Living in my first flip: What would you do?

Question

Hi all -- as I'm just starting out, I'd love your thoughts on general routes I'm considering for my first fix & sell property. My main question is whether I should live in my first flip?

Context: My husband launched his own business last year and we've invested much of our savings into his company. I'm researching creative financing options for my first flip as I don't have a large amount cash on hand (FYI I've had a stable job for the past 4 years and have excellent credit if I were to go the traditional route). We moved from Texas to Philadelphia this past year and are currently renting. We plan to purchase our own home in the next 6-12 months.

These are the 3 scenarios I'm entertaining:

1) Secure financing and do my first flip while continuing to rent our own apartment. Downside would be that it would require more $$ to flip while renting and I'm trying to be as cash conscious as possible short-term. Upside is that I could move forward with my goal sooner (3-6 mo), then purchase our own home following the flip.

2) Purchase an inhabitable property as our first flip and live in it while rehabbing. The major downside is that I would want to sell ASAP following the rehab and don't want to be penalized with capital gains tax since we wouldn't be in the property for 2 years. The other issue would be timing with selling the property and simultaneously finding our permanent home. Upside would be the $ saved as we would be combining our living expenses with the flip.

3) Purchase our own home first and flip a property second. Downside would be the delay in completing my first flip. Upside would be more time to save cash, research/network, and potentially get my real estate license sooner (that was something I was planning to do longer term anyway).

I've received some conflicting advice from other flippers and would appreciate further input. Sorry for the long post and thanks in advance for any guidance you can offer!

Lindsay

Russell Gronsky · Answer

I've rehabbed a property I was living in at the time (I didn't flip it, still own it) and I've done fix and flips on empty properties. Here are my thoughts for what it's worth:

Living in a place while rehabbing it:

-It was a pain in the butt living in a house that is under construction.

-Nothing is ever clean thanks to dust from building materials

-You constantly have to move furniture from room to room, damaging walls in the process (walls that might already be finished and now have to be re-finished)

-Because you have to keep moving things from place to place, it takes much longer to finish tasks (compared to an empty fix and flip, I estimate about 30% longer to finish tasks)

-You can never find anything because half of your life is in boxes

-Various things like painting and putting in carpet will take even longer because you want to be able to do those tasks at least 1 floor at a time (if not the entire house at once) to save time.

-Paint fumes are not good for you and you will want to stay at a hotel or a friend's house at least the night that you painted, even with your windows open (I don't recommend keeping windows open during the winter nights in Philly).

-If you paint room by room, you will want to spend the night away from the house to let the paint fumes air out after each painting session so that will be another hassle and extra cost.

-If you have to do work requiring to shut off electricity or water for an extended period of time, this can be very complicated

Rehab an empty house:

-Save 30% of time (estimate from my own experience, by no means a scientific measure) because you don't need to move anything from room to room

-No worries of vacating after painting

-Come to your residence after working on the house all day and get cleaned up

-You know where your things are in the house you live in and no boxes to dig through looking for that one thing you really need at the moment

-If you have to shut off water or electricity for an extended period of time, no problem. You don't really need it

-Wear a mask while painting and then leave for the day, no worries about inhaling fumes

-Can get projects like painting/flooring done all in one shot

The bottom line is fix and flipping a vacant place is the way to go...especially since getting a rehabbed property sold as fast as possible is important in flipping. Not to mention the health risks. Also, if you have kids or pets, that creates another layer of problems if you live in a house you are rehabbing.

-Russ

Russell Gronsky · Answer

@Lindsay Denny, Pros of #3 would be that you can get a commission off the deal. Cons are people generally get emotional when buying a home for themselves. They want the best and often go over budget to get it. Then, once you buy that house to live in, your attention will be divided. You'll notice things right away that you don't like, that you want to update, and things you want to fix so all the money you plan on saving will go back into the house you bought for yourself.

I know, it sounds easy and cheap to do some light home improvements yourself but believe someone who has done a few of these, money is like water through your hands. So, unless you are very good at keeping on a straight path to your goals, I would caution on buying a house to live in first, and then saving for a flip.

Plus, when you are living in a rental, it motivates you to hurry up and get what you need done so you can flip that house, earn some money and buy the house you really want.

Good luck.

Lindsay Denny · Answer

Thanks so much to each of you for your input and advice @Russell Gronsky @Ricardo Cortes @Luc Boiron

I am shying away from #2 as we moved cross-country less than a year ago and the headaches Russell mentioned do sound exhausting and ultimately inefficient.

Does anyone have any thoughts on #3/potentially getting my real estate license before flipping? Pros/Cons?

Luc Boiron · Answer

@Lindsay Denny My vote would be number 2 if you think you (and your relationship) can handle it. Living in your first flip can be a great way to learn how everything works, and can be a good way to save money. This is also better if you aren't in a rush to get it done. It is stressful though, as you will constantly fee like there is more to do. You never escape it. You come home from work and come into a construction site where you need to do more work.

I wouldn't worry so much about the capital gains. At least you aren't being taxed as active income. Capital gains are only on the profits anyways, so it's only coming out after everything you have spent on it has been taken into account. Much better to make more and be taxed as capital gains on it, than not make any gains and not be taxed.

Ricardo Cortes · Answer

Hello Lindsay,

Just from reading your options and reading what Russ had to say, it seems like your best option is option #1. You said you'd be able to reach your goal sooner, which I think is a good profit in hand, despite you still renting. When you've reached your goal you'd be able to buy your first home.Options 2 and 3 do not seem to be short term plans, sounds like there would be more $$ involved. I think getting with that first flip done it will help you reach your goals both in the the long run and short term.i'll be transparent with you I have no experience, I was just weighing out the pros and cons of each situations, if you had to put them in an plan A to C, A-1, B-3, C-2.

Just my opinion

Living in my first flip: What would you do?

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