The answer to that will depend on you, but today I want to talk a little bit about flipping and live-in flipping as real estate investment strategies. Real estate investing is so versatile with many strategies out there that can really help someone build wealth and generate passive income. In this post, I will talk about both strategies, their advantages, disadvantages, and some considerations for both. Flipping is a popular strategy that involves purchasing a property with the intention of renovating it and reselling it for a profit. Live-in flipping involves purchasing a property, living it in for a period while making renovations, and then reselling it for a profit. It is important to note that both strategies typically involve purchasing properties at a significant discount. First, let’s talk about flipping.
What is Flipping?
As covered above, the flipping strategy involves buying a property at a nice discount, renovating the property, and then reselling it for a profit. The goal is to make a solid profit, hence the discounted purchase price and then high selling point. It is important to consider the costs of renovations when analyzing a property. This strategy can be done on any type of property, residential (1-4 family) or commercial property types.
Flipping Advantages
A significant advantage to flipping is the ability to generate quick profits. It is possible to renovate a property quickly and sell it quickly. This can allow an investor to build cash quickly, which can then be deployed to other investing strategies (e.g., buy and hold) or purchasing other properties to flip. Renovations can take a while, so it is important for an investor to build a strong team that the investor can depend on. The team should include a contractor that can do a lot of the renovations in a timely manner. Another advantage to flipping is the high returns. Successful flips can yield upwards of 20% or more returns, which makes it an attractive option to investors that want to make a significant profit.
Flipping Disadvantages
There is a significant risk with this strategy. It requires a large upfront amount of capital and carries the risk of unexpected expenses, such as repairs and holding costs. A new investor might underestimate the cost of repairs and holding costs, which can quickly decrease any potential returns. Another disadvantage to flipping is the fact that it is highly dependent on the real estate market, which should be obvious – most strategies are, but I think it is easier for flippers to get burned when there is a quick downturn or loss in economic trust from consumers. This can make it difficult to sell property for a profit.
Further Considerations
Flipping is a competitive game. It has become a popular investment strategy. It is important for a new investor to understand how to navigate that competition and put in the work to acquire deals. This might include creative mailers, navigating angry phone calls from potential leads, knocking on doors, whatever strategy works best for that investor in that area. A new investor could consider traveling around their area and looking for dilapidated properties or properties that might need a little care and targeting those properties. Note: it is a popular game, so these properties might have already received 100 calls or mailers. Find a way to be creative in this game and approach it with a positive mindset that you are looking to bring a solution to someone’s problem. Do not let the negative leads mindset get into your own.
Another important consideration for this strategy involves carefully considering the renovation costs when flipping a property. As mentioned previously, it is likely that a new investor might be more prone to underestimating the costs to renovate the property. Of course, this is stuff that the investor will learn with time, and this should not be a blocker to someone that wants to get into this strategy. This is just a reminder to carefully consider costs and get multiple quotes from contractors. Over time, the investor will develop relationships with these contractors and the investor will know who is reliable and who is not reliable. Time and experience will be your best friend with this strategy. You will make mistakes and might get burned a few times, but if you adapt and adjust going forward, you can find ways to make this profitable.
Timeframe and turnaround times are other important considerations for this strategy. It is important for the investor to communicate the desired timeline to contractors. Of course, things happen, and timelines do get extended or, perhaps, sometimes contractors do not communicate that effectively. It is up to the investor to stay proactive and get these updates as often as possible. Taxes and insurance are still due on properties while they are being renovated and these expenses could add up quickly if the timelines continue to be extended, so the investor should have clear timelines to get the property sold.
Let’s move on to live-in flipping.
What is Live-In Flipping?
This is a real estate investing strategy that involves an investor purchasing a property to live in for a period, renovating that property during that time, and then reselling it at a profit. As with flipping, the goal is to make a significant profit on the property, so the investor should include the upfront cost to buy and renovation costs when calculating the gross profit on the property.
Live-In Flipping Advantages
There can be lower capital gains taxes with this strategy if the investor lived in the property for at least two years because profits can be exempt from capital gains taxes up to a certain amount. It would be very important to discuss this with a CPA to determine what the exemption rules are and how long someone would need to occupy the property to take advantage of this advantage. I am not a CPA or tax professional, but I wanted to highlight a potential advantage that could exist, and it should be up to you to figure it out for your own situation in your state.
Additionally, the costs to renovate and hold are lower than you would incur with the flipping strategy. Owner-occupied properties typically offer better real estate tax rates and lower insurance than non-owner-occupied properties. Therefore, an investor can save money on these costs over time following the live-in flip strategy as opposed to the flipping strategy.
Finally, do-it-yourself (DIY) renovations are typically cheaper than hiring a contractor because the person doing it themself is not paying for labor costs. This can help an investor figure out how renovations and their costs work while saving money to start their real estate investing career.
Live-In Flipping Disadvantages
There can be a significant amount of time invested into the process. This strategy requires the investor to live in the property and make renovations to it, which can be challenging for those that might not be willing to or able to commit the amount of time to the renovation process. For those that cannot commit the time to the renovation process might incur additional expenses if they choose to hire a contractor instead of doing it themselves.
Living in a property that seems to be perpetually under construction can be quite an eyesore for someone. It would be difficult for most people to have a family on board with this strategy because people want things done in homes. Hence the term “turnkey” being so popular in the descriptions of a real estate listing. So it would be important to know oneself and ones family before deciding to embark on this investment strategy.
Further Considerations
An investor following the live-in flip strategy should carefully consider the renovation budget. There should be a detailed renovation plan and budget to avoid overspending on these renovations. This is a business after all, keep track of those expenses. Investors should think about the resale value of the property when making renovations. Focus on renovations that will increase the resale value of the property and avoid renovations that might not add value to the property. For example, if you are in the northern states of the United States and are debating whether you should spend your last amount of money on a new furnace or a new air conditioner, focus on the furnace. A new air conditioner is nice to have on the property in the summer, but a new furnace will go a long way in the north when it gets super cold in the winter.
Finally, tax advantages should be discussed with a tax professional or CPA. It is important to highlight twice because this can change over time and having a CPA around on your team can really help you stay up to date on any tax advantages that you might be able to take advantage of with this strategy.
Final thoughts, for now
Flipping and live-in flipping can be attractive real estate investing strategies for investors looking to make a significant profit in a relatively short amount of time. Flipping offers high returns on investment but comes with high risk and market fluctuations. Live-in flipping offers a tax advantage and lower holding and renovation costs but is time-intensive and may not be feasible for all investors. Investors should carefully consider the advantages and disadvantages of each strategy and their own investment goals and risk tolerance before deciding which strategy to pursue. With careful planning and consideration, flipping and live-in flipping can be successful real estate investing strategies for investors looking to build wealth and generate passive income.
Disclaimer: I am not a financial advisor. The content on knowxchange.com or “this site” are for educational purposes only and merely cite my own personal opinions and experiences. In order to make the best financial decision that suits your own needs, you must conduct your own research and seek the advice of a licensed financial advisor if necessary. Know and understand that all investments involve some form of risk. There is no guarantee that you will be successful in making, saving, or investing money. Additionally, there is no guarantee that you won’t experience any loss when investing. Please seek the advice of a financial professional and do your own research.