Live-in House Flip Case Study - 6 Years, Free & Clear Home

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:

• $145,000 = full value
• $115,000 = your purchase price
• ($ 11,500) = down payment (10%)
• $103,500 = 30 year mortgage, 4.5% interest, $525/mo payment

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 (simplified for the example by excluding likely materials/repair costs):

• $145,000 = sales price
• ($7,000) = commissions to sell
• $138,000 = net proceeds
• ($115,000) = purchase price
• $23,000 = net profit (WITH NO TAX)
• $11,500 = return of down payment
• +$ 3,500 = paydown of loan principal during 2 years
• $38,000 = total cash available for next purchase

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:

• $145,000 = full value
• $115,000 = your purchase price
• ($ 38,000) = down payment (cash from last sale)
• $77,000 = 15 year mortgage, 4.5% interest, $589/mo payment

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:

• $145,000 = sales price
• ($7,000) = commissions to sell
• $138,000 = net proceeds
• ($115,000) = purchase price
• $23,000 = net profit (WITH NO TAX)
• +$38,000 = return of down payment
• +$7,500 = paydown of loan principal during 2 years
• $68,500 = total cash available for next purchase

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:

• $145,000 = full value
• $115,000 = your purchase price
• ($ 68,500) = down payment (cash from last sale)
• $46,500 = 7 year mortgage, 4.5% interest, $646/mo payment

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:

• $145,000 = sales price
• ($7,000) = commissions to sell
• $138,000 = net proceeds
• ($115,000) = purchase price
• $23,000 = net profit (WITH NO TAX)
• +$68,500 = return of down payment
• +$12,000 = paydown of loan principal during 2 years
• $115,000 = total cash available for next purchase

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:

• $160,000 = purchase price
• ($115,000) = cash for down payment
• $45,000 = mortgage, 4.5% interest, $714/mo, just 6 more years to free and clear!

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.  I simplified some numbers to make my example easier to understand, but the principle works exactly like this.

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.