Sold the live-in flip, and the flip part is not what worked

@compass occupancy clauses usually require you to move in and live there as your primary residence, typically for a stated period after closing, and the exact language varies by lender and loan program. It's not the same as promising never to sell. Two years is long past most of them. But you read the note, you don't take a forum's word for it.

Flint, my question is the 71k. You spread it over 22 months out of pocket. What would this deal have looked like if you'd had to borrow that money?

86k on a 248k purchase over two years. What's that as an annual return on your actual cash in? You put down about 12k plus 71k reno, so 83k of cash, 86k of gain. That's better than it first sounded to me.

@windlass borrowed it would have been ugly. A HELOC or a second on the house would have meant payments during the months I had no cash, which is exactly when I couldn't have made them. The reason this worked is that the reno budget was optional in any given month. Debt takes that away.

@bramble roughly what you said, but the cash wasn't in all at once. It went in over 22 months. So the return per dollar per month is better than a flat calculation shows. It's also not repeatable at speed, which is the tradeoff. I did one deal in two years on this house. Normally I'd do six or seven flips in that window.

@compass windlass has it right. My note had an occupancy requirement measured in months, not years, and I lived there the entire time anyway. Read yours.

Two things in this thread are worth separating because beginners run them together.

The first is the loan occupancy requirement. That is a contract term between you and your lender, stated in the note and any occupancy affidavit you sign at closing. It typically requires you to occupy the property as your principal residence and establish that within a set period after closing. Terms differ by lender and program, so confirm yours in writing with the lender rather than relying on a general description.

The second is the federal capital gains exclusion for a primary residence, which requires ownership and use as your main home for at least two of the five years before the sale. Single filers can exclude up to 250k of gain and married couples filing jointly up to 500k. Those are separate tests from anything your lender asks for, and satisfying one says nothing about the other. How the exclusion applies to a particular seller depends on facts like prior use of the exclusion, periods of non-qualified use, and depreciation history, so that determination belongs with a tax professional.

On @bramble's return question, the number that matters on this strategy is not the headline gain. Flint had 83k of cash in and 86k out over roughly two years, and the reason the after-tax result looks different from a standard flip is that a standard flip's gain is generally taxed as ordinary or short-term income. That is the entire economic argument for the live-in flip.

The constraint @flint named himself. He completed one deal in the window where his normal business would have completed several. Capital velocity is the cost of the tax treatment, and it does not go away.

The four months of stopped work is the part I'd have handled badly. I'd have finished the bathroom on a credit card and told myself it was fine.

I've read a lot of these breakdowns and this is the first post that made the strategy click for me. It's the carrying cost. Every flip breakdown I read has holding costs eating the margin and this one just doesn't have that line.

@flint did you count the mortgage interest as a project cost at all, or purely as housing?

@pike that's the question I keep chewing on too. You'd have paid rent somewhere regardless, so the honest comparison is mortgage payment minus what rent would have been, not the whole payment. Flint, do you know what a rental of that size in that area would have cost you over those two years?

I want to push on the thing everyone is calling the win here, because I've done this once and the mechanism is slightly different from how flint is telling it.

The carrying cost isn't eliminated. It's converted into rent you were paying anyway. @tally is asking the right question. Say a comparable rental was 1,500 a month and flint's payment plus taxes and insurance was 1,750. That 250 a month spread is a real project cost, 6k over 22 months, and it belongs in the deal. It's still a fraction of what a conventional flip carries because a flip pays both sides.

But the bigger thing in flint's post that people are skipping: the reason this survived is that the reno budget was discretionary month to month. He said it himself. Four months of zero spend and nothing bad happened. That is the actual structural advantage and it's worth more than the interest arithmetic.

Here's what it means practically for anyone planning one. The house has to be livable from day one with the work sequenced so no single stopped item makes it unlivable. Flint got that by accident because his ugly part was a contained addition. I got it wrong on mine. I opened the only full bath in month three and when money got tight I couldn't stop, because we had nowhere to shower. So I borrowed at a bad rate to finish and that borrowing cost me about 9k I hadn't planned on.

Sequence for the ability to stop. Not for speed. Do the bathrooms one at a time even when it's less efficient, and don't touch the kitchen until you can eat in it through the whole job. If you can pause at any point without moving out, the two-year clock is free. If you can't, you've built a deadline into a strategy whose whole point is not having one.

@girder that's the best thing anyone has written about this strategy. I'm eleven months into one and I have the kitchen and the primary bath open at the same time. Reading that made my stomach turn a little.

I went through this twice before replying. When flint says the gain is 86k, does the 71k of renovation get subtracted from the gain for tax purposes, or is it just spending that happened?

@juniper improvements generally add to your cost basis, which reduces the gain. Repairs are treated differently from improvements and the line between them isn't always obvious, so that's a CPA question rather than a forum one. But you're not taxed on money you spent putting in a roof.

Dumb one. If you have to live in it two years, and the reno takes most of that, when do you actually get to enjoy the house you built?

@rigging about three months, from what I can tell from every one of these posts. Flint, is that right?

@flint on the 5% down. If you'd put 20% down instead you'd have had 37k less cash available for the reno. Did you choose low down payment on purpose to keep cash for the work, or was that just what you could do?

The thing that gets me is 22 months of living in it. I'm a career changer with no deals and I can imagine the flip. I cannot imagine the plastic sheet where a wall goes for five weeks.

@ember it's five weeks of plastic sheet versus paying tax at ordinary income rates on 86k. Put a number on the discomfort and it stops being a feeling.

Though I'll say @girder's point makes me want to change my buy criteria. I've been building my list around biggest spread. I should be filtering for houses where the ugly part is contained.

The due diligence angle nobody has raised: flint bought at 248 and sold at 431 in a market that moved. How much of the 86k is renovation value and how much is just two years of appreciation? Because those are different deals. One is repeatable in a flat market and one isn't.

@flint do you have any read on what an unrenovated house like yours would have sold for last month?

@canton is asking the question that actually decides whether this strategy works for someone. On my last one, I pulled it apart afterward and something like 40% of the gain was market drift. In a flat market I'd have made roughly half. Doesn't kill the strategy, and the tax treatment applies to appreciation either way, but you should underwrite it as if the market gives you nothing.

Separately, @quarry, get one of those two rooms closed up. Don't wait for the money to get tight to find out what girder found out.

@ember thank you, that makes sense. Basis, then gain, then the exclusion applies to the gain. I'd been picturing it as tax on the whole sale price.

What this thread settled for me is that the live-in flip isn't a flip strategy at all in how you run it. Flint's normal business is speed and this one succeeded because he could stop for four months. Those are opposite skills.

So the honest question for anyone deciding is whether you can tolerate a slow, stoppable, discretionary project in your own house for two years. If yes, the tax treatment is a genuine advantage over anything else in the active category. If you need to be doing something every week, you'll hate it and probably rush it and lose the two-year mark. I'm still working out which of those I am.