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.