Flipping VS. BRRR???!!!

[Account Closed]

Hello All,

I wasted a portion of my day looking back on past deals and spread sheets instead of finding my next project...Long gone are the days of buying a POS like this for $46,000! (In my market at least.)

Seeing the current estimated values on some of these flips has been a gut punch. The home below: Bought 46k had 90k in repairs - Sold at 240k - Current Est Value is $350,000!!!

I have to admit, this is making me reconsider my fix and flip strategy. If I RRR'ed the smallest 3 of my flips over the past decade I'd have $675,000 in equity before even counting the rental income.

Looking back I had the mentality that I have to sell them to free up cash and keep moving but clearly I dropped the ball over the past 10 years.

Never should have sold the smaller deals, never should have watched the Big Short movie.

Are other flippers looking back at deals and coming to a similar conclusion?

[Alex Bekeza]

@Account Closed From depreciation, to mortgage expense deductions, to the fact that cash out proceeds are not taxed as income there are many reasons I believe BRRRR is superior to flip in most circumstances (assuming the property can debt cover at high LTV). Even with all of the downward pressure on values caused by rates, demand is still extremely high, supply extremely low, and therefore you'll be hard pressed to find a property worth less today than a year or two ago. I predict another unhealthy spike in home prices the moment we're officially in a recession and rates creep back into the 5s. You're only as good as your last flip but building a portfolio via BRRRR over time can create long term wealth.

[Eliott Elias]

Flipping builds cash, BRRRR builds wealth.

[Evan Polaski]

@Account Closed, when you sold the property, and netted about $80k after tax, did you reinvest that or spend it?

I absolutely HATE the "flipping builds income, rentals build wealth" statement.  It is simply wrong on so many fronts.  It implies you only do one flip, then stop investing. But let's look at 3 flips, assuming you made about $80k each, 10 year ago.  You made $240k.  If they were rentals, you would have made what, $20k net, in that year, so let's work with the $220k you had left.

Let's assume each flip you profit about 20%, you do 3 per year, one at a time, 4 months each.  So you are annually generating 60% returns.

Yr 1: $220k
yr 2: $352k
yr 3: $563k...

Yr 10: $15mm.  If you consider this "income" versus your $675k in equity from the same houses, you should have your head checked.

Wealth is built through TRAJECTORY of capital. And rentals, even in good appreciation times, can't hold a candle to the trajectory of successful flips, IF you are redeploying the capital into another flip to keep it growing, and not spending it.

[Account Closed]

@Evan Polaski That is a valid point although the 15M number is inflated by putting a 60% ROI on top of the massive gross profits for 10 years. Breaking it down for years 4 to 5 the profit would take 7 homes all making $80,000 for that year. Years 6 to 7 over 17 deals are needed for the 1.38 M profit. I didn't calculate past that point but I'd guess it is near 70 homes a year by year 10.

Overall I agree with the TRAJECTORY point on successful flips, it has been a great way to build wealth. Moving forward I have to look to hold the low cost / high cash flowing properties for the reasons mentioned. Plus owning some of these over the long haul is a good way to add passive income.

I joined Bigger Pockets yesterday to expand what I know, make business connections and to stay motivated.

Going to look at another house to flip this afternoon. I always save it and redeploy it, homes and land are what I spend my money on!

Thanks for reaching out, I appreciate it.

[Evan Polaski]

@Account Closed, yes. 60% annualized is a lot, but also not terrible unrealistic, when you consider you need to do three flips per year at 20% profit margin.  I don't think the 20% is too far off, generally, but I understand to do 20% profits at scale, is harder to pull off.  

The great thing is: even when you halve that and assume you only make 10% on your invested capital (again with challenge being able to place all of that capital), you are are still earning at about 30% per year, which is over the long haul, more than any rental will earn you.  Is it passive: not really.  

But neither are rentals.  And when you are truly reserving for full capex on rentals, you will barely be breaking even.  Given a light turn will be $2k or more, typically, that is north of $150/mo just to turn it, let alone new kitchens every 10-15 years, roofs 25 yrs, baths 10-15 years, exterior paint, flooring, mechanicals,...

In my experience having both flips and rentals, flips are 100% better for growing my wealth. Am I an exclusive flipper, no. But, many of my rentals and putting that money into flips has put me in a FAR better position financially than continuing to own the rentals.  But I am not using my flip money as "income".  I use it to continually reinvest in more deals that are creating significantly higher returns than even a best case scenario rental.