Live in Flip Financing

[Adam Widder]

We are looking to do a live in flip in our current market. Here's the strategy: Purchase the home, live in until we move, place tenants, after 2 years, sell the property. The home is a 2/1 listed a 90k, I believe we will offer half of that and negotiate from there, renovate the home to a 3/2, my realtor believes ARV is 150-165 depending on how many bedrooms we put in. That being send how can we finance this?

When I spoke with a lender today, she suggested the FHA 203k loan. She stated once the home was ours under contract, the lender would appraise the home based on the after rehab status of the home, the appraisal number would be the number to determine 3.5% down. We would then get estimates on the rehab, and the lender would lend us money based on how much the rehab estimates were.

So my main point is this.  Where do we make profit? If the appraiser knows we're putting in $X plus purchase price, it will most likely be appraised at that amount, then the loan would be that much, so how would money be made on the sale?  My guess is that money is made by using less than the estimated cost of rehab?

[Chris Mason]

Originally posted by @Patrick James:

@Adam Widder I think you are trying to combine too many tactics here. If you are not going to live in it for at least two years before selling, in most circumstances you are going to get hit with capital gains taxes. You might as well just buy an investment and flip it. Second, if you finance the rehab costs into it then the lenders appraisal is going to be pretty darn close to the final number. So when you go to sell, unless your market skyrockets, you are not going to make much if any after only making a handful of payments.

In my opinion the better option is to put the 3.5% down (FHA), put your blood, sweat, tears and money into it. When done with the rehab, refinance it and drop the PMI. Live in it for two years, then sell it or rent it out and run with the passive income. Then repeat all over again.

 I agree with this. 203k requires the use of an arms length GC for everything. Boom there went all your profit. Unless, of course, you are an insider in your local GC community. 

Many think that 5% down conventional SFR is just for first-time homebuyers. Nope. Can do it over and over and over again. Fulfill your 12 month owner occupancy promise while fixing the place up for six months, and spending the next six months saving up your next 5% down. Convert the old one into a rental each time.