The Pros and Cons of Live-In Home Flipping

Mindy Jensen and her husband Carl have made up to $100,000 every two years by buying a house, fixing it up while living in it full time and then selling it for a profit. Call it live-in flipping.

“I didn’t even know I was doing it” for the first couple of homes, said Jensen, 44, who began using the strategy to build wealth in 1998. “I bought an ugly house because it’s all I could afford.”

The Jensens invest in the stock market with the proceeds from flipping their homes, money that has grown into a sizable nest egg while also providing capital for the next project.

Like any investment, there are pros and cons to live-in flipping, as a few veterans explain.

Pro: There are no income taxes, if you do it right. Live-in flipping exempts owners from paying capital gains taxes on the sale (up to $250,000 for an individual and $500,000 for a couple), provided they have lived at the property for at least two of the previous five years.

Con: You move around a lot. To continue making significant tax-free profits, you’ll have to move every few years.

Pro: You have one mortgage instead of two. Live-in flippers avoid carrying double mortgages and can take their time selling the home, says Jensen, who is the community manager for the real estate investment blog and podcast, BiggerPockets.com.

“You don’t have to buy at the very bottom of the market and sell it very fast,” she says.

Marketing officer of DNA Behavior Tripp Rockwell eliminated about $7,600 in carrying costs by living in a property outside of Decatur, Georgia, that he flipped after four years, netting about $40,000 in profit.

Con: Your home is a construction zone. What you save in carrying costs will be paid for in aggravation as portions of the home are remodeled. Rockwell washed his dishes in the bathtub while his kitchen was gutted.

“If you are a very clean person and can’t have dust around your house, this may not be for you,” Jensen says. “If you do a lot of entertaining, you’re going to have to stop.”

You may also have to live in close quarters with workers all the time.

“They may use your restroom, use inappropriate language you don’t want your children exposed to, or play music not to your taste or volume preference,” says Dan Bawden, chair of the National Association of Home Builders Remodelers.

Some projects such as pest extermination or a major plumbing problem may require that you stay somewhere else temporarily, and the cost of accommodations will cut into your profits, adds Joanne Cleaver, communications manager for national digital real estate agency USRealty.com.

Pro: You’ll save money, especially if you do the work yourself. Buying a beat-up house is cheaper than a turnkey one, especially if you’re handy.

Jensen and her husband prefer to do the work themselves – even electrical and plumbing – which is permitted in all of the places she’s lived, though many locales require that you hire a licensed professional.


 Investors must decide if the returns are worth the risk and effort involved in owning rental property.

Rockwell also used sweat equity to fix up his house, spending only about $30,000 to buy the raw materials.

It’s even possible to save on materials, if you’re diligent. New York Consultant Leo Giannini saves about two-thirds of the cost of materials on his live-in flips by purchasing materials at building supply auctions. He found drywall for $1 per sheet, insulation for 10 percent of its usual cost and discounted kitchen equipment.

To protect your in-progress investment, your homeowner’s insurance policy should include things like coverage for theft of materials, equipment and other builders’ risks, Cleaver says.

Con: Say goodbye to your free time. If installing flooring, fixtures and painting are a cinch and you opt to do the work yourself, expect to spend every weekend working on the house, Jensen says.

Timing projects may also be tricky, especially if you still work a full-time job.

“Spacing out projects meant some issues got worse and created more problems,” Rockwell says. “The roof was a goner from the beginning, but we just patched as best we could until, during one especially bad storm, the rainwater began streaming down an interior wall.” Rather than continue saving to repair the roof, Rockwell needed to blow the budget to make the expensive fix immediately.

Pro: You can use owner-occupied mortgage financing. Investors usually must put at least 20 percent down on an investment home mortgage and may have higher interest rates, but an owner occupant can put as little as 3.5 percent down, Jensen says.

Some foreclosed properties, such as Fannie Mae HomePath, are only open to offers from owner occupants for a certain period, making for better deals. Jensen purchased her current home via the HomePath program for $176,000. After she put $100,000 into the home, it recently appraised for $450,000.

Con: You still need to analyze your numbers. It may be your home but you need to think like an investor first. The best live-in flippers can spot problems in a house when they buy it so that they know how much money they’ll need to put into it.

Teris Pantazes, co-founder of Efynch.com, which helps homeowners find local, independent home improvement pros and handymen, has seen homeowners blindsided by issues like termites or cracks in the foundation. Although serious, these are issues that can be overcome if you understand construction, he says. “We’ve seen far too many people get involved without any knowledge of how to handle construction or contractors.”

You’ll also need to have an eye for a property that will sell and then time that sale well. Jensen admits not all of her homes have been easy to sell, including one that she tried to sell during the most recent housing market crash.

But having a budget, cash reserves and patience is key, especially if it takes longer than you expected to sell. You also have to be OK with keeping money tied up until then.

“We enjoyed the property, the location was great,” Rockwell says of his prolonged stay in the live-in flip. “We just knew that we wouldn’t get our money back out of it until we actually sold it.”

Source: money.usnews.com