House Flipping (with no taxes)!

[golftrek]

My husband and I have been retired for over 12 years. We retired at age 50 and have lived very comfortably. One thing we have done to increase our assets both before and after retirement is to "flip" our primary residences. Under the tax rules, a couple can sell their primary residence tax free every 2 years (up to a maximum of $500,000 in gains, $250,000 for a single person).

This is how we do it:

We find a run down house in a good neighborhood and buy it for the lowest price we can negotiate. (We have been able to buy the last few houses for cash.) We try to find houses that are in good structural shape but mainly need cosmetic work, yard work and redecorating. We move into the house and while we are living in the house we fix it up. In order for this to work, we have to live in the house while it is being fixed up, which is a downside but we can live with it. We are handy and can do a lot of the work ourselves.

We try to have all the work finished in a 2 year period. After the work is complete, we sell the house (usually at a nice profit). We pay no taxes, no FICA, no social security on the gains. Then we move onto the next house.

Over the years, we have flipped 6 houses and have cleared over $400,000 in tax free profits. Of course, it was easier to do this pre-2008. We did have to stay in the house we were in in 2008 an extra couple of years in order to be able to sell it at a profit. HOWEVER, we just flipped our most successful house.

We bought a run down foreclosure in a very nice neighborhood in 2010. We moved in in 2010 and brought the house up to the standard of the neighborhood. This past summer we sold the house and cleared over $100,000 in profits. The house went under contract 2 weeks after we listed it.

Before 2008, we were able to sell the houses without a real estate agent (and save the real estate commission). We have used a real estate agent for the 2 houses we have sold since 2008, but we carefully chose the agents and we believe that each agent earned their commissions.

The way we live (living in a house during construction and moving every few years) is not for everyone, but it allowed us to retire at age 50 and live comfortably without touching our other assets. In addition, WE HAVE PAID NO INCOME TAXES in 13 years!

Jo Ann

[daylatedollarshort]

I have friends that did exactly the same thing for a living. Very smart! I'd do it if I even knew which end of a hammer to hold.

I have actually thought about volunteering at Habitat for Humanity in part to do volunteer work and also learn how to fix up our own house and future houses to improve their resale values.

[FANOFJESUS]

Good for you and you make the neighborhood look better at the same time.

[NYEXPAT]

I bought pre-construction in 2001(250k) and sold in 2004 for 500k (no taxes), bought in 2005 (100k) and is worth 320K now, but throw's off 30k in rental income at 5% taxes, so I sold a bit to a friend (as a hedge) and will probably wait a few more years until I can get 500k tax free for it. In the meantime will probably pick up something in Ecuador as that market is heating up. I prefer to buy new to avoid maintenance issues and do not enjoy manual labor.

[Refresher]

Quote:

Originally Posted by NYEXPAT I bought pre-construction in 2001(250k) and sold in 2004 for 500k (no taxes), bought in 2005 (100k) and is worth 320K now, but throw's off 30k in rental income at 5% taxes, so I sold a bit to a friend (as a hedge) and will probably wait a few more years until I can get 500k tax free for it. In the meantime will probably pick up something in Ecuador as that market is heating up. I prefer to buy new to avoid maintenance issues and do not enjoy manual labor.

I have been reading a lot about Cuenca Equador.
Any opinions as a place to live and invest?

[NYEXPAT]

Quote:

Originally Posted by Refresher I have been reading a lot about Cuenca Equador. Any opinions as a place to live and invest?

Investing- Cuenca has "good bones" but I have heard from some that it may have gotten ahead of itself. Get involved in the expat forums and find out who are the quality construction firms in the area.

Living- All depends on you? Cuenca is beautiful and touted as a city of eternal spring. This sounds good on paper but South America is full of such cities and they are rarely as good as they sound. I could probably deal with the cold rainy weather, but the altitude is a "deal breaker" as I need to live at a "safe drinking level".

[Letj]

Quote:

Originally Posted by golftrek My husband and I have been retired for over 12 years. We retired at age 50 and have lived very comfortably. One thing we have done to increase our assets both before and after retirement is to "flip" our primary residences. Under the tax rules, a couple can sell their primary residence tax free every 2 years (up to a maximum of $500,000 in gains, $250,000 for a single person). This is how we do it: We find a run down house in a good neighborhood and buy it for the lowest price we can negotiate. (We have been able to buy the last few houses for cash.) We try to find houses that are in good structural shape but mainly need cosmetic work, yard work and redecorating. We move into the house and while we are living in the house we fix it up. In order for this to work, we have to live in the house while it is being fixed up, which is a downside but we can live with it. We are handy and can do a lot of the work ourselves. We try to have all the work finished in a 2 year period. After the work is complete, we sell the house (usually at a nice profit). We pay no taxes, no FICA, no social security on the gains. Then we move onto the next house. Over the years, we have flipped 6 houses and have cleared over $400,000 in tax free profits. Of course, it was easier to do this pre-2008. We did have to stay in the house we were in in 2008 an extra couple of years in order to be able to sell it at a profit. HOWEVER, we just flipped our most successful house. We bought a run down foreclosure in a very nice neighborhood in 2010. We moved in in 2010 and brought the house up to the standard of the neighborhood. This past summer we sold the house and cleared over $100,000 in profits. The house went under contract 2 weeks after we listed it. Before 2008, we were able to sell the houses without a real estate agent (and save the real estate commission). We have used a real estate agent for the 2 houses we have sold since 2008, but we carefully chose the agents and we believe that each agent earned their commissions. The way we live (living in a house during construction and moving every few years) is not for everyone, but it allowed us to retire at age 50 and live comfortably without touching our other assets. In addition, WE HAVE PAID NO INCOME TAXES in 13 years! Jo Ann

We will be able to retire at 50 as well.We sold four primary residence to pocket the profits. It wasn't our intension to flip but when we saw what we could make, we did. It wasn't really planned; we just bought in strong urban appreciating neighborhoods. In 2009, we bought our primary house as a foreclosure for 320K and might sell it within the next two years.

[Chuckanut]

Ummm... $400,000 in 12 years. Two people working.

I divide the $400,000 by 2 and get $200,000 in twelve years after taxes per person. What's the big deal about that?

No SS tax paid also means no SS benefits or very little. I expect once one adds in the SS benefits over say 20 years of retirement, one would be doing much better than the OP. Maybe not. Where am I wrong?

[REWahoo]

Quote:

Originally Posted by golftrek The way we live (living in a house during construction and moving every few years) is not for everyone...

+1

Isn't that a description of one of Dante's Circles of Hell?

[Meadbh]

Quote:

Originally Posted by Chuckanut Ummm... $400,000 in 12 years. Two people working. I divide the $400,000 by 2 and get $200,000 in twelve years after taxes per person. What's the big deal about that?

I agree. The payback for all that hard work and the stress of moving so often would not be sufficient to convince me to live like that. I presume the OP actually enjoys the process.

[daylatedollarshort]

I like the idea of the reusing capital gains exclusion multiple times plus not having to supply much investment capital, since you have to live some place anyway. I was assuming it wasn't a full time job for two to do the fix ups - just an enjoyable hobby job.

The people I know who did that were younger and the flipping their own house was basically their careers, which I though beat a lot of 40 hours a week regular jobs for stress, feeling of control and personal enjoyment.

[Letj]

We made more than $400K but it was all done while working a full-time job and did not require much of our own sweat. We paid for cheap labor.

[golftrek]

Original poster here,

We did enjoy fixing up the houses for the most part. We did not work at it as a full time job, just a few hours a week on our own schedule. We also lived "free" in the houses in that we had no rent and, for the last few houses, no mortgage. To earn $400,000 net after tax we figure we would have had to put in a lot more time in a traditional job.

House flipping enabled us both to retire at age 50. How many people get to do that? In the last 12 years we have traveled the world and have had many adventures in our motorhome and boat ( paid for by our real estate profits).

We both had fairly high paying jobs before we retired at age 50 so our projected Social Security will be fairly high even though we paid no FICA the last 12 years.. We have not started drawing SS yet.

The last house we flipped, ( that we just sold a couple of months ago) we owned for just over 2 years. We netted $100,000, free of tax, and we had a free place to live. i think we did pretty good. Our only problem now is what to do with the $100,000. We are looking for our next adventure.

Jo Ann

[Fishingmn]

Might be hard to duplicate. 2010 was the very bottom of the real estate market. Prices are up and the number of investors is up which makes finding good investment properties much more difficult. You do have the advantage of being an owner occupant which gives might let you bid on some houses ahead of investors but I still wouldn't expect to find many $100k flips the next time.

[foxfirev5]

Make no mistake about it, flipping is a job. As a licensed builder I've done my share of remodels and ground up construction. It only becomes more stressful when the work is subbed out. Yes there's money to be made but I wouldn't use retired and flipping in the same conversation.

[timwalsh300]

Congrats to the OP on finding something you enjoy and being able to call yourself retired at 50. I hope to say the same someday. I am skeptical about this as a strategy, though.

I know that many people did quite well flipping houses from the mid-1990s up until about 2006, but you seem to be one of the few who survived 2007-2011 in order to profit from the recent bounce in home prices. Without another bubble, I wonder (like Fishingmn) if this could really be replicated.

Every time you mention living "for free" in these houses, it also makes me wonder whether or not you are really accounting for the costs of mortgage interest (on the first few), property taxes, insurance, transaction costs, and regular maintenance in addition to the upgrades you did when tallying your "profits." By the way, money invested in any balanced mutual fund twelve years ago would have doubled without any work and comparatively less risk (at least you would have remained diversified and liquid by investing in stocks and bonds).

Tim

[daylatedollarshort]

Quote:

Originally Posted by timwalsh300 Every time you mention living "for free" in these houses, it also makes me wonder whether or not you are really accounting for the costs of mortgage interest (on the first few), property taxes, insurance, transaction costs, and regular maintenance in addition to the upgrades you did when tallying your "profits." By the way, money invested in any balanced mutual fund twelve years ago would have doubled without any work and comparatively less risk (at least you would have remained diversified and liquid by investing in stocks and bonds). Tim

But a person has to live some place anyway. He can't invest the money needed for housing in a mutual fund. I do see more interest at open house in homes that have been staged and fixed up already. A lot of people can't see beyond cosmetic fixes and are willing to pay a premium for a house that doesn't have a dead lawn and lime green walls, more than fixing a dead lawn and painting over green walls would cost to repair.

[Chuckanut]

Part of the appeal of flipping might be control over one' own time. It feels less like work.

[Chuckanut]

Quote:

Originally Posted by golftrek The last house we flipped, ( that we just sold a couple of months ago) we owned for just over 2 years. We netted $100,000, free of tax, and we had a free place to live. i think we did pretty good. Our only problem now is what to do with the $100,000. We are looking for our next adventure. Jo Ann

A free place to live? Did somebody just up and give you the house?

[Letj]

Quote:

Originally Posted by Chuckanut A free place to live? Did somebody just up and give you the house?

Why are so many people being so critical? I completely get what she is trying to say. Since she lived for such a short period in each house and made such a huge return on her purchase, for her it was equivalent to living free. She got all her money back plus a large return. I have done something similar and can say that I lived free since I recovered everything I put into my primary homes including repairs, utility and improvements. Even if I account for the time value of money, I still lived free. I suspect the same is true in the OP's case even if she takes into account opportunity cost.