Roanoke, VA · Member since 2017 · 48 posts · 15 votes
Hello everyone,
I am new to the real estate world, and I was wondering if those who have done live-in flips do their numbers any differently for those versus a normal flip. For me, I feel that the numbers would differ at least slightly because if I bought my current home my guaranteed monthly payment would drop by about 50% for P&I. Then the money that would go toward forced appreciation gets factored in, and down the line a few years when I would like to move I should at least break even. That would mean that I essentially lived for free for 2 years, right? I haven't gone through all the numbers, and I will. In terms of mindset, am I on the right track for this or should I consider the numbers just like any other flip?
If the answer to the last question above depends on my goals which it often does for everyone, my current goal is to get through med school living for as close to free as possible. I am happy to give some estimated numbers if they would be helpful; just let me know.
Well, if you are going to live in a property for 2 years it is not a flip. I would say forced savings as opposed to forced appreciation. The property could lose value more than the principal payments.
The challenge of living in the property would be where do you store your possessions while the work is being completed and does this hamper the remodeling efforts.
The math may be different in terms of how much of a down payment is required. Many hard money lenders will not loan on owner occupied properties.
Thank you @Timothy Winn; I agree that there is an element of forced savings. Are you steering away from forced appreciation because that term depends more on the current market conditions when flips are completed in a short amount of time? (ie. less holding time allows for less movement in overall market values)
Tyler, I was just trying to convey that appreciation is not guaranteed. Of course I was referring to living in the property and remodeling the property then selling it quickly.
As you mentioned, yes flips are completed in a short amount of time. Typically your profit is a result of buying at a discount and/or improving value by repairs/remodeling.
I think buying a home to live in and improving it over time can be a wonderful way to increase wealth. Everyone needs a place to live!
As to your question as to the math, interest rates are lower on owner occupied loans and only having 1 payment to manage vs 2 (primary plus the investment property to be flipped). I would also want to include the cost of moving into the equation if I were to occupy the subject property. Also how often does one want to move? It may not be a concern to some but to others it may be a massive ordeal.
I would be interested in others opinions on this type of analysis.
Tyler Willson Sooooooo...how is what you’re doing different than just buying a house? Plenty of people buy a home and then (if work situations change) sell it in two years. Unless there’s a bunch of appreciation they lose money because, well, selling a home isn’t cheap. And during the start of a loan, most of the payment goes towards mortgage interest. My suggestion: look at an amortization table for your loan amount. Look at how much goes to principal for the first 24 months. The juxtapose that against 10% of the purchase price for future selling costs (agents, closing costs, some vacancy, getting it sale ready, etc.). See where that gets you and then look at how much appreciation you’d have to “force” to get to breakeven.
@Andrew Johnson Thank you for bringing that up. I guess the only difference between simply buying to live in for two years versus what I would like to do would be the mindset and running the numbers up front. I don't think most owner occupants run the numbers on what they could eventually sell a home for. They look for positive features of a home, and I would say in many cases are swayed by the emotional aspects of buying a home.
I also don't believe many owner occupants want to turn a 2/1 into a 3/2 in order to force appreciation. I'll run the numbers and see what happens when I add up PITI for 2 years + rehab costs. I'll post them later today.
The numbers for a live-in flip are very similar to a traditional flip.
Traditional Flip Analysis
A traditional flip is analyzed by forecasting the After Repair Value and subtracting all of the project costs & your desired profit..
Maximum Purchase Price = After Repair Value - Buying Costs - Holding Costs - Selling Costs - Repair Costs - Desired Profit
Live-In Flip Analysis
A live-in flip would be similar, except you would have a longer holding period & moving costs.
Maximum Purchase Price = After Repair Value - Buying Costs - Holding Costs - Selling Costs - Repair Costs - Moving Costs - Desired Profit.
With that said you will likely have a hard time finding deals if you are including 24 months of holding costs in your analysis.
I would imagine your Holding Costs w/ a mortgage will likely be $1,000+ /month. 24 months x $1,000+/month = $24,000 minimum in holding costs...You won't be able to beat out competing offers w/ $24,000 in holding costs....
@David Robertson I agree that including holding costs for such a long period would put me at a great disadvantage. If I factor in the rent that I wouldn't be paying to someone else into that equation, then that may negate some of those holding costs. That's how it makes sense in my head anyway. Essentially, it seems different given that I am actually living in the space, so to me it is just the cost of living somewhere which I have to pay anyway. I just have the opportunity to get that money back at the end of 2 years which I couldn't do if I were just renting.
@Mike Dymski The lack of taxes on the gain (if there is one) is definitely a good point to bring up. Unless there is greater appreciation in my area, more than I would be adding by adding rooms, then I don't think the gain/profit would be all that much.
I am new to the real estate world, and I was wondering if those who have done live-in flips do their numbers any differently for those versus a normal flip. For me, I feel that the numbers would differ at least slightly because if I bought my current home my guaranteed monthly payment would drop by about 50% for P&I. Then the money that would go toward forced appreciation gets factored in, and down the line a few years when I would like to move I should at least break even. That would mean that I essentially lived for free for 2 years, right? I haven't gone through all the numbers, and I will. In terms of mindset, am I on the right track for this or should I consider the numbers just like any other flip?
If the answer to the last question above depends on my goals which it often does for everyone, my current goal is to get through med school living for as close to free as possible. I am happy to give some estimated numbers if they would be helpful; just let me know.
Thank you for your input!
I disagree with the posters here on this thread to a degree.
Yes its fine to look at a live in flip, or a house hack by running the numbers to see how the investment would work, ie run the flip, or the BRRR thru the calculators.
But remember, and you touched on it, not only do you get the forced appreciation of the repairs/flip, but you also get cost avoidance from not needing anther place to live., and if you keep it long enough tax savings from the 2 year exemption on capital gains.
I think house hacking you end up picking different neighborhoods etc than you would as purely a flipper or a landlord.
One question, do you really want to live in the house while you are doing a flip? that could be really be tough to do, the dust, the missing utilities etc.
Net Net, I would pick a deal that at least shows a little bit of a return and analyze the flip separately and then any cost avoidance is a bonus.
The deal doesn't need to be perfect as a flip only, it needs to do ok as a flip, and then the icing on the cake is you aren't paying rent.
So many people, it seems, are missing the point...
The calculators are for investment property. A house hack is not a pure investment property - it is a blend of that which is an investment with that which is a home.
Now - in case this point gets lost in all of the nonsense, the component that is of most prominence is THIS IS A HOME. If you want an investment, go get it. This is a home, with some amount of investment rationale.
That said, the triggers are not all financial, and most cannot be measured in dollars and percentages.
@David Robertson I agree that including holding costs for such a long period would put me at a great disadvantage. If I factor in the rent that I wouldn't be paying to someone else into that equation, then that may negate some of those holding costs. That's how it makes sense in my head anyway. Essentially, it seems different given that I am actually living in the space, so to me it is just the cost of living somewhere which I have to pay anyway. I just have the opportunity to get that money back at the end of 2 years which I couldn't do if I were just renting.
@Mike Dymski The lack of taxes on the gain (if there is one) is definitely a good point to bring up. Unless there is greater appreciation in my area, more than I would be adding by adding rooms, then I don't think the gain/profit would be all that much.
Thank you both!
I understand what you are saying better now. It's not really a flip...just a way to cover your housing costs by adding some value...always a great idea to cover/cut costs, especially one as large as housing.
@Bart H. I think you hit it on the head with comparing it more to house hacking rather than flipping. It would certainly be closer to that.
@Ben Leybovich Thank you for the insight; that helps puts things into perspective.
@Mike Dymski Yeah, flip probably wasn't the best terminology to use for this purpose. I think Bart said it better above by comparing it to house hacking.
I appreciate all the advice everyone; thank you very much!
So many people, it seems, are missing the point...
The calculators are for investment property. A house hack is not a pure investment property - it is a blend of that which is an investment with that which is a home.
Now - in case this point gets lost in all of the nonsense, the component that is of most prominence is THIS IS A HOME. If you want an investment, go get it. This is a home, with some amount of investment rationale.
That said, the triggers are not all financial, and most cannot be measured in dollars and percentages.
We may be saying things slightly differently, but you can still use the calculators, all you have to do is model cost avoidance of rent as an income stream.
Yes its a hybrid investment. And perhaps you take a lower return than a normal property investment. But still for the beginning investor, its absolutely the best way to get started.
And end of the day, I think you can model it as an investment, it still has a return, you are still adding value via repairs. The only difference is that it is a hybrid.
If you run the numbers, you might be motivated to select different properties. And if you include the cost avoidance of where you live, and lower interest rates from owner occupied properties, then there is a really good chance that you end up with higher returns.
@Tyler Willson, if your "goal is to get through med school living for as close to free as possible", then that's astute. But along with such astuteness, my goal under the same circumstances would include: having as few distractions to STUDYING as possible! Which would lead me inexorably back to the NORMAL investing mantra - Buy the worst house in the best street (that I can afford), and forget about value-adding to it while studying. If you buy well, the STREET will continue appreciating anyway, as will your home! All the best - with your investing AND your studies!...
Hey @Tyler Willson . If you're trying to get through Med School, the live-in flip isn't your best choice. I've never been to medical school, but I'm guessing you'll need to study. I have done multiple live-in flips and they're a great way to make tax free money. But they're not quiet, they're not stress free and they're not conducive to being a med student.
House Hacking is a much better option for you - buy a house and rent the extra rooms out, maybe even to other med students who understand the need for quiet.
@Brent Coombs and @Mindy Jensen My priorities are certainly heavily weighted toward studying for medicine and becoming an excellent physician. Right now real estate is what I like to do when I have free time. I have been enjoying working on our current rehab project which is out of town. There is certainly some added stress sometimes, but overall, I would say it's a good way to spend free time. I agree that the ideal situation would be to get a du-, tri, or quad-plex and rent out the other units.
The problem I am running into there is that I haven't been able to make the numbers work with anything currently on the market. I'm not sure if I am just being too conservative in my numbers or if there really aren't currently good deals for investing. I should post the last analysis I did and try to get some feedback from people in my area.
Tyler, the market is a little different in Roanoke. It doesn't rise and fall as significantly as a lot of other markets. Natural appreciation is at a slower rate. Time on market is a little longer as well. In order to find a deal you have to find something significantly deteriorated, which as Mindy suggests is not a good idea for a med student. The MF is the best option for you but then there is still a need for spending time property managing which is not always convenient. Good deals are getting harder and harder to find right now as market cycle is peaking. That puts you at risk when time comes to sell. No one can totally predict that but there is the potential. You may even keep the MF after med school as an income property. Then hire a property manager when you move away. When you move out and gain another rental income it will look even better. I recommend buying the MF, find one where you see the possibility of improving the management. Right now, Instead of learning to rehab, learn to be a property manager. Invest for cash flow instead of appreciation. You can always rehab later. Let the tenants pay the mortgage and avoid the need to do much so much rehabbing. Forcing the appreciation in a MF involves improving operating costs and rental incomes which can be done with less tax on your time. Read some blog posts on ways to do that. As a nurse who has worked with med students for years, that would be my advice.
@Sonia Spangenberg Thank you very much for the advice! Your med students really shouldn't have stolen nurses' lunches; you all tend to be the ones who actually run the hospital and get things done. Thank you for your service in healthcare!
I definitely agree with seeking out a MF which needs a little less work. One of my current ideas is just to do some driving for dollars in a neighborhood that I would want to live and then send out letters to owners who have MF property in the area. Any thoughts on that idea? I know direct mail usually needs a lot of mail sent out to get any results, but if I specifically want to be in a certain area could this work?
He is way up the chain in MFP investing but I highly recommend reading his stuff. He is a funny writer too. Lots of brilliant ideas and ways of thinking.
Marketing: some of the local realtors can have heads up on new leads for small MFPs and that can potentially be more efficient. There are a lot of them in Roanoke. Mail marketing is useful. Craig's list can be a good resource. Both filtering for sales and advertising that you are wanting to buy. Better than mail, just call the Craig's list listings, newspaper ads, or the landlord's you find in those little booklets found at grocery stores for apartment units. You speak directly to landlords with empty units. Do follow-up calls on those every 3 to 6 months to see if their mind has changed. In marketing in general follow-up is critical in everything you read about it. It gives you credibility as an actual buyer and more likely to get yes responses. If you are time crunched to make calls, look into using VA's (virtual assistants, read Virtual Freedom: How to Work with Virtual Staff to Buy More Time, Become More Productive, and Build Your Dream Business Chris Ducker Sold by: Amazon.com LLC ) to make your initial calls. You just talk to the interested parties your VA's find for you.
Another good option is looking up court records for evictions. Might find some disgruntled landlords. Just some ideas. Also, don't forget to look into making offers that include seller financing options too. Read up on that.
Disclosure. I am an relatively newer investor, about 4 yrs now. I have rehabbed 3 properties in the Roanoke area which turned into rentals. (clue: The older homes in Roanoke alway have hidden problems, lot of them water related. Also old crumbling sewer pipes, watch out for "jerry rigged" electrical too.) Fourth property is a MFP in rehab process. I started out wanting to be a flipper but now like the landlord thing better. Since your investment plan was not intending to be fast cash, this may make more sense for you as well. I am looking to do MFP exclusively going forward. Flipping returns have declined nationwide over the past few years. MF Rentals are a much more efficient way to do cash flow! They are also less affected by market downturns than SF investing. Home ownership is at an all time low and more people are renting than buying. There is a little turn around on that but don't foresee a huge change in that trend. There is some discussion of slowdown in rental rate increases, especially in larger markets, that's where value add comes in to stay competitive. Need to do market research regularly as an investor and landlord.
Tyler, I look forward to hearing how things are going with you. Stay in touch.
I plan to hack in a small multifamily property and I now have a better understanding of what I need to do and how to do it. Thanks, everybody, the numbers were not working and now I understand why.
