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Good morning everybody and welcome to Sweat Equity!
For the past two years, I’ve been passively learning about real estate investing: reading books, listening to podcasts, and speaking with investors. Next month, I’ll be closing on my first investment property. I finally pulled the trigger, but I’m still nervous if it was a good investment or not. But here’s the thing.
I don’t think I ever would have been fully ready to invest in something. Why? Because I don’t know shit about real estate investing. Sure, I’ve spent a ton of time educating myself, but I’ve never actually done it.
You might be thinking “Oh Austin, don’t be so hard on yourself! You know a lot more than you think you do.” And to that, I say, “You’re right, but I still have never done it.”
Have you ever heard of the Pareto Principle? It’s the theory that states that 80% of the output from a given situation is determined by 20% of the input. When it comes to being a real estate investor, sure, you need to spend some time (20%) educating yourself - researching different types of investments, practicing some underwriting, defining your strategy - but you need to actually do it, which is that 80%.
I’ve learned more about real estate investing in the past three weeks since being under contract for my property than in the past two years of reading about real estate investing. I’m not saying to go buy some crappy property because you’ll be a better investor by just buying something as opposed to doing some upfront learning. What I’m saying is that you’re never going to feel 100% ready no matter how much time you spend educating yourself. Especially if you are like me and struggle with making big decisions.
If you’ve put that 20% of time down on learning about the foundations of real estate investing and defining your investment strategy, then you’re probably ready to pull the trigger on something. However, if you don’t feel ready, here’s what I did to help prepare myself for buying my first property.
Begin learning about different investment strategies, and then challenge yourself to write detailed summaries about the ones you’re most interested in.
For me, that’s the BRRRR strategy and the Live-In Flip strategy. Writing about these strategies helped me understand 1) what I know and 2) more importantly, what I don’t know.
When you’re forced to explain something through writing, it’s easy to see the gaps in your knowledge. Once you’ve identified those gaps, you can go back and fill them in. This a learning framework has been popularized as The Feynman Technique. My friend Sahil Bloom wrote an awesome piece about The Feynman Technique here.
Anyways, today I’m going to share a piece about the Live-In Flip strategy. I’ll likely be revisiting this piece later on as I learn more.
Let’s get into it.
Live-In House Flipping 101
A simple strategy for getting started with real estate investing.
As of three weeks ago, I am officially under contract for an investment property. It’s a three-bedroom, one-bathroom, single-family house in Point Pleasant, NJ that Rachael and I will be live in for one to two years.
We’ll be making a series of cosmetic updates to the house: adding new paint, ripping up carpets and refinishing the hardwood floors underneath, remodeling the bathroom, remodeling the kitchen, and ripping out the existing landscaping and making it prettier.
After the cosmetic updates, depending on how much money I have in the bank, I might decide to put in a second bathroom and add some square footage to the house. Square footage, bedrooms, and bathrooms are the best way to add value to an existing property.
The plan is to make these renovations and then do one of two things: 1) rent it out, build equity in the home, and then refinance it to pull some of the rehab cash out 2) sell it and roll the profits into another property (tax-free) using a 1031 exchange.
In other words, my plan is to execute the BRRRR strategy or the Live-In Flip strategy.
The BRRRR strategy is the process of buying a property, rehabbing it, renting it out to build equity, refinancing it to pull some of the rehab cash out, and then repeating that process.
The Live-In Flip strategy is the process of buying a property, rehabbing it while living there to save on carrying costs, and then reselling the property after the rehab has been complete.
Both strategies have their pros and cons, but in this post, I’ll be doing a deep dive on the Live-In Flip strategy covering:
What is a Live-In Flip?
Pros of a Live-In Flip
Cons of a Live-In Flip
Live-In Flip Example
What is a live-in flip?
A Live-In Flip is quite simple. You buy a property, live in it for a few years, do a few renovations, and then resell it.
Renovations can include more simple cosmetic updates; painting, flooring, bathroom remodels, kitchen remodels, and landscaping. Or, they can include more complex updates; adding square footage, adding a bathroom, or adding a bedroom. All of these things will increase the value of your home.
Typically, you can get a little less than 100% ROI on every dollar you put into the house. For example, if you spend $50k on renovations, you should see around $100k added to the total value of the house. I’m still trying to figure this part out, but based on my research, this is what I’ve found.
It’s also good to note that the ARV (after repair value) of your home is contingent on the market in which your home resides. No matter what renovations you make to your home, recent sales in your market are ultimately going to determine the value. Keep this in the back of your head if you are considering a Live-In Flip.
What appealed to me about the Live-In Flip strategy is that it's a conservative way to dip your toes into real estate investing without a lot of risk.
If you execute the strategy effectively, you can make a lot of money. But before you dive in, it's important to understand the pros and cons.
Pros of Live-In Flip
No Income Tax On the Sale: In 1997, Congress passed the Taxpayer Relief Act, relieving homeowners from paying any capital gains taxes as long as you follow a couple of rules: 1) the home is your primary residence 2) you live in the home for two of the last five years. You can write off up to $500k in capital gains as a married person and $250k as a single person. It's important to track all of your rehab expenses so you can maximize your profits. After I officially close on the house, I plan on getting a 0% APR credit card to charge all rehab expenses and to keep track of everything.
Renovate At Your Own Pace: I don't know anything about flipping houses. Unlike other real estate investing strategies that require you to move quickly, the Live-In Flip gives you time to renovate at your own pace. I know how to paint, and I am eager to learn how to do more complex home renovation projects, but still, I don't want to stress myself out with a timeline on my first investment. That’s why the Live-In Flip was appealing to me.
Great Opportunity to Learn: I've been reading about real estate investing for the past two years. But reading is no supplement to actually doing. A Live-In Flip is a great way to learn about real estate investing without the risk of losing a ton of money.
Save Money With DIY: When you're living in the flip, you can do all of the repairs yourself while saving a ton of money that you would be spending on contractors. I am super excited, but also kind of nervous, to get my hands dirty with all these DIY projects.
Building Equity: One of the most appealing things to me about the Live-In Flip is that instead of lighting your money on fire to pay rent, you're building equity in something. I've spent over $30k in rent since graduating from college. I'll never see that money again. Doing a Live-In Flip puts you in a position to build equity not only through paying your mortgage, but also through the renovations you are working on.
You might be thinking to yourself Live-In Flips sound great! But it’s not all sunshine and rainbows. Here are some cons of the Live-In Flip.
Cons of Live-In Flips
You'll Be Living In a Construction Zone: Fortunately, I plan to renovate before we officially move in, but there will definitely be times when the place will be a little messy. My plan is to update the floors and paint as soon as I close. The one thing I am most nervous about is the bathroom renovation. There’s only one bathroom, so it would really suck if I messed that one up. Might need to hire a contractor for some help with that one.
Falling In Love With The House: This is going to be the first piece of property I buy, and I very much might fall in love with the house. This is something I've read from other Live-In Flippers. They buy the house, renovate it, and then as soon as they are done, they put it on the market and never truly get to appreciate the house! My goal is to renovate within the first year so we can actually enjoy the house for a while.
There's Always Work To Be Done: Every day, I'm going to wake up, and there is going to be stuff to do. Fortunately, I work from home, so I could work on little projects throughout the day if needed. But it's definitely going to be stressful knowing that there is always work to be done.
Real Estate Is Illiquid: I'm not sure if this is a true con, but rather something I am worried about. Real estate isn’t like the stock market. You can’t just hop over to your Vanguard account and pull some cash out of your index fund if you need it. Liquidating real estate is a lengthy and costly process.
Now that you know some of the pros and cons of Live-In Flipping, let’s dive into an example.
Example of Live-In Flip
I’m working on putting together a more detailed scenario analysis for this. I’ll share it with you all when it’s complete. But for now, here’s some napkin math.
I’m estimating the ARV to be $550k.
I will be buying the house for $370k, and closing costs are going to be around $10k.
Depending on what renovations I end up doing, this number might change, but I’m going to estimate $100k. Holding costs will be $0 because I’ll be living on the property unless I end up throwing a second story onto the house, in which we’d have to move out during that time.
When you’re selling a house you have to account for two large expenses: agent commission and closing costs. The estimated agent commission is 6% of the sale of the home. So for a $550k sale, they’ll make $33k. Closing costs will be around $10k, but maybe more.
Assuming I’m able to sell the property for the $550k ARV I had estimated, I’d make $30k on this flip. Not a huge ROI, but 1) the learning experience would be worth it 2) this is not factoring in market trends.
Another option besides flipping the property is to continue living in it or rent it out to build more equity in the home, and then do a cash-out refinance to pull some of the rehab expenses out of the house. In other words, the BRRRR strategy.
I’ll do a BRRRR deep dive in a future post and obviously continue documenting my whole investment property journey here. If you or anyone you know is interested in following along, you know what to do. Subscribe to Sweat Equity.
That’s all for today.
Thank you for reading and I’ll see you next week!
Hi Austin. Thanks for sharing your journey. As someone who is super passionate about live-in flips, I’m trying to help as many people as I can, achieve their goals in this area. And I need your help. I have a couple of questions. What has been your biggest frustration so far with buying your first live-in flip? What is your biggest hope and/or dream for the next twelve to twenty-four months? It would mean the world to me.