I started writing a serious post, but it just wasn’t happening. I took a break to find something amusing on TV and settled on Zombie House Flippers. I have thoughts.

For starters, their math doesn’t “math” for me, and I’ll explain that in a minute. But it made me think about how our DIY economy has grown beyond all measure, courtesy of these types of programs, customer workshops at Home Depot/Lowe’s, and social media. I applaud the industriousness, talent, and personal ambition of these creators.

But ….

We should be practical and know when we’re operating out of our left brains (analytical) vs. yearning to exercise our right brains (creative). When we know this about ourselves, we find satisfying hobbies and avocations, and for some of us, businesses.

Otherwise, I worry that our dreams will get us into financial trouble. These shows and videos are really good at creating “you-can-do-this-too” inspiration. And, full disclosure, I’ve had some clients with big dreams who did not know what they were getting themselves into.

For starters, let’s address the math of flipping and developing real estate. It looks so much easier than it is, even if you know your way around construction. Professional flippers and developers have something that you and I don’t have: the ability to get as much margin out of their activity as possible by creating economies of scale.

They have:

· Crews that work on multiple jobs at a time, so if one is delayed, the crew goes to the next job site.

· Wholesale purchasing power for materials and fixtures, and the ability to reuse them in a different location when they can’t be returned.

· Warehouses of furnishings used for staging that can be reused over and over again.

· Industry contacts and licenses that reduce fees for inspections, listings, and marketing.

· Banking contacts that enable them to create flexible financing on demand.

They know:

· The exact cost of executing an upgrade/renovation and how to source things efficiently.

· The cash flows they need to satisfy the financing entity and their own liquidity. (Lenders want to know when and how they will be repaid.)

· The people who facilitate contracts and permits.

In short, they’re good at this because it’s not their first rodeo. Even if they are small concerns, they always treat themselves like businesses. And that means when something doesn’t go according to plan, they don’t throw good money after bad. Instead, they compromise or cut their losses. That’s why sometimes you see a house with only a partially complete renovation come to market.

What kills me about these flipping shows is that their profit at the end of the day–split among the three or more participants–is not great. They make it look easy to do a 60-day flip; but with margins of $35,000 to $50,000, that does not include the split or the tax burden at project’s end. Whether the profit is business income or personal capital gains, it still has to be taxed. Even if these professionals can hide the income in their business expenses, it just isn’t that much money in their pockets at the end of the day. If they’re getting rich, it’s on endorsements and their contract with the network.

I thought you should know in case you romanticize doing this for yourself. And guess what? I do. Always have. I’ve had great joy in renovating various homes over the past 40 years. I also romanticize renovating old furniture … and taking up fabric arts.

And….

Somewhere inside, my right brain is screaming to do something besides financial planning. As you know, Colonel Mustard (the Hubs) and I are renting in two locations while waiting for “the next thing.” We have a line of credit ready and waiting to be used against the invested proceeds of our last house sale so we can write a check quickly without liquidating assets. We are prepared. And opportunity favors preparedness. Let’s see what happens in the next few years.

As a fan of geographic flexibility, I know a creative way to have a little fun in retirement while generating additional wealth you may need. (Extra points if you love renovating and redecorating.) But it requires buying low, selling high, and at least two years’ patience for each transaction. The idea is based on the real-life flexibility of a wonderful couple, acquaintances of mine who, in their 20s, bought a fixer-upper and sold it; bought another fixer-upper and sold it; and bought a third fixer-upper and sold it, each two to three years apart.

Today they live in a multi-million-dollar home in the Hamptons because they chose and financed well, lived in their homes during renovations (out of cashflow), and were patient enough to get the full capital gains tax exemption on each home sale.

Aside: If you’re not aware, the tax law permits an exemption of $250,000/individual or $500,000/married couple on the capital gains from a primary home sale. This exemption is available every two years, and there is no limit on how many times you can use it.

What’s the opportunity? First, get rid of your stuff. Ship it off to your kids or grandkids and give away anything that can’t be sold on Facebook. Radically downsize. Then, sell the damned house while the market favors sellers. Don’t stare at Zillow thinking it’s worth so much more than you paid for it. It’s only worth that value if you execute the transaction. So, sell your highly appreciated home, and prepare to rent or Airbnb.

Then seek out a place you may want to live for two years. Find the best neighborhood that has desirable schools, good services and supports a community that is attractive to you. Be on the lookout for neighborhoods the newspaper real estate sections feature as “on the cusp of renewal” or in line to receive Federal infrastructure upgrades.

Find a house that needs work. If you have serious skills, maybe it’s a holy disaster. But there’s usually at least one underpriced property due to its (ahem) unattractiveness. Maybe there’s a foreclosure. That’s your new challenge.

Find the house for which your home sale proceeds will fund the purchase plus the cost of renovation. Consider reducing your renovation tastes to something that looks fresh but isn’t super high-end, as this is not your forever home. Purchase and renovate over two years. Stay within budget. Sell and repeat in places you’ve always dreamed about living.

Maybe there’s an opportunity to make this a family effort. Or maybe you target the proceeds to fund a future custom build for multiple generations that will provide accessibility as you age. (Better yet, make all your renovations accessible so that you improve the housing stock!)

As owners, you will receive your first $500,000 profit free and clear of capital gains tax. Your job is to get the most profit possible.

When the Hubs and I purchased our home, we knew we were purchasing the “least” house in the most desirable neighborhood. But, as a bonus, it was on an extra-large lot. It was unique in that it had a first-floor primary and first-floor laundry (accessible!). Sure enough, we sold it to empty nesters. And the house was made more attractive by the recently renovated primary bath with the zero-entry open shower.

And that’s something to consider about creating the perfect romantically renovated home: accessibility will be in high demand in the future.

Hmmm. Maybe I should propose a Creatively Accessible Homes program to A&E. #NotYoungNotDone #WeRescueOurselves

P.S. Look for updates on the Madrina Molly Community. Coming Soon!

Join us for our first ever LIVE webinar, “From W2 to Solopreneur.” Click here for details.

Copyright © Madrina Molly, LLC 2024. All rights reserved.

The information contained herein and shared by Madrina Molly™ constitutes financial education and not investment or financial advice

Sherry Finkel Murphy, CFP®, RICP®, ChFC®, is the Founder and CEO of Madrina Molly, LLC.

Related Posts