I recently heard from Mr. F2P that he’s been thinking of taking on a renovation project. Not a bathroom, not the basement, not even the garage. No, Mr. F2P is wanting to take on a full home renovation!
That’s right. Mr. F2P wants to try his hand at house flipping. What he’s proposing is to find a home that’s under valued because of its “uglyness factor”, fix it up structurally and cosmetically and sell it at a profit.
Though I say I “recently heard”, he’s been talking about trying out a bigger project for a few years now. What’s new about it now is that this wish to try something new has gone from an idea to a short-list item to a yearning to give it a go.
What’s His Motivation?
Though Mr. F2P hasn’t done heavy duty construction in a while, he has the skills, and he wants to lead a significant project again. His background includes home builder, home renovator, carpenter and plumber. These are all good reasons but the “because he wants to” is really the driving force behind the project. He has a strong itch and it's time to scratch it.
Regret Is Costlier Than Losing Money
The way we see it, even if we experience a loss, it makes sense because he’ll be content with having done it. I can’t imagine him not doing it if he really wants to because he’ll always wonder “what if” and that wondering can be destructive for anyone because:
Regret weighs heavier on us than trying and failing ever could. Hence the saying “at least I tried”.
Where to Live
What Mr. F2P doesn’t want is to live within the chaos of a flip. We had that experience as we finished the interior of our current home over a five-year period and he isn’t interested in repeating the experience. The main driver for him is to have some distance between where he works and where he gets his R&R, to not be surrounded by “to-do” lists 24/7.
We also have a home-based coaching and personal training business that we love and moving would be disruptive to our clients/friends, which is what makes me very hesitant to consider moving.
Source(s) of Funding
This is the doozy and the one I really have to get my head around. To make this dream a reality—and we want to do it soon, as Mr. F2P’s had the itch for a while—we're getting financing!!!
YUK! We went to the local credit union to look at our financing options. I’ll admit I feel I need a shower after any dealings with a financial institution when it comes to debt vehicles. They just feel wrong. It’s like begging to get under someone’s thumb.
I considered the possibility of accessing our investments as a top up to the cash we have on hand but taking out a line of credit (LOC) against our paid-off home seems to make the most sense because:
- The timeline for the flip is under a year so the debt will not be a long-term obligation.
- Interest rates are very low and not expected to rise much over the next few years.
- We’d be using about 30% of the value of our home to finance the flip.
- We save about $1,000 in costs associated with mortgaging the property we want to flip because you don’t need an appraisal or have legal fees when you use a LOC.
- We can make more by leaving our investments where they are.
- We believe in the “set it and forget it” investment approach (you can never be sure of what the value of investments will be when you want to reenter the market).
- The size of the LOC is based on how much we need at a given time, which makes it quite flexible and there are no repayment penalties.
- The use of investment money is punitive when it’s done in a trickle due to transaction fees.
- Assuming Mr. F2P wants to continue flipping homes after the first experience:
- Our continued savings rate will enable us to self-fund a greater percentage of flips as we go along with money that’s not been diverted to investments (if that makes us more comfortable than continuing to use the LOC).
- The profit, if any, from the flip will help fund a portion of the next flip.
Given we're not spenders to begin with, I admit the LOC likely is a reasonable option.
We had no trouble being approved for the LOC and our net worth will be the same on paper but I’m still having a tough time of it because I don’t want to resume the master/slave relationship associated with indebtedness.
And, we're going to do it anyway because not going ahead with the project would be selfish and cruel on my part, given we have the means to do it comfortably. I want to help satisfy Mr. F2P’s curiosity and help him turn his “what if” into an “I did that” experience.
After all, this is what we do when we have a partnership with a loved one. We support one another’s dreams because that’s what makes us grow as people. It's also what makes life interesting, and who doesn't like interesting?
(So if that's the case, why do I feel like the reluctant bungee jumper who's hanging on to the railing while his "helpers" are shoving him over the edge of the platform! What's that saying about "feel the fear...")
We’re now working on next steps, which are:
- Setting budget book ends (a spreadsheet that’s ready to go to establish a budget for a given home we might be interested in to understand whether it’s a good buy).
- Establishing the LOC.
- Finding a realtor (still discussing this one).
- Finding a house that’s a good makeover candidate.
- Making an offer.
Yup. Life is about to get a lot more…[see above].
What do you think? Is it a good idea? A bad idea? What would you if you were in this situation?
Interested in house flipping? Here are some resources: