Whether you’re looking for a way to lower your down payment on a flip or a way to house hack for free housing, live-in flips might just be the answer.
But what is a live-in flip, and how exactly does it work? How do you finance them?
Here’s everything you need to know about this under-utilized real estate strategy.
What Is a House Flip?
Before diving into what makes a live-in flip unique, you first have to understand what a house flip is.
A house flip involves buying a 1-4 unit property — which classifies it as “residential” for lending purposes — and then renovating it to “force equity.” Which means buying a fixer-upper.
After creating equity in the property by rehabbing it, you turn around and immediately sell the property for a (hopefully strong) profit. One variation involves refinancing the property and keeping it as a rental, known as the BRRRR strategy.
Either way, most investors use a short-term hard money loan to buy and renovate the property. They’re expensive but flexible and fast. For a comparison of short-term investment property lenders, see our Loans page.
What Is a Live-In Flip?
As the name suggests, a live-in flip involves moving into a fixer-upper while you update it.
When you finish remodeling, you can then sell the property for a profit. Or refinance it to pull your money back out, and sign a long-term lease agreement with a tenant (the BRRRR strategy) . Or rent it on Airbnb as a short-term rental.
Hardly rocket science. People have been doing live-in house flips for, well, ever.
Still, it comes with specific advantages unique to the modern world.
Advantages of Live-In House Flips
Why should you consider a live-in flip over the standard house flip?
Here are some upsides to consider as an investor.
1. Low Down Payment
When you move into a property yourself, you get to use owner-occupied financing. That means a traditional mortgage with a down payment as low as 3% or even 0% if you qualify for specialty loans. Compare interest rates and down payments from different lenders on Lending Tree.
In contrast, when you take out an investment property loan, you typically have to put down at least 20%, often 25-30%.
If you want to flip a house with no money down — or at least very little cash — your best bet is a live-in house flip.
2. Low Interest Rates
When you borrow from investment property lenders, they charge far higher interest rates than homeowner mortgage rates. Think double or higher, in many cases, when you borrow from a hard money lender.
Take advantage of lower interest rates on owner-occupied mortgages by doing a live-in house flip.
3. Renovate at Your Leisure
With traditional house flipping, every month that you hold the property diminishes your returns. You have to pay the mortgage on an empty house under renovation, so every day costs you.
When you live in the property, you get something of value for your mortgage payments: housing. You have to pay for housing one way or another, so it doesn’t cost you in the same way to take your time with the repairs and capital improvements.
That means you can potentially do the repair work on your own, without needing to pay expensive contractors. In fact, you can avoid bad contractors altogether.
4. Pay Capital Gains Tax Instead of Income Tax
Taking your time with renovations could mean keeping the property for a year or more. Which in turn means paying the lower long-term capital gains tax on your real estate profits, rather than your regular income tax rate.
Depending on your income, that could mean paying 0% in capital gains tax.
But even if you fall in the 15% or 20% capital gains tax brackets, you might still avoid paying capital gains on your house flipping profits.
5. Avoid Taxes Altogether
If you live in the property for at least two years before selling it, you likely qualify for the primary residence exclusion.
Also known as the Section 121 Exclusion, it states that your first $250,000 in profits from selling your home is exempt from capital gains tax ($500,000 for married couples filing jointly).
Something to think about if you forecast high profits from your live-in flip.
6. Potential for “Free” Housing
I like to think of live-in house flipping as another way to house hack.
Most people think of multifamily house hacking when they think of it at all — moving into a duplex, triplex, or fourplex, and renting out the other units to cover the total mortgage cost. But there are other ways to live for free.
Imagine you do a live-in flip and stay in the property for two years. In that time, you spend $70,000 on repairs, mortgage interest, homeowners insurance, and property taxes.
You sell the property for an $80,000 profit, and pay no capital gains taxes on it due to the Section 121 Exclusion. Not only did you effectively score free housing for that two year period, but you walked away with an extra $10,000. You made money on your housing, rather than spending money on it.
7. Repeat & Scale
Homebuyers who do live-in flips can use their profits to scale upward to larger or more expensive homes.
In the example above, where you walk away with an $80,000 profit, you can use that money as a down payment on a better house than you could previously afford. You get to live in that better home as you repeat the process.
And then sell and trade up to a better house again. And again, and again, ad infinitum.
With more cash to invest, you can potentially buy bigger and more profitable deals. Or you can simply funnel that money into buying more rental properties and building passive income.
Either way, you can put it towards reaching financial independence.
Risks & Downsides of Live-In Flipping
No strategy comes without drawbacks.
Bear the following in mind as you explore live-in flipping as an investing strategy.
1. You Live in a Construction Site
Not everyone wants to live with half-finished bathrooms or hanging dust sheets. In fact, few of us do.
That said, you can often isolate the repairs to a single room at a time. If the house has two full bathrooms, you can probably live without one of them for a week or two while you renovate it.
Just let repairs languish half-finished for months on end.
As a final thought, make sure your spouse is truly on board. You may love the idea of fixing up an old house over time, but if your spouse doesn’t, you could be in for some stormy seas.
2. Frequent Moves
Likewise, not everyone wants to move every year or two. Moving is disruptive, particularly for families with children, and that goes doubly if your move involves a change in school district.
For young or single people with few belongings to lug around, live-in flipping is an easier proposition. But that doesn’t mean couples or families shouldn’t do it — just aim to live a leaner lifestyle with fewer “things” to move.
Some homebuyers who do a live-in flip complain that “Just when I got this house the way I want it, it’s time to move!” If you can front-load the repairs and updates, completing them when you first move in, you can then enjoy living in an updated house for the next year or two before selling.
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3. Stricter Mortgage Rules
When you borrow from an investment property lender, they typically allow flexible loan rules as long as the collateral is strong and the deal makes sense. You can buy a shell and gut it if you want.
With homeowner financing, most lenders require that the property be habitable. You must be able to move into it in its current condition.
That limits you to cosmetic updates to the property, rather than deeper renovations — at least if you use a conventional mortgage loan. Which in turn limits your ability to force equity through home improvements.
4. Risk of Deeper Property Problems
When you buy a fixer-upper, you always run the risk that you’ll open the walls to find more problems than you expected.
Of course, you run that risk with properties that look up-to-date as well. But it’s higher with obviously outdated properties.
Still, a home inspection goes a long way in minimizing the risk of unknown property problems. Always conduct a thorough home inspection before settling on a property, and keep the inspection contingency in your contract so you can pull out and get your deposit back if the home’s condition is worse than you expected.
Should You Do a Live-In House Flip?
If you’re relatively handy, don’t mind moving once every year or two, and don’t mind living with some tools and tiles lying around the house, live-in house flips can offer a fun, hands-on approach to house hacking.
Nor do you have to do all, or even any, of the repairs yourself. I’m not handy in the slightest, and periodically brought in a handyman to make updates to my last home through the three years I lived there. I sold it for a tidy profit, and of course enjoyed the improvements while I lived there.
Ultimately, it comes down to how much you mind the downsides outlined above. Some homebuyers don’t bat an eye at them, while they’re a dealbreaker for others.
Before considering a live-in flip, speak with a few mortgage brokers about 203K loans, HomeStyle loans, and other financing options. They’ll determine how you screen and evaluate potential properties.
Or you can simply move into an ugly, outdated, but habitable home with a traditional mortgage.
Either way, have fun with live-in flips. Enjoy the process of updating older homes. Do that, and it makes for an ideal way to “live for free.”♦
What’s held you back from doing a live-in house flip in the past? If you’ve done one, what were your experiences like?
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About the Author
G. Brian Davis is a landlord, real estate investor, and co-founder of SparkRental. His mission: to help 5,000 people reach financial independence by replacing their 9-5 jobs with rental income. If you want to be one of them, join Brian, Deni, and guest Scott Hoefler for a free masterclass on how Scott ditched his day job in under five years.