Columbus OH - House Flip #1 - What the heck did I sign up for?

Question

My opening statement is: I have finally walked the plank, closed a HUD foreclosure a on December 9th, and have been wading deep into this project.  Ive talked about doing something like this for awhile now, but lacked the actually doing it part.  I am past that hard obstacle, because the papers have been signed. Depending on the time of day and the project at hand, I find myself ranging in emotions and feelings, similar to that of a roller coaster.  This is not only my first time owning a home, but my first time renovating the "ugliest house in a nice neighborhood". I have some experience in certain areas and some knowledge regarding tools, materials, and processes. Plumbing and electrical are proving to be my weakest points. But the discovery of black mold recently has also tested me as I try to source its cause before moving on, which as of this post Im still not entirely sure how to move past that.

One of my struggles currently is despite a lot of research, creating and executing a game plan has proved to be tough at times. Ive created some written timelines, task lists, budget estimates, knowledgeable resources and contractor/company references, but putting all of this information into action has proved to be the overwhelming portion.  For example, my bathroom demo and rehab, I see the end result in my mind,  but I get hung up in little things in the process like hindsight, analysis paralysis, and reluctance to install something in the wrong order only to see myself having to redo it later and ballooning my budget out of control.  Sometimes I find myself having a question, but cant find the answer, and it holds me up from moving to the next step.

Ive decided rather than thinking about posting on this forum, I would just open a dialogue and go from there. I appreciate any advice, responses, links, etc in advance. While Im relatively new in actually engaging in this community of people online, I have been reading posts and skimming forum topics awhile now, and love the togetherness of it!!

Dumitru Anton · Answer

I would add, have a functioning bathroom (toilet, sink, shower)!!! and a big fridge+microwave

Dave Foster · Answer

@Cameron Lewis, Taking actions just to avoid tax is not always the best course.  But adjusting actions to maximize profit is.  And the greatest gift the IRS gives is the primary residence exclusion because it means tax free cash every two years as long as you can convince your wife to keep moving.  Offer her lots of money, trips, and flowers :)

for your non-owner occupied properties the 1031 exchange is available to sell and buy more investment real estate as long as it has been your intent to hold for productive use.  The word "flip" as it is commonly used implies that you're buying to resell as fast as you can.  Those properties do not qualify for 1031 treatment.

You mention that your goal is to begin to turn as quick as possible.  When you do that you lose both potential benefits of tax free primary residence and tax deferred 1031 transactions.  So you will go from no tax liability and reinvesting all the money to paying 40% of your profit to the IRS in ordinary income tax + self employment tax + ACA surcharge tax + state tax.  You've got some time but you may want to think about a model that is buy, fix, rent, then evaluate after a year or so to see if you want to continue holding it as a rental.  Couple that along with a primary residence sale every once in a while and you're on your way to real long term wealth.

Mindy Jensen · Answer

Not all mold that is black in color is the dreaded Black Mold. Did you get a mold inspection? There are mold remediators out there if you don't want to tackle it yourself.

For a Live in Flip, keep your sanity by choosing one room to NOT work on, one place where you can get away from the dust and mess.

And if you're living in the flip for the tax gains, do not sell even one day before those two years are up. You can put it on the market beforehand, but make that an unbreakable condition of the contract to not sell before December 9, 2018.

Steve Vaughan · Answer

You might want to listen to the BP podcast with @Mindy Jensen. (Not the one she just co-hosted).

It's about live-in flipping and frugality to save money.

Since you are engaged - if you and your SO can survive a live-in flip together - then you know you got a good girl there and can survive about anything together :)     There will be tests, but selling tax-free down the road will be huge for your future and I wish you the best!

Katie Neason · Answer

Congrats on taking action. It sounds like you are  doing all of the work your self. Is that correct? If so, what is driving that decision? Is there not enough money in the deal to hire it out professionally? Also how are you financing it?  Seems like doing it yourself is a potentially very slow way to do it and if financed will eat up profits. If not financed it will still drag your returns way down. What is your plan for the house? Sell? Rent? Live in?  I would outline a detailed scope of work and then hire subs that are working for other sussessful investors in town. Then your only job is managing the subs, which is a big enough job in and of itself. It will make the job run much soother and faster and will get you out of the way of yourself. Good luck!

Rip Rittell · Answer

This is going to be a great opportunity and a lot of laughs 4 years from now if yall make it through it. I did the same exact thing a few years ago with my wife (then fiancee) we made it. She bought the house, I did the total rehab on my days off over the course of 12 months. I moved walls, ran new gas lines, scraped popcorn, textured, painted, installed all new floors, etc. We had a fridge line burst about 3 weeks after we finished the new floors and had to replace 1500sq ft of them..... We custom poured a 9 ft x 5ft island bar out of white concrete. This was a Huge remodel but it was fun! After all the sweat and tears it will be worth it. Here are some of my tips.1. Isolate your work areas: don't work in all the house at one time, if you are going to do the bath then mask it off with plastic and work only in there. 2. Have a staging area. If there is a covered parking or garage have your materials there. Don't clutter the house or hallways with tools, materials, etc.3. Have a safe area. Do the master bedroom first and the master bath second. This way you have a place to relax and you can shut the door and not have to see remodel mess. You can destress and relax and have a place that is finished and yours.4. Celebrate small victories and checkpoints in the remodeling process. When you finish the second second bath all the way go out to dinner and a movie to celebrate, when you finish the kitchen cook a nice 3 course meal or order in a nice one from a local restaurant, etc. 5. Document everything. It's easy to get lazy in this area especially later on in the process. Take a lot of pictures before and during. This will be great to show banks on the next project down the road. Keep track of all your receipts. Get a binder and keep them in it all well as any magazine clippings of design inspiration or stuff you like and want to incorporate into the house. 6. Lastly I would try to journal at least once a week. Write how y'all feel, what is going on with the rehab, what you learned and what you did wrong. You will learn/grow so much it will be amazing. I knew a lot going into our remodel but YouTube and Google know way more ;) I hope this has helped you a little. You definitely can do it and it can be fun too. Take it a small piece at a time and you might even end up with a spouse at the end of it! Congrats and good luck!

Ed Matson · Answer

If you haven't already done so, I would suggest buying Jay Scott's books on flipping and estimating rehab costs, available at the BP store.  Really helpful.  We just finished our first flip.  I partnered with a carpenter, who was more knowledgeable than I, but I still had the same emotions as you.  We made some mistakes, but the house came out great and is now has a buyer.

Matt Stewart · Answer

@Cameron Lewis  First of all, congrats on taking that huge first step!  Even though it doesn't seem like it at the time there's tremendous value in what you're going through right now.  You're gaining experience and learning a lot and that will pay dividends on the next one.  As far as the rehab process, it's very easy to get overwhelmed.  I typically do the majority of the rehab myself when I do a flip.  I have a general guideline and order of things that I use on every project.

1.  Systems - plumbing, electrical, hvac

2.  Walls and ceilings - repair and paint

3.  Flooring and tile work - non carpeted areas

4.  Bathrooms

5.  Kitchen

6.  Light fixtures

7.  Carpet

8.  Trim and doors

9.  Exterior landscaping

10.  Punch list

I set for myself weekly and daily goals to keep on track.  It can be difficult to walk by a dozen things that you know need to be done and just focus on one area, like a bathroom.  That's why it helps for me to be able to look at my weekly plan and then even what I want to get done that day and just focus on those few items.  Bottom line, if you plan on doing a lot of the work yourself you need to be as productive and efficient as possible.  Everyone does things a little differently, but over the years I've fine tuned this process and it works out pretty well for me.

Good luck!

Dave Foster · Answer

@Jay Brown, the path that @Cameron Lewis is taking actually has better financial consequences although it is slower - a preference thing.  Because he is planning on living in the house as his primary residence for two years of the 5 years before he sells it he will be able to take the first $250K/$500K depending on their filing status tax free.  He doesn't give us much insight into his game plan other than the intent to move in to it and live there.  But that makes it his primary residence and also ineligible for 1031 treatment.  However, he'll have the option of renting it out for an additional 3 years after living it for 2 and still be eligible for the primary residence exclusion.  If he goes past the time when he can claim that he has lived in it for 2 out fo the previous 5 then he could still do a 1031.

The 1031 that you are suggesting would be tax deferred.  Not a bad thing but not as good as tax free - again depending on the pace you were wanting.  However, the 1031 applies to property that you have purchased with the intent to hold for productive use in business trade or for investment.  Purchasing property with the primary intent of reselling (flips) does not qualify for 1031 treatment.

However, there's some incorrect information floating around in this forum string.  While there is a specific 2 year residency/holding period requirement to take advantage of sec 121, the primary residence exclusion, there is no statutory holding period for 1031 treatment.  It's easy to confuse those two statutes.  For 121 there is a very rigid and specific residency requirement of 2 out of the previous 5 years. For 1031 there is the establishment of intent - not a specific time period.

Many conservative professionals feel comfortable with a holding period of more than one year.  But there can be circumstances where a property held for less than a year but with the intent of holding for productive use could be sold and used in a successful 1031.  There are also circumstances where a hold of much longer than a year is not sufficient to demonstrate that the intent was to hold for productive use.  The specifics of your situation will determine appropriateness.

Berny Petersen · Answer

I think the difference is primary residence vs. investment property:

If they live in the house for the 2 years they will qualify for a tax-free sale to use the proceeds as they like. My understanding of 1031 Exchanges pertains to investment property - non owner occupied.

Columbus OH - House Flip #1 - What the heck did I sign up for?

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