Flipping better than holding for fast growth

[David B.]

Hi all,

I just wanted to get your opinions on flipping to grow faster vs holding . 

This year I've really doubled down on investing and have about 7 rehabs I'm currently doing. Three of them are flips, while the others were going too be BRRRR'S.

But here's the thing...  I've forced so much appreciation throughout my properties that I'm inclined to just sell rather than hold as I intended. My reasons for this are -- 

1. To free up as much cash as possible for either a new round of flips or perhaps a commercial value add multi family. 

2. To sell the houses at the current peak market value. I think it's conceivable that higher rates held for longer could pull back on prices and I may as well take my return now. I'll either buy new deals in a growing market or buy properties at the bottom. 

3. I have a significant tax loss from a business investment that went sideways some years ago and I wouldn't pay any tax. Huge bonus. 

4. De Lever as much as possible during what could be an upcoming recession. A) I want to be protected from downside risk and B) I want to have cash on hand for potential opportunities. 

There is also the factor that i don't love property management. Obviously it comes with the territory, and if I had awesome A or B class units that were worth keeping (and I could pull my capital out) I think it would be worth it. 

But with where I'm at, and my current goals (which is to force equity and money as fast as possible),  I see dead equity that I could recycle for a higher return on more value add deals. So it seems to me that if I want to grow quickly, I should focus more on the flipping rather than the Brrrr's. 

FYI - In the future, as I have more equity, I would definitely hold bigger real estate deals for cash flow. But cash flow doesn't feel as necessary to me currently. 

The one thing that cuts against this idea for me is that real estate is already tax advantaged, and maybe it's silly for me to liquidate my whole portfolio in a way that eats up my tax losses when I could 1031, or even hold for a long term Capital Gains tax @ 20%. But then again, these are uncertain times and having a lot of cash and little to no debt doesn't sound so bad either. The intent would be to go out there and reload my slate with a bunch of new deals anyway. 

I'm a younger investor and still learning/ formulating my strategy. So forgive me if this is long winded... I guess I'm just talking this out loud as I play out the various scenarios hahah. But very curious on seasoned investors thoughts on this strategy, and what helped them grow their potfolios/ wealth best. 

Thank you! 

[Dave Foster]

@David B., shift your model just a little and you can have it all.  If you can document your intent to hold those three for investment use then they would qualify for 1031 treatment.  Use the 1031 exchange to purchase new value add properties.  All the benefit and rush or fix n flip but also the stability of a buy and hold.  

The three you were going to flip why not hold on to until you've had them a year.  That would demonstrate your intent to hold those and they would be eligible for 1031s.  You'll be plenty busy fixing the first three you 1031d and when these three are ready you can sell 1031 and buy your next round while the second three are seasoning.

I put a chapter in my book on this called "Flipping fix n flipping on its head".

I like @Henry Clarks analogy of the snowball.  Changing the model will slow you a little temporarily.  But it will accelerate much faster because your not giving up 20% - 40% on your profit each time.  I have clients who will do 20-30 exchanges a year.  They are fix n flip junkies.  But they've grown their scale so that the properties they are exchanging they've all owned more than a year.  

All the adrenaline of a good fix n flip.  All the tax benefit  and compounding of a good 1031.