A bit conflicted- flip or brrr

13 Replies

my ultimate goal is to generate enough cash flow to retire early. 

I have about 40k plus a 50k heloc on my primary home. I am conflicted on whether to flip a property first to generate more cash or to just begin looking for a property to brrr? 

The good news is that you have a little time to make your ultimate decision. The important question to answer at the point of refinancing is what the ARV is. Plan for somewhere around 70% of that on the refi to pull out to pay off initial loan and the rest is potential cash for the next project. If it is not enough to accomplish what you need next, then you can always sell to more of a turnkey buyer since you will already have a tenant in place.

@Chris Ellis yeah I understand both strategies in detail my concern is that with a flip i could lose the money if something goes wrong pushing me further from my goal 

@Chris Ellis in terms of risk, a lot of the same risk inherent in flipping are still there with BRRRR - namely that if there are hidden issues, you contractor bails or does shoddy work, or it turns out you can't find a buyer/tenant, you're in trouble.

However, as you know, with BRRRR you still pull out cash when you refinance the rehabbed prop - ideally, you've forced enough appreciation through your rehab that you can pull out everything you put in, or even more. So in terms of having capital to work with, you'd still be sitting relatively pretty - though perhaps not as pretty as with a very successful flip. Plus, if you do the BRRRR correctly, you also have a cash flowing rental under your belt.

You also should consider the fact that a flip is considered inventory under tax law, so you'll pay normal income tax on that gain and self-employment tax. You can't do a 1031 exchange on a flip, because (while there is no hard and fast rule about how long you need to own an investment for it be considered 'long-term') you must be able to display your intent to hold the property for the long-haul. And buying something, rehabbing, and immediately selling is almost always not what buy-and-hold investors do. That means you're paying taxes on those gains, and lots of taxes.

Now, my gut would say BRRRR, because I'm a fan of having flowing rental properties. First, you should find out which banks would be willing to refinance an SFR rental, ask around on BP for recs. Then you need to ask about seasoning periods etc. Since you are a new investor this might be slightly trickier just because the bank doesn't have a relationship with you yet. Homework is a huge part of both these strategies, as you know.

You could go either way, and both have risks, but your immediate hesitation about flips tells me that you would be more comfortable with the BRRRR method and honestly, a little piece of mind goes a long way in REI, especially in the beginning.

Updated over 2 years ago

Update: Apologies I tagged the wrong person!

Flips, especially now if you are not experienced, are extremely high risk. Under normal circumstances a first time flipper often does not do very well. Many will lose money. There is definatly money to be made...go big or go Brrr

You must determine your experience level and your risk tolerance.

@Clayton Mobley no problem. I am I am leaning toward your suggestion of a brrr. It would allow me to get more comfortable with a rehab which is key for obvy for a flip 

@Rigo V. I think that's a good course of action. Plus, I think you will find having a cash flowing asset will give you a bit of peace of mind as well, even if the refi means most of your income goes to PITI, at least you have tenants basically buying you a house while you recycle your original capital into something else. So the next step is looking for places with solid rental demand with 2-hour drive of you. I don't know the NJ market but I'm sure you can find some threads about it. Just set up some specialized keyword alerts and then send messages to folks who are more experienced in your market.

Good luck!

I am somewhat in a similar boat...Have 2 rentals and have completed 1 flip with positive results. My 2 rentals have eaten up my cash in a heloc which is interest only. 

I just put a property under contract with the intent to flip and clear about 30k when complete. However, due to its location and the potential for a premium rent I am now considering the brrrr method(which I am trying to study feverishly right now!)

I can purchase, rehab and refi and still cash flow approx $500/mo and will then have a cash flowing property and no $$$ add to the heloc, but still not paying it down either.

@Ryan Cartier this prop sounds ideal..... would you mind sharing the details of this flip-turned-potential-BRRRR? $500 a month after refi is incredible cash flow, so I'd just be interested in looking at the numbers. Certainly not trying to punch holes in it, but seeing that you are a new investor I'm always happy to take a look and see if there are any considerations being missed.

If it helps, here is a good article on the risks of BRRRR vs flip: https://www.biggerpockets.com/renewsblog/the-5-pri...

Sure....

FLIP
Purchase Price $ 239,000.00
Fees $ 1,500.00
**Seller Paying $5000 towards closing
$ 240,500.00
Repairs $ 32,000.00
Total In $ 272,500.00
ARV $ 335,400.00
Realtor & Holding Costs (10%) $ 33,540.00
Clear $ 29,360.00
BRRR
Purchase Price $ 239,000.00
Fees $ 1,500.00
**Seller Paying $5000 towards closing
$ 240,500.00
Repairs $ 32,000.00
Total In $ 272,500.00
ARV $ 335,400.00
Cash Out (80%) $ 268,320.00
Mortgage $ 1,752.00
Insurance $ 158.33
Taxes $ 208.33
Monthly Expense $ 2,118.67
Rent $ 2,400.00
Monthly Cashflow $ 281.33
Yearly $ 3,376.00 

Hope this makes sense.

I think too many people equivocate the two different routes. If your goal is cash flow and you want to start on that road now then BRRRing is a fine strategy. If you want to generate a lump sum of cash there's no real reason why the "other" alternative is flipping. Sure there is a relation, but there are a number of other ways you could generate cash that may not involve real estate at all, but may be more suited for you. 

Also, sure you could go in on a flip and lose all your money because you planned wrong, the market turned on you, etc, but you could also lose a ton of money on a BRRR because you planned wrong, the market turned on you, etc. I think you're essentially asking the wrong questions. Are you adequately prepared financially, mentally, emotionally, and wherever you are in life to start on acquiring cash flowing assets? If so what kind of assets? If real estate why? You shouldn't invest in real estate because someone told you it was a good idea or that they made a billion dollars doing it. Your mileage may vary. Why do you look at flipping as a means to generate sums of cash? Plenty of people lose money doing it. Are there other means to generate cash that may suit you better?

@Ryan Cartier

Hello community!

In response to Ryan Cartier's post

Thank you for taking the time to give an example. If we compare both end profits, Flip ($ 29,360.00) vs BRRRR ( $ 3,376.00 yearly) Does this mean that it would take approximately 6.5 years with a BRRRR to match the profits of a flip?

If so, is this typically the average time it takes to match the profits on a Flip?

Thank you in advance for your response!