Investing Hiring

Home Cycling as a Financial Strategy

Home cycling is a pretty nifty financial strategy. At its core, the idea revolves around buying a low-end home, fixing and upgrading it, and then selling it for a profit off the back of your own time and energy investment in that home.

It bears some similarities with the idea of “home flipping” that was lauded in the mid-2000s, but it offers a great deal of appeal to people like myself who are fairly frugal and don’t want to take on a ton of real estate risk.

Rather than following the “home flipping” strategy of buying a home, hiring people to fix up the home with you as fast as possible, and then re-selling while the market is still rocketing upwards, home cycling is a slower strategy where one person or a very small group of people invest labor and effort over a long time to improve a home, taking on all of the tasks themselves. Part of the value in this type of effort comes from the skills you learn as well as the simple pleasure in handling tasks like this yourself.

Here are two examples of how it works, from people I know.

Case Study #1 – The Single Guy

One of my closest friends in the world is a rather frugal single guy with a good job. He really enjoys hands-on projects and he needed to find a way to invest his money, so he came up with a pretty smart plan.

For several years, he lived in an apartment while he saved up enough money to buy a house. He bought an extremely beat-up home that needed a lot of work done to it and he turned the home into his personal workshop. He’s invested many, many hours into the home, as well as a lot of supplies. It gives him many projects to work on to fill the hours.

Recently, he reached a point where he felt the house was finished – so now he’s searching for another home to purchase. He plans on doing the same thing to this new house while actually living in his finished home.

What will he do when it’s finished? He’s not sure whether he will rent this second home or sell it. He’s sure of one thing, though – he only wants to tackle one home at a time so he can focus his time and energy into DIY projects on just that one home.

What kind of return does he get? Based on his own estimation and subtracting his expenses, he believes he’s added approximately $10,000 in value to his current home. However, he says the real value has come from the work he’s done, as he really enjoys these types of projects.

Case Study #2 – The Family with Older Children

Another family I know well uses a similar approach, but with a few key differences.

During their children’s high school (and early college) summers, the family has purchased a fixer-upper home in their neighborhood. That home becomes the family’s summer project, particularly that of the older children.

During that summer, the whole family gets involved in fixing up the home. They take on all of the home improvement projects themselves, figuring out how things work and making it happen. The parents bankroll the expenses, but the children provide the labor.

At the end of the summer (or into the early fall), they finish up the home and make it nice and clean and sell-able, transformed from a dump into a nice starter home for a family. They stick that home on the market. All profit from the home sale is split between the parents and the children, with most going to the child. That money is earmarked for their college education.

Why do this? It keeps the older children out of trouble for the summer and teaches them home improvement and life skills that they can carry forward from that point, plus it allows them to put aside a wad of cash for college.

What kind of returns do they get? The family claims that they can get about $8,000 in total return on their time and money for a summer’s worth of effort from the whole family. Most of that return is given to the older child for college expenses.

Things They Have in Common – The Strategy’s Foundation

Clearly, these two stories have several pieces in common. Those elements form the basis of this strategy, so let’s take a look.

Buying an Old Home

In both cases, an older home was purchased, one that needed several repairs in order to be appealing to home buyers.

One of the purchasers told me that they were specifically looking for the “worst home on the block” for the purchase. When a home looks decidedly worse than the ones around it, it looks really awful by comparison, so it often goes for a very low price.

Foreclosure listings were studied in both of these stories and both purchasers visited several homes before buying.

In both cases, they were looking for homes that had significant “potential.” What did they mean by that? They were looking for homes that, with repairs, could be quite beautiful. They were looking for homes that had a sensible interior layout. They were looking for homes where most of the damage was superficial, like matted carpet and beat-up drywall, rather than deeper problems like a damaged foundation.

Using Mostly/Entirely Your Own Labor to Improve It

In each case, the game plan was simple. Once the home was purchased, they started taking on home improvement projects themselves. They ripped out carpets, cabinets, and drywall. They removed toilets and sinks and linoleum. They replaced a bit of plumbing and some baseboards.

All of those projects are fairly straightforward once you actually dig in, but they can be somewhat intimidating if you’ve never taken on that type of project.

There were only a few specific issues in either case where someone was hired to address a problem, and in both cases it was an issue related to an inspection by the city where they had to get something up to code.

Using “Bang for the Buck” Materials

Both of the homes were rebuilt using materials that maximized the “bang for the buck” quality. They used paints that were on sale, used coupons at hardware stores (and stretched them to their limits), and even tapped some friendships to get nice discounts.

When buying items, everyone involved looked for low-cost purchases that were still functional and gave off a good appearance. The items purchased were far from “high end” items, but they were all new and functional.

Learning New Skills

Along the way, both homeowners learned a number of new skills, from plumbing and carpentry to electricity and carpet installation. These skills were used repeatedly in the process of building up this refinished home.

More importantly, these are skills that they can take back to their own home and put to use with projects. They can also use them to help friends in need and perhaps even use in gainful employment in the future.

Beyond that, learning new skills builds self-confidence in terms of taking on new things as well as improving your own ability to learn new things.

Getting Some Exercise

Home improvement projects usually mean getting out of your chair and moving around. It involves lifting things, holding things in place, and often involves a lot of walking around, too. It’s far better for you than simply kicking back and watching television.

Many people aren’t motivated to exercise because it seems like an unproductive use of their time. If you take on a physically active project like home improvement, you’ll be inherently getting some exercise along the way, likely extending your life and improving the quality of your life.

I consider that to be a big bonus of any project.

Using Projects for Leisure

In both of the cases (to some extent), the home improvement projects were used to fill spare time in the evenings. Instead of watching American Idol, they would head over to the project house and put up some drywall or tear out a rotting base board or install a toilet.

Many evenings and weekends – though not every evening and weekend – were filled with hours spent at the house.

The key was that they found these projects enjoyable. Learning a new skill and then investing hours into that skill to make the home look better provided personal pleasure for both homeowners. It wasn’t just work. It was fun.

Things They Did Differently – The Strategy’s Variants

How did these two stories differ? Several major details set these two experiences apart. Let’s take a look at some of the variations of this strategy.

To Debt or Not to Debt?

In the case of the solo homeowner, he waited until he could actually pay for the house entirely in cash before purchasing it. He has only minimal utilities in the home – just electricity and water – to keep costs as low as possible during the project. This will significantly increase his profit margin, but it also meant that he had to wait for a long time to actually take on this project.

Of course, in the future, he’ll be able to leap from project to project. The sale of this home – should he choose to sell it – will immediately fund the next purchase and so on, giving him the option to either roll the proceeds into a home in a nicer neighborhood or extract some of the money before the next purchase.

In the case of the family, they took out a loan to purchase the house. While this loan cuts significantly into their total return on the project, they are very confident that they will still make money on the sale of the home. The sale will cover the debt incurred on the home and the remainder will go toward paying for college.

Family Project or Solo Project?

With the family project, there are three to five people working on the home virtually every evening and weekend, enabling the entire project to finish up over the course of a summer.

With the solo project, there’s usually just one person working on it on some evenings and weekends. The improvements, all told, will take more than a year to complete.

The more people you have involved in the project, the faster it will go – it’s as simple as that. If you’re taking out a loan, having more people working means fewer months of interest on the loan. However, if you’re doing it solo, the loan is going to last longer, meaning it’s harder to keep adding enough value to the home to keep up with the interest.

In other words, if this is a group project, getting a loan is more tolerable than if this is a solo project.

Poor Neighborhood or Nice Neighborhood?

In the solo case, the home was purchased in a poor neighborhood where there were no homeowner’s associations to deal with. In fact, no one really cared what was going on with the property, so he had free reign to do almost anything he wanted with the home.

In the family case, there was a homeowners’ association to deal with, which wasn’t a big fan of the project. They had hoped that someone would demolish the property and put up fresh construction and the idea of a family in there banging around all summer did not appeal to them. Members of the association stopped in frequently to check on the progress and ensure that it met the terms of the association agreement.

In general, the nicer the neighborhood, the higher the expectations will be for your finished product. You’ll also sometimes run into issues of homeowners’ associations and you’ll definitely face higher property taxes, and the initial cost of the property will be higher. However, you’ll usually have a much higher profit potential from raising the worst house in the neighborhood to average (or better) than you would in a low-cost neighborhood.

Flipping or Renting?

What do you do when the home is finished? Do you sell it immediately? Or do you rent it out and become a landlord?

The steady income of being a landlord can be nice, but it can mean having landlord-renter interactions with people, some of which can be harsh. It also means you’re going to have to keep the home listed for rent when people aren’t renting from you and you may have periods where the home just sits there empty.

On the other hand, selling the home immediately provides a quick burst of income, but you lose all chance of having a steady income stream. Once the home is sold off, you can’t make money from renters!

The family obviously intends to sell off the home as soon as it’s finished; renting isn’t even in the question. The solo owner is undecided at this point, though he seems to be leaning toward renting it out.

How Much Will They Make?

Earlier, I mentioned that the solo owner estimated he would bring in $10,000 in additional value to the home, whereas the family estimated their gain at $8,000 after expenses.

However, when I asked them about the time invested, the equation changed. The solo owner estimated he would be putting in an average of 20 hours per week over the course of 18 months, which adds up to about 1,500 hours. This brings his hourly wage down to $6.67 per hour spent on the house.

The family said that they would be spending variable time in the house. The primary worker would be spending about 30 hours per week, the two parents would be spending about 20 hours per week each, and the other siblings would average about 15 hours per week. That totals up to about 100 hours per week over a 13 week period, which adds up to 1,300 hours. This provides a wage of about $6.15 per hour.

Their direct return on the home’s value will be less than the minimum wage on the hours they put in.

However, if you dig in a bit deeper, you’ll see that both families have other reasons for taking on this project.

The solo homeowner does it because he loves hands-on projects. He loves the process of taking things apart and rebuilding them. He gets a great deal of personal enjoyment out of the reconstruction of the home.

The family is learning a lot of home maintenance and improvement skills, particularly the children. These skills will save them money later on in life; if a toilet is problematic in the home of one of their children, that child will feel confident in just fixing it. They’re also spending a lot of time together during the final stages of childhood, just as a child is leaving home.

In both cases, financial return is just part of the equation. Sure, financial return might be a big motivator, but there are other motivators which are at least as powerful as the money.

Final Thoughts

Having investigated this type of home cycling, I’ve come to the conclusion that it can be a profitable hobby for a person or a family, but it’s not one that could easily replace a full time income in a normal real estate market.

Instead, I would define this type of home cycling as a income-positive hobby. Most of the time, an income-positive hobby is one that produces money rather than consumes it. After a sufficient amount of time spent on the hobby, you’re left with more money than when you started.

Can this become more than an income-positive hobby? Absolutely, particularly if you decide to become a landlord and use that money to buy more homes to fix up. Over time, you’ll own a number of homes, all of which can be rented, and the rental income can become your main income.

In terms of actually flipping the homes for a living, it requires an overheated real estate market. Many markets were growing at an unsustainable rate in the middle of the ’00s, which meant that house flipping like this could actually work in a lot of places. Today, few markets are growing at that rate, so unless you really know your local market, this won’t work – and it will likely never work over the long term.

So, if you like working with your hands and learning new skills, home flipping can be a great income-positive hobby. You won’t earn a mint from it, especially at first, but you can use this strategy to earn at least a little in your spare time while picking up some great skills and getting some exercise.