Why I Prefer BRRRR Over Flips

[Ryland Taniguchi]

Seems to be a general concept that you have to start with wholesaling to get money to do flips. And then do flips to buy long term rentals. I agree that if you have no money that wholesaling is the way to start, but I cannot understand why you would do flips to find long term rentals.

1) BRRRR is a way better way to learn construction management than flips. I ran into a lot of construction problems this year when I tried scaling from 3 - 5 projects to 20-25 projects running at the same time.

I have done a lot of flips in over the last sixteen years but I think BRRRR is an easier way to learn construction.

On a flip, you have no room for error. If you use hard money like I often do (even though I have lots of capital in 3 hedge funds), the cost of construction delays is incredible. If it takes 6-months to sell a flip, the holding costs are 8% of ARV. It costs 8% of ARV every six months. So if it takes you 12-months to do your rehab, you are paying 16% of ARV plus 10% in selling closing costs. Even the smallest delays and you are not making any money on a flip.

BRRRR on the other hand is much more forgiving. If you are holding onto a rental for 7 to 12 years, a few construction delays will barely effect your IRR annualized.

2) Flips have less margin because you have to pay 10% in closing costs.

3) Flips are seasonal at least in areas with four seasons. Generally unless you are in a sunny area year round, August to February is a bad time to sell. BRRRR can be refinanced at any time.

4) Flips are much much more risky if the market crashes. At 8% of ARV per six months of project holding, during market crashes it can take 18-24 months to sell a property. Can anyone survive paying 32% of ARV plus 10% in selling costs. BRRRR is based on cash flow and you should be fine during a market crash.

5) BRRRR requires less rehab. You are renting it out and need to make it nicer than other rental comps versus flip comps.

6) BRRRR often has higher returns. I get 70% IRR consistently on BRRRR. I prefer BRRRR at 70% IRR than a 2% rental at 24% IRR. In this hot market, I see people flipping and happy to get a 10% IRR. If I am going to take the risks of flipping, I need to get 150% IRR.

7) With BRRRR, your tenant pays down your debt while the market increases your value through appreciation.

8) With flips, you can't compete with hedge funds because they can pay more for properties since they are getting their capital at less than 2%.

9) I see the smaller investors getting smashed everyday by their flip providers. Company charge $30,000 on assignment fees, take another $80,000 in hard money interest and make the listback mandatory with $30,000 in listing commissions. I see flip providers making $140,000 and the small investor making $15,000 or losing money and taking all of the risk.