To Flip or to BRRRR?
Real Estate Agent · Tampa St. Pete Clearwater, Apollo Beach · Member since 2023 · 15 posts · 4 votes
To Flip or to BRRRR?
Most Popular Reply
Rental Property Investor · Tampa, FL · Member since 2018 · 35 posts · 16 votes
3yTypically when getting started, flipping is used to build capital, where as Brrrr is used to build a portfolio since your not selling the property. I personally don't care for the idea of flipping because now you take your profit with a big tax bill or you have to 1031 into a new deal in a short period of time. Whereas Brrrr allows you to cash-out-refi without getting taxed so you can do another but the best part is you still have the house that's cashflowing and an appreciating asset that you can consistently pull money out every so many years. Only reason I personally would flip it after the rehab is if the numbers make sense too or if it was causing to many problems. It really comes down to personal preference, but at the end of the day your taking a risk with RE either way so if you have the time and will power id say Brrrr, unless your hard-pressed for cash.
26 Replies
- Rental Property Investor · Tampa, FL · Member since 2018 · 35 posts · 16 votes3y
Typically when getting started, flipping is used to build capital, where as Brrrr is used to build a portfolio since your not selling the property. I personally don't care for the idea of flipping because now you take your profit with a big tax bill or you have to 1031 into a new deal in a short period of time. Whereas Brrrr allows you to cash-out-refi without getting taxed so you can do another but the best part is you still have the house that's cashflowing and an appreciating asset that you can consistently pull money out every so many years. Only reason I personally would flip it after the rehab is if the numbers make sense too or if it was causing to many problems. It really comes down to personal preference, but at the end of the day your taking a risk with RE either way so if you have the time and will power id say Brrrr, unless your hard-pressed for cash.
Well, it goes to what is your "investment" strategy and goals. Sounds you don't want to be a landlord. So, looks like you will be flipping, and will be an "unintentional" landlord if a flip goes a little south.. Renting out a flip is a common back up plan to a flip...
Just remember that flip income is tax differently than rental income and property gains. Flipping is considered "dealing in inventory" by the IRS so you are generating active income subject to self-employment tax. If you sell an investment property, its long term capital gains... But, at least if you flip you won't be a landlord which is what you stated you wanted to stay away from. Also, the active income lets you put money away into a tax deferred account such as a self-employed 401k.
Make sense? Happy to chat if you like. Take care.
- Rental Property Investor · San Francisco Bay Area · Member since 2022 · 1k+ posts · 1k+ votes3y
I don't know anything about the Tampa market. I think it would depend on the properties you're looking at. I'm in San Francisco Bay Area and most people are flipping here in California now. It's negative cash flow for rentals here unless someone bought a while ago.
Example in San Diego, buy for $550,000, renovation about $75,000. Sell for $800,000 to $850,000 (someone else's flip)
I would flip in California but it's risky, don't want to get stuck with a house I'm trying to rent out that won't even cover my high mortgage payment. I have 4 long term rentals and was trying to build capital by attempting my first flip, made an offer on Indianapolis SFH. Great location with other flips in the area. Seller wouldn't accept less than their high list price. That wasn't going to work for me - being cautious since it was a major rehab $80,000+. I was going to do a Hard Money Loan with some of my own cash in for the Gap Loan amount. There are closing costs and holding costs (insurance for vacant property, electricity, water) and high interest (10% to 13% HML) or private lender, unless you're paying cash. Then the re-sale with agent commission with closing costs after the renovation. That added up so I walked away. Some investors use 10% as minimum profit margin, which is what I used.
Maybe talk to experienced investors in the area you're trying to flip and get their feedback if you have properties in mind and have them help you run numbers with an exit strategy if you had to hold it as a rental. Happy investing!
- 3yDoug SmithPro MemberLender · Tampa, FL · Member since 2013 · 2k+ posts · 2k+ votes
Hi Chris. Most of our investment arm's stuff is in the Tampa Bay area, so we're in your back yard. We've evolved over time where that entity is doing a combo of ground-up construction and flips, but the majority of what we do ends in a retail sale. We're not holding much. I think that's a personal choice. Our skillsets and resources have been more conducive to the "in-and-out" model. That being said, holding good property is smart. We should probably do more of it. You can build capital with flips that progressively get more complex until which time you can add ground-up construction. As you start building a capital base, you can hold periodically. Most of what we hold are properties that didn't move as quickly as we wanted, so we made the best of it by sliding a renter in there and soaked up the appreciation. I'm happy to have coffee some day to compare notes. Good luck to you!
- Real Estate Agent · Tampa St. Pete Clearwater, Apollo Beach · Member since 2023 · 15 posts · 4 votes3y
Quote from @Bryce Kennebeck:
Typically when getting started, flipping is used to build capital, where as Brrrr is used to build a portfolio since your not selling the property. I personally don't care for the idea of flipping because now you take your profit with a big tax bill or you have to 1031 into a new deal in a short period of time. Whereas Brrrr allows you to cash-out-refi without getting taxed so you can do another but the best part is you still have the house that's cashflowing and an appreciating asset that you can consistently pull money out every so many years. Only reason I personally would flip it after the rehab is if the numbers make sense too or if it was causing to many problems. It really comes down to personal preference, but at the end of the day your taking a risk with RE either way so if you have the time and will power id say Brrrr, unless your hard-pressed for cash.
Thank you for your feedback. The tax part is the other portion that I need to get smart on. I think I have tools in the toolset to figure out the "right" property price but I don't want to get stuck with a huge tax bills from the properties that I flipped. 1031 exchange seems to be the way to go. Need to get feedback from the ones doing it to see what percentage they keep (from the earnings) and what percentage they roll over to the next property to avoid tax gains.
- Real Estate Agent · Tampa St. Pete Clearwater, Apollo Beach · Member since 2023 · 15 posts · 4 votes3y
Quote from @David M.:
Well, it goes to what is your "investment" strategy and goals. Sounds you don't want to be a landlord. So, looks like you will be flipping, and will be an "unintentional" landlord if a flip goes a little south.. Renting out a flip is a common back up plan to a flip...
Just remember that flip income is tax differently than rental income and property gains. Flipping is considered "dealing in inventory" by the IRS so you are generating active income subject to self-employment tax. If you sell an investment property, its long term capital gains... But, at least if you flip you won't be a landlord which is what you stated you wanted to stay away from. Also, the active income lets you put money away into a tax deferred account such as a self-employed 401k.
Make sense? Happy to chat if you like. Take care.
Thank you David for your insight. My investment playbook needs some tweaking. I know I don't have to have all the answers for me to move forward, yet it feels like I must to define whether I want to buy and hold as many doors as possible (long term strategy) or get a quick cash infusion and move on to the next flip. I see the benefits on both courses of action. Maybe I ought to balance the potential pitfalls of being a landlord vs the dangers of ending up w/a big hole in my pocket thanks to taxes at the end of year.
- Real Estate Agent · Tampa St. Pete Clearwater, Apollo Beach · Member since 2023 · 15 posts · 4 votes3y
Quote from @Becca F.:
I don't know anything about the Tampa market. I think it would depend on the properties you're looking at. I'm in San Francisco Bay Area and most people are flipping here in California now. It's negative cash flow for rentals here unless someone bought a while ago.
Example in San Diego, buy for $550,000, renovation about $75,000. Sell for $800,000 to $850,000 (someone else's flip)
I would flip in California but it's risky, don't want to get stuck with a house I'm trying to rent out that won't even cover my high mortgage payment. I have 4 long term rentals and was trying to build capital by attempting my first flip, made an offer on Indianapolis SFH. Great location with other flips in the area. Seller wouldn't accept less than their high list price. That wasn't going to work for me - being cautious since it was a major rehab $80,000+. I was going to do a Hard Money Loan with some of my own cash in for the Gap Loan amount. There are closing costs and holding costs (insurance for vacant property, electricity, water) and high interest (10% to 13% HML) or private lender, unless you're paying cash. Then the re-sale with agent commission with closing costs after the renovation. That added up so I walked away. Some investors use 10% as minimum profit margin, which is what I used.
Maybe talk to experienced investors in the area you're trying to flip and get their feedback if you have properties in mind and have them help you run numbers with an exit strategy if you had to hold it as a rental. Happy investing!
Thank you Becca for your feedback! So, looks like you started on the buy and hold side of the house. Have you had any issues with your tenants? What strategies do you employ to protect your assets from less-than-desirable tenants?
you can't 1031 a flip... you can only 1031 exchnage investment property and flips are inventory, not investment.
You shouldn't have a "big hole in your pocket..." You realize that you only get taxed on profits, correct? Don't let paying taxes get in your way of making money.
getting "good tenants" is some luck and more management. Yeah, it can still be luck of the draw.. but invest in "good" properties in good areas that attract better clientele.. keep your properties in good condition to attract better clientele... Since I self manage I in many ways can bettter manage my tenants and do some things that most to all property managers would/could never do (e.g. just ask my tenants if they want to leave..). Its all part of the "speculation" of real estate investing (they can sell you all they want about how REI is a slam dunk, but its still speculation...)
Good luck.
- Rental Property Investor · San Francisco Bay Area · Member since 2022 · 1k+ posts · 1k+ votes3y
Quote from @Chris Rodriguez:
Quote from @Becca F.:
I don't know anything about the Tampa market. I think it would depend on the properties you're looking at. I'm in San Francisco Bay Area and most people are flipping here in California now. It's negative cash flow for rentals here unless someone bought a while ago.
Example in San Diego, buy for $550,000, renovation about $75,000. Sell for $800,000 to $850,000 (someone else's flip)
I would flip in California but it's risky, don't want to get stuck with a house I'm trying to rent out that won't even cover my high mortgage payment. I have 4 long term rentals and was trying to build capital by attempting my first flip, made an offer on Indianapolis SFH. Great location with other flips in the area. Seller wouldn't accept less than their high list price. That wasn't going to work for me - being cautious since it was a major rehab $80,000+. I was going to do a Hard Money Loan with some of my own cash in for the Gap Loan amount. There are closing costs and holding costs (insurance for vacant property, electricity, water) and high interest (10% to 13% HML) or private lender, unless you're paying cash. Then the re-sale with agent commission with closing costs after the renovation. That added up so I walked away. Some investors use 10% as minimum profit margin, which is what I used.
Maybe talk to experienced investors in the area you're trying to flip and get their feedback if you have properties in mind and have them help you run numbers with an exit strategy if you had to hold it as a rental. Happy investing!
Thank you Becca for your feedback! So, looks like you started on the buy and hold side of the house. Have you had any issues with your tenants? What strategies do you employ to protect your assets from less-than-desirable tenants?
You're welcome Chris. I have property managers for 3 properties (two in Indianapolis metro area and one multi-unit in San Francisco). They do the advertising, screen and place tenants and coordinate repairs. I don't have any direct contact with those tenants. So far it's gone well and all paid rent during COVID rent moratorium. In California it's usually 6% monthly management fee (of the rent) and 10% monthly fee in Indianapolis - some PMs will give you a discount if they're managing multiple properties. The one here in S.F. is a large company who knows all the local rental laws and has access to attorneys if something were to go horribly wrong. It's difficult to self manage out of state rentals although some people are able to but I wasn't going to attempt that from 2000 miles away.
I self manage a SFH locally. I've had a couple of problems.I wouldn't recommend renting out to family or friends...long story. Once you let things slide with late rent etc, they'll keep asking for things because they're family/friends. I have a lease with them and had to get strict with them. Treat it like a business separate from personal relationships. I'll eventually get a PM for this property.
- 3yDave FosterBusiness MemberQualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
@Chris Rodriguez, Your dilemma will remain tenants vs profits exactly as you identified. As @David M. identified, you cannot 1031 flips. However there is a modification hybrid of the flip and Brrrr method that many of my clients who like to flip have adopted that is allowing them to take advantage of the benefits of longer term ownership while still getting the adrenaline rush (and instant cash) from flipping.
they will slow down their flips. And use the Brrr method to get rolling. Buy rehab rent (use a management company since you're not trying to maximize revenue. You're just wanting to be free of the hassle) and refinance to get the cash for your next project. You can do this and end up with several homes in a very short period of time. As soon as any of those reach a year or so of ownership they now qualify for 1031 treatment. So in addition to using cash-out refis to purchase more property you are also using 1031 exchanges to purchase more property. It's adding gasoline onto a fire. And you're doing it while also keeping all of the tax-deferred since there is no tax on cash out refis and your 1031s are tax-deferred.
The 1031 Investor5137 Reviews I'm a little lost on this one... Whats the point of 1031'ing a 'flip now brrr' into another probably 2 flips to become a brr? The 1031 just gets you into more investments, but you weren't going to have any realized tax liability as a brr anyway? exchanging into another flip/brr doesn't buy you much since there isn't much equity left in there anyway. Meanwhile, you are highly exposed to price risk.
I know you are just passing a long techniques. But, a brrr, if can be executed per the book, is still basically a flip that you don't sell. The sale and the cashout refi probably net around the same amount of funds in hand--- suggesting to me personally its better to sell since it wipes clean all the additional liability of holding the property.
So, what does the exchange buy you just after one year?
- 3yDave FosterBusiness MemberQualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
@David M., You're exactly right. But even if you only slow down the flip to more than a year that changes the taxability from ordinary income to capital gains.
There are three things to this strategy.1. You've always got properties you are working on (buying and value adding). So your flip desire is fulfilled
2. The refinance R is always awaiting you once you have value added your properties. So you have the option to hold until your taxability goes down to capital gains. Or you hold until apprecication make it worth your while to sell. But at any time you can access cash.
3. If you do the refinance right after your value add you do indeed set yourself up to use the refi to purchase one or more "slow flip" targets. And if you end up 1031ing after a year or two in a hot sellers market it's conceivable that you have 25% equity left after the refi plus an additional 10-15% from appreciation. which translates to almost 40% equity. and this translates to a 1031 exchange to buy not one but two or even three replacement properties similar to your purchase price of the first one. So this strategy let's you leverage up very quickly.
You're exactly right that a well executed Brrr allows you to grow and not sell. But @Chris Rodriguez doesn't like management. this approach can be tailored so that he can get the growth and activity of flipping while minimizing tax liabilities and management responsibility. It's really just about being very sensitive to timing and the impact of deferred (or reduced tax) on your margins.
The 1031 Investor5137 Reviews - Specialist · NJ · Member since 2022 · 1k+ posts · 653 votes3y
The end goal of course is to build that beautiful portfolio of holds, but not every investment will qualify.
My new clients, I put them in three small deals that need just cosmetic rehabs and have timelines under 6 weeks. I have them flip them. This does a few things, one it makes them some profits which they can use for more deals and two it gives them experience which makes financing easier and more beneficial.
The mid grade SFHs are good flips, the 2 - 4 units are the solid holds, or the SFH in B+ or better neighborhoods. But you really should be doing both at the same time if you want to be a full time investor.
I had a friend who attended one of those RE seminars that cost like 10k, they said that you should flip 3 for every hold.
You should set your parameters for what makes a good hold. The LTR loans are done through the DSCR analysis which compares your rent collection to your mortgage payment. The minimum ratio is 1.1 : 1. You need to collect 1,100 in rent for every 1,000 in your payment. I don't think anything is worth holding unless you are north of 1.3 DSCR and really near 1.5.
I'm not so sure I agree... I guess the big difference i see is being "stuck" in the exchange, both in the short and long term.
For example, in #3 while you 'defer' taxes on "40% equity," you also don't access it. Can use it to live on or do potentially some other investment (sorry, there are other vehicles to invest outside of real estate). In the long term, you are "trapped" in the deferrment. Meanwhile, one is still managing, or having somebody manage, rentals.
Perhaps that's where your #2 kicks in, but there are risks associated with remodeling, renting for a 1+, then trying to sell. Personally, I think this strategy is a bit of 'smoke and mirror' (not you personally). Just my 2cents. Thanks for for clarifying it.
- Real Estate Agent · Tampa St. Pete Clearwater, Apollo Beach · Member since 2023 · 15 posts · 4 votes3y
Quote from @Mike Klarman:
The end goal of course is to build that beautiful portfolio of holds, but not every investment will qualify.
My new clients, I put them in three small deals that need just cosmetic rehabs and have timelines under 6 weeks. I have them flip them. This does a few things, one it makes them some profits which they can use for more deals and two it gives them experience which makes financing easier and more beneficial.
The mid grade SFHs are good flips, the 2 - 4 units are the solid holds, or the SFH in B+ or better neighborhoods. But you really should be doing both at the same time if you want to be a full time investor.
I had a friend who attended one of those RE seminars that cost like 10k, they said that you should flip 3 for every hold.
You should set your parameters for what makes a good hold. The LTR loans are done through the DSCR analysis which compares your rent collection to your mortgage payment. The minimum ratio is 1.1 : 1. You need to collect 1,100 in rent for every 1,000 in your payment. I don't think anything is worth holding unless you are north of 1.3 DSCR and really near 1.5.
Mike,
I like the idea of starting with a few deals that need only lipstic or cosmetic rehab to get my feet wet. I do understand that this approach limits the pool of potential homes but I also understand that this is a bit of a confidence builder. Thank you so very much for your feedback!
- Columbus, OH · Member since 2023 · 427 posts · 254 votes3y
Hey Chris, flipping is a great way to gain experience and profit in real estate. You will gain valuable experience in negotiating, renovating, dealing with sellers, etc. Having said that, flips have their own risks as well- missed deadlines, going over budget, unforeseen issues coming up with the property, etc. And lastly, no one wins Monopoly by selling.
- 3yDave FosterBusiness MemberQualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
@David M., Thank heavens there's no one size fits all for REI! I've got clients regularly doing 20-40 exchanges a year (including a couple from right here on BP). They're all flippers at heart who extended their timeline just enough to get the[ tax benefit of 1031. So every property they sell they've owned over a year. They've scaled so they never look at a toilet or tenant. They are in full on flipper mode as far as finding deals and value adding. But their doing it paying $0 in taxes. And the refis give them all they need for living expenses as needed.
My family took it one step further and then converted those value add flips turned rentals into our primary residences. So we reduced our deferred tax to almost completely tax free.
Example of impact - Purchased a SF on Long Island Sound for $350. Value added $200K. sold for 890K. Rather than flip it we put a renter in for a year and then moved in for 2 years before selling. By tapping the brakes a little I turned a $130K tax bill into a $7,000 tax bill (depreciation recapture only). The other $123K went towards buying the sailboat we raised our 4 boys on for 12 years. The government paid for my boat!! So I'm a fan :). The story's in my book!
BTW - the "flip" side of this is the model I remember a bunch of crotchety guys doing down in Lee County FL. They would meet everyweek on the courthouse steps and buy every property that came up for foreclosure. I swear they had a system of some kind for who got what. But they would buy and then rent as is without any fix up at all. Then after a year they would renovate and then sell. So they never worried about new renovations being damaged by rentors. But they also called me for 1031 exchanges to defer the tax.
The 1031 Investor5137 Reviews - Rental Property Investor · Tampa, FL · Member since 2018 · 35 posts · 16 votes3y🙌
Quote from @Account Closed:
Hey Chris, flipping is a great way to gain experience and profit in real estate. You will gain valuable experience in negotiating, renovating, dealing with sellers, etc. Having said that, flips have their own risks as well- missed deadlines, going over budget, unforeseen issues coming up with the property, etc. And lastly, no one wins Monopoly by selling.
- 3yAdam BartomeoBusiness MemberReal Estate Broker · Cape Coral, FL · Member since 2015 · 2k+ posts · 1k+ votes
My rule of thumb is, use flips as the engine to fund buy and holds. B&H's are the true way to wealth! Flips are very difficult for new investors as they don't understand the 3 pillars of flipping success - buying right, always come under budget for the rehab, and sell for more than your projected ARV. It is VERY common for new investors to lose money on their 1st 2 flips. With B&H you will AMWAYS make money as long as you hold long enough.
Bartomeo Property Management4.7150 Reviews - 3yEric FernwoodBusiness MemberRealtor · Las Vegas, NV · Member since 2014 · 997 posts · 1k+ votes
Hello @Chris Rodriguez,
The decision on whether to Flip or BRRRR is straightforward, which I will explain. Your statement that you do not want to manage tenants is understandable. I will address this first.
Property Managers
We have delivered over 480 investment properties to more than 180 clients worldwide. However, only one client manages their own properties. Why? Because even though you may think you can save money, one bad tenant can cost you far more in the long run. Additionally, managing properties requires a significant amount of time and expenses if you do not have access to the right service people.
As an owner of 6 investment properties in Las Vegas, I have found that using a skilled property manager is essential for making money, lowering maintenance costs, and avoiding tenant issues. If you would like my free guide on selecting a good property manager, please DM me. (Spoiler alert: Do not base your decision on selecting a property manager based on Yelp reviews.)
Flip or BRRRR?
Ask yourself the following questions:
- Is the property currently profitable (after all recurring expenses) and are rents and prices increasing fast enough to keep pace with inflation?
- Yes - Keep the property and consider BRRRR.
- No - Flip or 1031 the property.
- Does BRRRR make sense?
- Do you have enough equity in the property to do a BRRRR (ARV)?
- No: Flip or keep the property and continue renting.
- Yes: consider BRRRR.
- Does Flipping make sense? Do you possess the experience and resources necessary to successfully flip the property and generate a profit?
- No: Unless you have the experience and skills, chances are you will lose money flipping. If anyone wants my free guide on profitably flipping properties, DM me.
- Yes: Determine how much money you will net and decide based on this.
Other Considerations
- Many of our clients used BRRRR to expand their portfolios. However, when interest rates are as high as they are, it requires further consideration. For example, suppose your property is profitable with the existing loan at 3.5%. If you refinance the property, will it still be profitable at 7% or 8% and with a higher principal?
- Making money flipping is not easy - I often read about people advocating for flipping properties as an easy way to make money. However, flipping is far from easy. We encounter properties three or four times a month where someone is selling a flipped property but failed to sell it for enough to even cover their expenses. Zillow's attempt at flipping is a good example of a large-scale failure, which they eventually stopped. Another example is Open Doo. We occasionally see their properties on the market and it seems they are losing money on many of them.
- What we are doing to mitigate high-interest rates - We implemented a process whereby, once we secure a property under contract, we reach out to multiple lenders to obtain their interest buy-down rates. We then choose the lender with the best option and move the loan to them.
Summary
Deciding whether to flip or use the BRRRR method is largely a spreadsheet decision, especially during times of high-interest rates.
FERNWOOD Team, KW VIP Realty520 Reviews - 3yMichael SmytheBusiness MemberReal Estate Agent · Metro Detroit · Member since 2023 · 4k+ posts · 3k+ votes
Flipping is more of a JOB than landlording.
You can also hire a property management company to handle landlord duties, but not really possible to hire someone to flip for you - although you could try partnering.
Logical Property Management4.9455 Reviews - Real Estate Agent · Tampa St. Pete Clearwater, Apollo Beach · Member since 2023 · 15 posts · 4 votes3y
Your feedback is pretty clear and much appreciated. Great advice. Gracias!
- Real Estate Agent · Tampa St. Pete Clearwater, Apollo Beach · Member since 2023 · 15 posts · 4 votes3y
Thank you for taking the time to provide your feedback! Getting a property manager or managing company might be the solution.
- 3yBasit SiddiqiBusiness MemberAccountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
Flip = Make money once at the time of sale
BRRRR = Make money on a monthly basis forever
Flipping is not investing, its a job
Holding on to real estate is investing.
Basit Siddiqi CPA4.979 Reviews - Real Estate Agent · Tampa St. Pete Clearwater, Apollo Beach · Member since 2023 · 15 posts · 4 votes3y
@Basit Siddiqi Thank you for your feedback. @Account Closed said "...no one wins Monopoly by selling." That has stuck with me since I read it.
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