caution here, you DO NOT want to use hard money in a 2 year live in flip, that will be painful. You need conventional financing or soft private money or the interest will kill you.
Your numbers are purchase price + rehab cost (which should be low with you doing much if not all of the work). Your spread between cost and ARV should be pretty high.
Move forward and profit
Thank you for the input @Josh Caldwell
That is what I was doing, but wondering if there was a better way...
Thanks for posting this. I've been wondering this for the purpose of living in a duplex, and rehabing one side then move to the next and repeat. It seems reasonable to add your living expenses as is, or as budgeted to your calculations as a loss, but don't take anymore of a loss than what you already be paying on somewhere else. The other risky part is that I need somethign very specific and might have to pay premium dollar for it. I ahve four boys, and they need a lot of space outside and inside. So just any old property is not going to work. Also, I have had to try and sell the wife on this, she's aboard, but she has her limits to mixing business with peronal.
What are the tax benefits for this?
I think it may depend on how complex would you like to make the calculations. Unlike a typical flip, as you mentioned, you will have tax advantages as well as subsidizing a place to stay; additionally, you may be able to use an FHA 203k loan which may likely be the best source of funding. I would analyze it just like any other flip, like Josh said. Don't want to overpay on the going-in price or over renovate just because you are going to live in it.
This is actually how i built up my investment fund - my wife and I have done six of these properties with the last one netting over 200k. As Josh noted above, you can just calculate the purchase price + rehab cost as your basis. I would not bother trying to 'back out' any of the mortgage or other normal household expenses and try to justify that as profit. Doing so will cause you to buy something you shouldn't. All the properties I've done I targeted to have 80% ARV (or better) after renovation, where I only look at non-owner occupied at 70%.
I am not a tax adviser and this is not advice, but the primary reason we went this route is that if you live in the property for 2 of the last 5 years you can get a tax exemption on the capital gains. I believe it is 250k single / 500k married.
Sounds great, right? Well that depends. The down side is you are living in a renovation for an extended period of time and if you are doing a lot of the work yourself to maximize profit, the trade off is your personal life. You will go weeks without a functional kitchen, sometimes no floors, heck, sometimes no walls. It will take a lot more time to do everything than you think it will and your wife will nag you because she doesn't like living in a construction zone. Additionally, if you have children, I do not think this would work very well at all - too much dangerous stuff to get into. It can get very overwhelming at times and if you aren't completely focused and devoted, you can lose hope of ever getting done.
I also agree that you should never use hard money in this situation. Find something that will just barely qualify for financing (conventional or rehab loan), the last home I bought I had to put in some work before the appraisal just to get the appraisal in at a suitable price.
Hope some of this info helps,
Resurrecting an older post here, but I am wondering the same thing. I believe I understand what the commenters are saying - don't factor in your living expenses because that may make a deal look more attractive, and you may pay more than you need to on a house...
We are wrapping up a slow motion live-in-flip, which will have ended up taking 3.5 years. (We have 2 small kids, and everything has taken twice as long as we expected). I'm looking back at what our profit will be after subtracting realtor costs, the money we put into renovations, etc... It looks kind of sad - especially for how long it has taken us. But I sit here thinking that we will have whatever of our principal that we have paid down back in our pocket. I guess that's not a profit because it was our money to begin with? But if we were living somewhere else, we wouldn't have gotten that money back. I feel like it should count for something. A little column on the side, a number with an asterisk...
The weird thing about it is that when we are done, assuming we sell for what I am imagining, we will have a lot of money in our pockets, but such a small amount will be actual profit. Most of it will be what we put into renovation costs. It's like a little savings account. I still feel good about what we have done. We learned so much, and are excited to do it again. This time in 2 years, of course!
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