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Old 12-04-2013, 02:45 PM   #61
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OP here on my statement that I made $100,000 on the flip and also lived in the house for "free"--here is how I look at it.

I bought a foreclosure for 250,000 cash. I moved in. I did have some expenses--utilities, insurance, taxes, but I would have had some of those expenses even if I had rented a place. Maybe on the house my expenses were a couple thousand more per year than if I had rented a place, but if I had rented I would have been also paying rent.

I could have taken the $250,000 and invested in the stock market. Maybe I could have made $100,000 in 2 years in the stock market (and maybe I could have lost a lot of it too), but in any event if I had invested the $250,000 in the stock market I still would have had to live somewhere.

I am renting now so I know how much it costs to rent where I live. To rent a house comparable to the one I flipped the rent would be around $2500 per month, plus I would have to pay utilities and rental insurance. For 2 years to rent a comparable place would be $60,000.

So to compare apples to apples, if I had invested my $250,000 in the stock market, I would really need to make $160,000 over the 2 year period to cover my gain on the house and pay my rent. That is around a 30% return per year. BUT the gain on the house was tax free. My stock market gains would be subject to capital gains of at least 20% (federal and state) so that bumps up the return I need on the stock market to 50% per year. I have never done that good in the market.

To be fair, I should also factor in our time. On this last house we worked
really hard for the first 3 months and got all the renovations done. We worked pretty much full time for those 3 months. So say for the 2 of us we put in 40 hours each for 12 weeks, a total of 960 hours. Maybe we could have gotten some kind of temporary 3 month job earning $20 per hour and made about $20,000 BUT we would have had to pay income taxes and FICA, etc. So maybe we could have netted $10,000. So maybe what I need to earn on the stock market over the 2 years should only $150,000. That kind of return on my $250,000 stock market investment is VERY unlikely.

So now you see why I think I made $100,000 and lived for "free." I will admit that this flip probably cannot be duplicated. We were in the right place at the right time. But we have flipped a lot of houses and made very good profits every time and lived for "free".

This way of living is not for everyone--but it is the way we live and make money. We have nice IRAs and pensions and Social Security that we will live on someday but for now we live on our tax free "flip" money.

Jo Ann

PS Our family and friends can't believe we are able to do this either, but they see the results.
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Old 12-04-2013, 02:48 PM   #62
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I applaud Golftrek for what they have done. Their creative approach provides shelter for them and they get a significant return on their capital investment every couple of years!
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Old 12-04-2013, 02:51 PM   #63
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As for keeping kitchen remodels cost -effective I re-did my daughters kitchen 18 months ago by resurfacing her laminate coutertops with new Wilsonart High definition laminate and they look superb. Less than $500 to do the entire kitchen.
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Old 12-04-2013, 02:53 PM   #64
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The fact that you worked really hard on the renovations for the first three months and then enjoyed the house for the remainder of your time there makes it seem a bit more bearable. What would be really awful (to me) would be to live in a construction site on an ongoing basis.

But how did you put in all those hours while still working? Did you take time off work to do the renos? And if so, what was the opportunity cost?
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Old 12-04-2013, 03:03 PM   #65
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Your real living costs were the opportunity cost on the $250k cash you invested in the house plus the direct expenses you incurred (taxes, insurance utilities, etc). For discussion sake, let's say your investment opportunity cost of the $250k was $50k for the two years and your expenses were ~$8k a year or $16k for the 2 years.

So to me, you made $100k profit on the flip and had $66k of living costs. If you want to claim that you lived "free" then your profit on the flip was only $34k.

It is disingenuous to claim to have made $100k on the flip AND lived for "free".

BTW, I think what you are doing is novel and am glad it works for you and can see where it may appeal to others. My only objection is to the way you are portraying it as both profiting AND living for free.
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Old 12-04-2013, 03:05 PM   #66
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The only way you can live for free is to move into your car and don't drive it (as long as it's paid for).
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Old 12-04-2013, 03:14 PM   #67
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Meadbh

We are retired, no jobs. No way would could have done all the work in 3 months if we were not retired. Once we got all the work done we took off in our motorhome.

Jo Ann
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Old 12-04-2013, 05:05 PM   #68
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I agree with ERD50 on this one. The profit is a +50 and the living costs are -50 so the net cash is zero. So any profit - living costs needs to sum to 0.

I think most properly it is that one had a profit of 50 and 50 of living costs. But if you want to think of it as 0 profit and 0 living costs, then go for it.

But you can't claim to have a profit of 50 and 0 living costs because to do so would be counting the profit twice. Profit - living costs must equal zero.
I understand this argument but it seems to say living in the house while flipping it for $50k is no different financially than not living in the house while flipping it for $50k. That is obviously not true.

Situation 1 - Let's say you are spending $50k to live in your own house. During the time you spend that $50k, you are retired. So at the end of, say, 2 years you now have -$50k from where you started (i.e. the $50k you spend on living expenses during the 2 years).

Situation 2 - Still spending $50k to live in your house, but during that 2 years you flip a house and net $50k. At the end of the 2 years you are exactly where you started. You are $50k better off than in Situation 1.

Situation 3 - You flip the same house making $50k net, but this time you live in it and your living expenses are, say, $10k. At the end of the year years. You are $90k better than in Situation 1.

So, it is clear that living in the house does in fact better your financial situation over not living in the house. Situation 3 is financially much better for you than Situation 2 even though you are netting the same amount from flipping the house itself in either situation.
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Old 12-04-2013, 05:19 PM   #69
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....
So now you see why I think I made $100,000 and lived for "free." ...
No, I don't. You are still double-counting.

You netted $100,000 tax free with some sweat equity, and that's great if that's what you want to do. But if you netted $100,000, you still had property taxes, utilities, etc. So to pay those and net $100,000 you would have had to make $100,000 plus those expenses.

Trying to say that you would have spent that in addition if you lived in another house while you rehab'd is a whole different case, as you can't get this tax free unless it is your primary residence.

Try looking at it this way to break this double counting logjam - let's say the real estate market went south on you, and you sold it for $0 gain, you just broke even. You are trying to tell me that your checkbook is just fine, you didn't spend anything out-of-pocket for taxes, insurance and utilities? That doesn't make sense, of course you had to pay for those things. And if you had a $100,000 gain, you had to pay for those things - they are separate from the gain.

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Your real living costs were the opportunity cost on the $250k cash you invested in the house plus the direct expenses you incurred (taxes, insurance utilities, etc). For discussion sake, let's say your investment opportunity cost of the $250k was $50k for the two years and your expenses were ~$8k a year or $16k for the 2 years.

So to me, you made $100k profit on the flip and had $66k of living costs. If you want to claim that you lived "free" then your profit on the flip was only $34k.

It is disingenuous to claim to have made $100k on the flip AND lived for "free".

BTW, I think what you are doing is novel and am glad it works for you and can see where it may appeal to others. My only objection is to the way you are portraying it as both profiting AND living for free.
Exactly.

PS - I'll answer Katsmeow's post a bit later....

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Old 12-04-2013, 05:37 PM   #70
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Katsmeow:

Certainly, owning one house is less expensive than owning two houses (all else being equal). But (ignoring tax consequences for now), living in the rehab doesn't make your housing expense 'go away'.

You have a net gain/loss, and you have a living expense. That is all there is.

If you don't live in the rehab, you have two (of some) living expenses. So you obviously save money by living in the rehab, rather than living in another home (again - ignoring all the tax issues). But again, that doesn't make the living expense 'go away', it is there, you pay the bills each month, it is a real expense separate from the net gain/loss of the eventual sale.

Like my $0 gain example in the previous post - the living expenses are still there, you paid them. You don't pay for things that are free, by definition.

It's fine to say we saved money by living in the rehab rather than living in a separate home that is not under construction. But saying that you 'lived for free' would be like saying I got my car fixed 'for free' because I got it fixed rather than buying a new one. No, it was a savings compared to buying new, I still had to pay for the repair - it was not 'free'.

heh-heh, if the OP really says they are living 'for free', then that living costs need to be claimed on their taxes as income. The same way as benefits from my employer are taxed.

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Old 12-04-2013, 07:29 PM   #71
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Hi Jo Ann. I haven't gone through all the comments but I couldn't believe all the negativity either.

I've always have been relatively poor and when I bought my first property (in a very bad area, but inexpensive), my rental neighbor said she would never own, for when her oven breaks, all she has to do is call the manager.

That was 20 years ago and the rent was $1K/mo. So while she's still renting, I'm now living in an expensive home all paid for and never need to work the rest of my life. My monies were made from RE and index investing.

I like the idea of moving every 2 years and learning new construction skills. Hell, I'd rent out one of the rooms at a discount and have a tradesman help with the rebuilding.

Besides a Roth, this is the best thing going.
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Old 12-04-2013, 07:33 PM   #72
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Old 12-05-2013, 01:36 AM   #73
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The reason OP did so well was because they knew which house to buy, worked hard to fix it up, and probably kept their moving expenses low. All are worthy of praise. Had they bought an over priced home at the peak of the bubble, this discussion would not be happening.
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Old 12-05-2013, 07:10 AM   #74
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IMHO the only mistake the OP made was living in a state that taxes income. While renovating the flip they could have also been doing tIRA to ROTH conversions and avoiding the 5% state income tax on the conversion.
Think about it. Have motorhome will travel
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Old 12-05-2013, 08:33 AM   #75
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Maybe this has been raised elsewhere in the thread but if you include opportunity cost in the calculation, which is right and proper to do, then to be fair you need to also include cost avoidance of the imputed rent on the other side of the ledger.


Consider the situation where the flipper only broke even financially on the deal. They may have actually come out ahead once factoring in the avoided rent expense.


So would that mean then that they lived in the house for free? Look at this this way. Consider all those ton pickups on the highway with business insignia painted on the side, yet they're pulling a trailer with four-wheelers, a toy hauler or a boat. Is that small business owner excluding the operating expenses of that trip from his/her business ledger? Of course he/she is (not.) Does that person think that using a business asset for personal use and being able to write off the cost means that it's free?


They probably do. So how is than any different than the OP feeling that after consuming a “business” asset (by living in the house) and realizing real economic benefit, that they used the asset for free?


I'm in no way meaning to imply that I'm questioning the ethics of the OP. In my mind they are doing what's right in both the letter and spirit of the law. But I do think that saying the use of the house was “free” is a bit of a stretch.
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Old 12-05-2013, 08:51 AM   #76
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Funny to see so many wrapped around the axle .... EVERY flip has utilities and taxes - occupied or not. No one works in the DARK. The heat is on and your taxes come due whether you live there or not.

Maybe the utilities were a little higher because someone lived there ... but it's negligible. Living there for "free" makes sense to me ... to think otherwise is nit-picking.
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Old 12-05-2013, 10:48 AM   #77
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My dear FIL lives in such a house (except that it is not "close to new"); my MIL died a few years ago and FIL is still in the same house where they raised their family starting back in 1955 when they bought it before it was even built. It is now 'updated' with early 1980s decor.

What will have to happen is that DH and I will have to buy it from the estate and save realtor fees. We would also benefit somewhat from Prop 13. DH and I kick this around from time to time. Mostly he is inclined to let it go because it wlll take money and effort to put lipstick on FIL's nice little piggy.

However, I keep reminding him, "This is a Southern California/ Orange County pool home on 1/3 acre we're talking about here, so let's think this over verrrryyy carefully."

FIL is behind me, but no one else is!
We bought from my Father about 10 years ago. 1960's house that had been maintained but not updated. Original kitchen and bathrooms.... 20 year old carpet.

The way we handled it - because Dad wanted to be fair, as did I... we determined market value by exchanging comps and negotiating the price. My sister oversaw this (with a vested interest.) We paid market value - but a 1/3 portion of it was in a loan payable on his death. I'm one of 3 kids. This loan was covered out my share of the inheritance - so I basically got an early inheritance equal to 1/3 the value of the house... and a significantly reduced inheritance when my dad passed. If your dad has other assets he plans to pass on - this might work for you. It won't if the house is his only asset.

This made it fair to my brother and sister and mortgage that we could comfortably afford. That's a rare thing in Southern CA.

The prop 13 tax rate is the biggest reason we had for purchasing the house. It makes a HUGE difference in the carrying costs. You can transfer the prop 13 tax rate if you purchase from a parent/grandparent/child or grandchild. We save about $5000/year in property taxes compared to if we bought from a stranger.

We're 10 years into the purchase and still fixing up - because we're doing it piece meal, ourselves, pay as we go. But we'll end up with the perfect house for our needs.... affordably.
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Old 12-05-2013, 12:21 PM   #78
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The only way you can live for free is to move into your car and don't drive it (as long as it's paid for).

Or if someone else pays for your living expenses while you cat/house sit. Happened to my sister for 3years and her and her ex-husband were able to reach FI much sooner.

Flip it around, now she owns about 10 rental homes and is targeting her kids financial independence.
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Old 12-05-2013, 01:03 PM   #79
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Funny to see so many wrapped around the axle .... EVERY flip has utilities and taxes - occupied or not. No one works in the DARK. The heat is on and your taxes come due whether you live there or not.

Maybe the utilities were a little higher because someone lived there ... but it's negligible. Living there for "free" makes sense to me ... to think otherwise is nit-picking.
But in this case, they are promoting the tax free nature of the gains, which means this has to be their primary residence. There is no consideration of living elsewhere.

Correct me if I'm wrong, but AFAIK, with a personal residence you cannot (legitimately) add your living expenses to your cost basis to offset gains. So they are an out-of-pocket expense and not 'free'.

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Old 12-05-2013, 02:35 PM   #80
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We haven't been able to take advantage of the tax free exclusion yet. I hope it doesn't get repealed as our house has appreciated substantially in the past 15 years. One of our rentals is a block away. It's up in value about 150k. If/ when we need the money from our current home we will sell, take the 500k exclusion and move into the rental. The homes or lots that we have flipped in the past were taxed at 15%. I didn't mind that at all. In fact, I used to question why I was paying 35% plus in taxes for helping people by practicing dentistry but only 15% for helping myself remodeling homes. And now that I'm " retired" , I pay 0%! This country's tax code is ass backwards. lol
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