Thinking of flipping foreclosure on conventional mortgage

[Rachael Faulkner]

New here, hi! This is my second home purchase, would be my first flip.

I own my first home free and clear, it’s a 1000sqft 1950s 2/2 cottage I bought w cash from Medicare in 2014 for $18k and put only about $2k into repairs. my family’s outgrowing it though, 2 adults 2 kids and wanting to have a baby but kinda putting it on hold til we’re settled in someplace bigger.

So I took out a conventional mortgage to buy a foreclosure we loved back in April for $70,500 in a nearby military base town. it’s in the downtown historic district on a big corner lot, 2200sqft, 4/2.5 farmhouse built somewhere around the 1930s best I can tell. Been working on it ourselves since purchase, mostly demo and plumbing/electric, but paid $14k to put a new galvalume roof on. Ready to start master bath and kitchen remodel now. Been held up trying to find a good contractor.

We thought we’d renovate and move in, figuring we would rent out the  cottage and just about cover the mortgage ($477, 3.6%, 30yr fixed) if we rent for $650-700 (avg for comps in this neighborhood). But now we’re trying to look at comps for the farmhouse and thinking flipping it could be a smart move and we could stay in the cottage another yr or so.

I'm having trouble establishing an ARV though. Before purchase the home appraised for $94k, but our realtor couldn't find recent comps at the time I was buying. I see comparable sqft renovated houses in the same neighborhood listing for $135-185, some w big differences from mine like asphalt roof or no central heat and air. I can't find actual sales price info within the past 6 mos from what I can see on Zillow. I found 1 good comp that sold 6/3/19 for $170k.

If I hold the house til May 2021 I could sell as a long term capital gain and since I file as single making under $40k I believe I won’t pay federal tax on that. I’ve heard spring is the best time to sell too but I know there’s lots of uncertainty right now. Outstanding principal on the loan would be around $65,800 and we’re trying to keep the total reno cost including roof under $40k. We’re paying for renovations out of regular income and savings invested in Worthy Bonds and doing all the work ourselves that we can. 

I'm sure we could more than break even at least. No solid idea of ARV though. Whatever we pocket off the sale, we could then do some light work on this little cottage and sell it to an investor (not many homeowners in this neighborhood). I know this area well and could sell it for $35 maybe $40k, then buy a bigger move in ready home w cash from both sales and maybe some savings. Or we could stay in the cottage even longer, use money from the flip to do another flip (holding it for a year first?) then buy something bigger w cash, and retain the cottage as a rental.

I’m just not experienced enough to know which way to go, super uncertain about the housing market right now, and waiting to grow our family or else go ahead and have another baby in this small house and tough it out. If it weren’t for the mortgage we’d definitely wanna live in the house we’re renovating, we’re putting quality second hand materials into it and restoring its original character as much as possible. We love the area and already met the neighbors and there’s a good school system. No mortgage is very attractive but so is keeping my first house for almost passive income. Looking for any suggestions wisdom insight or tips!