Newbie: Flip or Rent/ BRRRR

[Amit G.]

Hello fellow BP'ers! Like any other newbie starting out, I too have a lot of basic questions.  I am grateful to this community who likes to kick @$$ and make you get started. Its like having an older sibling that makes you learn things faster ;).   

So, in the quest of finding opportunities and trying to make sense of what niche is better suited for my passive style of investing (which I see myself as), I came across this GC who does everything, even maintain books.  He comes recommended by a very good friend of mine, who I could easily see as my mentor.

This GC guy wants to enter in a partnership (I don't know the detailed terms yet) and want to flip houses and was trying to explain the obvious to me that flipping is less risky than to maintain a long term renter and dealing with their hassles on almost a daily basis, making small profits for a longer duration compared to profit up front (if we really could make that happen!). This kind of makes sense to me and I couldn't come up with any argument to support why rent or even BRRRR would be a better option. Now considering that the terms of partnership are such that I procure capital and he puts in the sweat money, and we split the profits. Do you see any cons with this approach?

[Ross Denman]

What we have done and is working out for us so far is as follows.

We pulled/raised/borrowed money to do our first rehab. We don't touch the profits at all. Once we built $300k in cash (the amount needed will depend on your market and goals) we kept a rehab as a rental. We continued to rehab properties and every time that we have over $300k in liquid cash, we keep a home for a rental. The point of the matter is as follows.

Rehabbing is faster money, but you cannot rehab forever. Eventually, I want to retire.

Rentals are slower money. I have to park the money that I have and set aside reserves before I consider cash flow. If your rentals yield 9-15%, you need about $1M in rental properties to make a 6-figure income. You have to build (or borrow as in BRRRR) capital to get there and rehabbing is a good opportunity for this.

Diversification is always something to consider as is short-term goals vs long-term goals. Rehabbing homes is not what I consider retirement, even when I am not doing any of the work. Retirement is travelling with friends and family or enjoying your hobbies. I don't care to babysit contractors and realtors until I die.

It may not be a bad idea to partner with someone experienced, but ensure that they are bringing some kind of equity to the table. Newbie investors get taken advantage of all of the time... some of it is a right of passage though. You are paying for someone else's expertise. Make sure that you are getting exactly what you paying for.