Flipping to Raise Capital

[Nick Coons]

At the moment I own only my primary residence and looking to purchase my next investment. My long term goal is buy-and-hold. However, with the market as it is and finding deals, I'll likely not be able to successfully execute the "refinance" step in BRRRR in order to pull out enough cash to acquire the next property. So if I sink the cash I have now (which is coming from a HELOC on my primary residence) into a property, it'll likely be a few years before I can acquire the next.

What I'm considering is to flip properties first. The idea being that I take the cash that I have now to cover the down payments, rehab, and holding costs of one property, and then flip it after rehabbing to add value and force appreciation. At the end of that step, I'll have more cash than I started with. I will repeat this process until I have enough cash to use to cover the costs of acquiring a long-term rental, and also to acquire and hold another flip. I'll use the flips specifically for the purpose of raising capital to help acquire buy-and-holds.

I have experience (though not recent) in both buy-and-holds and flips. Are there pitfalls or issues that I should consider with the strategy? For instance, I know that the income that I make from a flip will be taxed as ordinary income and whatever my tax bracket is, so I need to make sure I set aside a proper amount for taxes and not drop it all into another property without being able to afford the taxes.

[Andrew Bang]

This is a popular strategy, starting off in flips or in wholesaling to build up some cash for the buy and holds. What you will also gain is experience in buying properties under market value. With the BRRRR strategy, if you find a home with enough room to flip, then you would also have found a home with enough room to refinance and get your cash out without leaving any in the property. Its all about the buy.

[Nicholas L.]

@Nick Coons

As you may know, one of the features of a BRRRR is that, unlike a flip, you recoup your invested capital when you refinance without paying taxes or realtor fees.  So... if you can find, and buy, a property to flip, you have likely found a candidate property to BRRRR.  And if you buy right and increase the value, you'll get all of your invested cash out when you refinance.

If you want to flip, that's great. But flipping in order to generate cash to BRRRR seems like two competing goals. As you noted your flip profits are going to be greatly reduced by taxes, closing costs, etc.

I also think it's the easiest it's ever been to refinance a BRRRR - as an example, I haven't run into any of the seasoning period restrictions that used to be so common. The interest rate on the refinance loan may be a lot higher, but to me that's well worth it to pull your capital out.

Hope this helps.

[Nick Coons]

Quote from @Nicholas L.:

@Nick Coons

As you may know, one of the features of a BRRRR is that, unlike a flip, you recoup your invested capital when you refinance without paying taxes or realtor fees.

...

I also think it's the easiest it's ever been to refinance a BRRRR - as an example, I haven't run into any of the seasoning period restrictions that used to be so common. The interest rate on the refinance loan may be a lot higher, but to me that's well worth it to pull your capital out.

Completely agree on the first point. However, the market as it is here locally where i'm investing (Phoenix), zero of the properties that I've analyzed will yield the result of allowing me to refinance and get my entire cash outlay back. It's extremely difficult to find a deal with as hot as it is here. A "deal" is basically anything in rather poor condition selling for <85% ARV (the only ones I've seen <80% ARV are literally ones that have caught fire and need extensive rehabs).

As I understand it, getting all of the investment back is generally referred to as an "infinite BRRRR" and isn't the norm in any case. So despite the tax implications, I want to make sure that I don't sink all of my cash into a property so that I have no resources available to acquire the next one. The other thing I want to avoid is a situation like "I've calculated I'll need $40k in cash, and I have $40k in cash, so as long as zero things go wrong, I'm fine."

Additionally, the idea of flipping and BRRRR (including the cash-out refinance) are not mutually exclusive. It's not that I flip properties OR I cash-out refinance a BRRRR. If I flip one property, then BRRRR the next one and do a cash-out refinance and get all (or sufficient) of my cash back so that I can BRRRR another, then awesome! What I'm looking for is a strategy to raise cash in the event that I need it because a cash-out refinance strategy doesn't work for a particular deal (or well in particular market conditions).

[Nick Coons]

Quote from @Andrew Bang:

This is a popular strategy, starting off in flips or in wholesaling to build up some cash for the buy and holds. What you will also gain is experience in buying properties under market value. With the BRRRR strategy, if you find a home with enough room to flip, then you would also have found a home with enough room to refinance and get your cash out without leaving any in the property. Its all about the buy.

Completely agreed! The last time I was involved in investment (both flips and buy-and-hold) was 2002-2006. Some of the experience I have is timeless, so that will come in handy. But some things have evolved and I'm out of date. I've heard from BP podcasts that "a good BRRRR also has to be a good flip", so it's nice to know that that skills in finding the right buy are common.

I'm glad this is a popular strategy, because it's probably popular for a good reason.

[Nicholas L.]

@Nick Coons good points! I totally agree that not every potential BRRRR is a potential flip, and vice versa. On a BRRRR you obviously need rent to cover the expenses, whereas on a flip how much it might rent for is irrelevant. I just finished a BRRRR myself and it didn't appraise for what I was hoping for, so I'm "leaving money in the deal." But it rented immediately at my target rent so I'm still fine with it.

It just seems to me that if it's tough to find a candidate property to BRRRR right now, it will also be tough to find a candidate property to flip.

Are you looking to invest right in the city of Phoenix, or can you expand your search area to more of the state?

[Nick Coons]

Quote from @Nicholas L.:

It just seems to me that if it's tough to find a candidate property to BRRRR right now, it will also be tough to find a candidate property to flip.

Are you looking to invest right in the city of Phoenix, or can you expand your search area to more of the state?

Agreed on the difficulty of finding a good candidate property.

I'm not targeting the city of Phoenix specifically, just the general metro area. So Tempe, Chandler, Mesa, Gilbert, Glendale, Peoria, Avondale, etc. So pretty much all of Maricopa county.

[Basit Siddiqi]

Just be mindful of the taxes when it comes to 'flipping' as the taxes can be quite high when you factor in federal taxes, self employment taxes and state taxes.

Flipping is a business. I think you may be better off starting a business / freelance in the field you have experience in.

Best of luck!

[Nick Coons]

Quote from @Basit Siddiqi:

Just be mindful of the taxes when it comes to 'flipping' as the taxes can be quite high when you factor in federal taxes, self employment taxes and state taxes.

Flipping is a business. I think you may be better off starting a business / freelance in the field you have experience in.

Best of luck!

I'm definitely aware of the tax implications (that's why I mentioned it in my OP :-) ).

I already have a couple of other businesses (one successful for over a decade, one a startup), and I'm adept in several fields (including long-term rentals as well as flipping). I was just asking if there were any issues that I hadn't considered that I might need to given the details I posted in my OP.