Flip to build capital OR BRRR? Which is better?

Question

@Brandon Turner about the BRRR strategy I wonder if we might be working too hard? Or maybe I'm not understanding it right, hence this post asking for feedback.

For example, if we were to buy several distressed properties to rehab and sell the plan is to then use the lump sums of cash we would (hopefully!) make to finance the down payments and closings on rentals with good cash flow.

BUT, why then wouldn't we save ourselves work and buy distressed properties and rehab them, then refinance them to get back what we put into them and then start renting them. The goal here would be to refinance only the amount we put in (enough to pay back any lenders and pay ourselves a small amount) to keep the mortgages low to increase the cash flow amount. This way we are only doing one rehab to begin getting the rental cash flow from a single property rather than doing several flips to make enough to not come out of pocket for the rental.

Hope my explanation makes sense. Based on that, is there something we are missing about either process that someone could enlighten me to? I was a special ed teacher for 10 years and my classroom motto was "work smarter, not harder" and something about our original strategy just seems to violate my code when I think about BRRR. Thanks for any clarification you can give :)

Ryland Taniguchi · Answer

Why would the refinance on a BRRRR take longer than the flip listing and sale? I do both BRRRR and flips and it's faster to refinance than to list and close. In both BRRRR and flips, hard money costs eat up the profit substantially if the rehab is not completed quickly. It's the same amount of work. Why not get your downpayment money back and keep a rental?

Both Flips and BRRRR require capital. If the All-In Cost is at 70% LTV and surpasses the 1% rule, it would probably always be better to BRRRR than flip. You flip because you have 70% of ARV minus construction costs but the All-In Cost does not surpass the 1% rule.

I just raised $30 million and will be launching a combo loan that does the hard money and the BRRRR upfront in one loan. The take-out loan will be 70% LTV, asset-based, 6.5% 30-year fixed. One of the benefits of BRRRR versus flip. Accumulating assets with cash flow and 30% instant equity is the fast road to using this portfolio as collateral to securitize bigger money raises through a reg D rule 506(c) private placement.

Matt Cruz · Answer

@Lisa Misuraca couldn't he still do the BRRRR with no working capital?  IE; get a hard money loan for purchase price + rehab, and later one once he refinances he can possibly get all the money out to pay off the loan.   Then depending on the deal he may still have equity in the house and a positive cash flow rental.

I guess I'm confused as to why he could do a flip with no capital, but not a BRRRR

Brent Coombs · Answer

@Zoe Mercier, certainly, if you have the means to "to buy several distressed properties to rehab", why indeed would you sell them rather than rent them out? @Ryland Taniguchi has it well summarized above. So long as you haven't paid more than 70% of ARV by the time it's at ARV value, and, it'll still positively cash flow even with a 70% refi leverage, BRRRR everytime! Cheers...

Scott W. · Answer

IMO it's way harder to flip than to rent. start w/ a rental and gain experience.

Alexi Schreier · Answer

@Zoe Mercier Thanks for posting this, I was asking myself the same question. If you can pull out your money from a BRRR similar to getting your money back from a flip, why do people even flip and not just BRRR everything?

I've never done either so I can't speak from experience. But just thinking about it, the strongest point I can think of for flips over BRRRs is the potential timeline of a project.

With BRRR, the bank requires a seasoning period of 6 months for conforming loans (Fannie/ Freddie). I know you can use a delayed financing exception to refinance sooner but this changes the way the LTV of your refinance is calculated and doesn't always make financial sense for every deal.

With a flip, if you have a good contractor who knows how to work fast and efficiently you can potentially flip much faster than 6 months.

The timeframe of a project could be important to you if you think the market might turn soon (which many people today are saying it will). If you can get in and get out quick before the downturn with a flip you'd more likely be in a better position than if you decided to BRRR and in the 6 months of waiting out the seasoning period the economy took a dive. Because if while holding, the value of your house goes down, you might not be able to get your money out with a refi.

Again I don't have experience in either of these strategies but that's the biggest plus I can think of for flipping.

Were you able to BRRR or flip since you've posted this? Would love to hear about your experience!

Anyone else following this thread had success with either method?

Zoe Mercier · Answer

Thanks, Lisa. I'm actually a she :) Yes, this is what I was wondering. But if we did this each time with our rentals (until we reach the mortgage limit) then we wouldn't need capital. If we refi'd each one just to get out what we put into it and then rent it to start cash flowing it. Does that make sense?

Lisa Misuraca · Answer

Mostly the length of time needed to refi the brrrr. The interest on the hard money would eat up all his profits,And the concept is to then get enough money out of the refi to repeat.Not saying it can't be done it'll just be a longer road.Where as he could do very efficient flips with the hard money and get his own capital to work into the brrrr.

Lisa Misuraca · Answer

I still think your missing something.You need capital to do the brrrr route.

Yes if you have no capital you'll need to do some flips to aquire some money for the purchase of your rentals. The 1st step is to use your own money to buy and rehab which builds value rent to have income then refinance to get your equity out.

Matt Cruz · Answer

Hey man no problem.  Glad I could lend some advice.  Sounds like I'm in a similar boat.  I'm looking now at my first investment property, so I've been reading up a lot lately on BRRRR and the financing part.

Zoe Mercier · Answer

Thanks, @Matt Cruz, I wanted to confirm that I was correct in understanding the BRRR strategy. Thanks for sharing some of the pros and cons of each, too. That's exactly the type of info I need to try and decide what to do.  Yes, we are looking to build working capital and thought that a flip might be the way to do it, but if we get a good deal, I was wondering why we'd even need to go that route and why we can't go straight to our goal of renting using BRRR.

Flip to build capital OR BRRR? Which is better?

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