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If your Investing in Real Estate when you’re not quite as financially established as you might like to be, you’re probably going to have to use an unorthodox investment strategy, and that’s okay. In this video we’re going to go through the pros and cons, and answer the question of CAN you, or Rather SHOULD you, Live in a House While You’re Trying to Flip it?
I promise it’s not a straightforward answer and there are DEFINITELY some considerations you’re NOT yet thinking about.
Let’s say you’ve found an ideal house to flip – Great Location, No real structural issues, and you know you can make it a success – but you REALLY can’t afford to have all of your cash tied up in a Flip and also be paying rent or a mortgage somewhere else. Especially when you’ll be at the house the vast majority of the time while you’re working on flipping it. Perhaps it’s your very first Real Estate Investment and you want to ease your way into it and not be stressed out by a tight schedule. Perhaps you’ll be doing the renovations after work and on the weekends. Rather than a 90 day timeline to get in and get out, you’re thinking 6-12 months.
It all sounds manageable, but Living in your house flip project will have a significant impact on things you may not have considered, like: how you’re taxed upon the sale of the finished house, how you finance your flip, your timeline to complete the flip, your stress and health, your budget for the project, and your progress toward financial freedom.
TAX IMPLICATIONS: Let’s start with the reason you’re taking on a House Flip project in the first place – to make some MONEY! But how much of that Hard Earned Money is Uncle Sam going to take when you’re done? Well, if you’re willing to live in the house for at least TWO years, then you won’t have to pay any capital gains taxes when you sell. Depending on your profit margin that could mean a LOT more money in your pocket.
The IRS classifies individuals who actively purchase and remodel real estate for profit on a continuing basis, as DEALERS rather than Investors. That means, the homes they flip are treated as inventory, and their profits are taxed as ordinary income, which is subject to the self-employment tax, which means approximately a 25%-52% tax hit to your profits, depending on where your property is located.
BEFORE you can sell the Property and worry about the taxes on your earnings, you need to BUY the property, but how are you FINANCING it? This is a potential CON to living in your flip. Not all mortgages and financing options work with fix-and-flips. If you are using the house as your primary residence for the next couple of years you could technically apply for an FHA loan, but they do come with strict habitability requirements – which means a home that requires major renovations to be deemed habitable may not qualify. Hard money fix-and-flip loans come with high interest and typically need to be repaid within a year or LESS. So on top of paying a high interest rate, you’re also not going to qualify for the capital gains exemption because you won’t own the home for long enough.
Another factor that will determine your ability to live in your house flip is your BUDGET. If your renovation budget is tight, living in your flip allows you to spread those costs out and make them more manageable. You can take on projects as you save up the money for them, without feeling rushed.
The bottom line is that you can ABSOLUTELY take on a flip project, and live in it, while you slowly get it ready for market (and hopefully a LARGE Return on your Investment). There are plenty of financial advantages to doing so, but you need to make sure you plan your budget, your tax strategy, and your mortgage financing BEFORE you jump into it (or rather Move into it). Set a timeline, even an approximate one, and Stick to it. “Discipline never leads to Failure.”
LINK to our “1031 Exchange Explanation” Video: https://youtu.be/2gci_AQKeUE
LINK to “How to Stay Motivated” Video: https://youtu.be/PvQwfA4zrko
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