BRRRR vs flip - selling your equity to uncle sam & realtor?

Question

Looking forward to the general discussion on this.

When you compare the numbers on a flip vs a BRRRR, I have a hard time seeing why you would go the flip route unless you’re strictly looking to build capital as fast as possible. Obviously it’s a huge market, which means I’m probably missing something. That said, let me lay out a very rudimentary hypothetical example (excluding common holding and closing costs for simplicity):

1. BRRRR

Purchase + rehab = $150k

ARV = $200k

Refi LTV = 75% ($150k pulled out)

Equity = $50k

Long term benefits = cash flow, appreciation, etc.

2. Flip

Purchase + rehab = $150k

Sale price = $200k

Sellers realtor commission = $12k (6%)

Tax on $50k gross profit = $12.5k (assuming 25% tax bracket)

Gross profit = $25.5k

Equity = $0

Long term benefits = none

You’re trading $50k in appreciable equity plus all future cash flows for $25.5k now. In my mind the idea of “would you rather have $1,000,000 today or a penny doubled for 30 days” applies here big time.

What am I missing? Why do you prefer one over the other?

Kris L. · Answer

Depending on rental market value, some properties will make good money as a flip but be negative cash flow as a BRRRR.

Larry Turowski · Answer

@Patrick Menefee Comparing unrealized gains ($50K in equity) to realized gains ($25.5K in your pocket after taxes) is not apples to apples.  You can argue that that $50K can work for you but so can that $25.5K.

I flip and buy and hold.  I'll put aside aside that flipping is more of a job than being a passive investor and comment on the financials.  Hands down you'll do better flipping IF you have a reliable deal flow (that will put your money back to work).  But flipping is harder to scale.  At some point you'll have more financial resources than you can put to work on flips.  At this point you'll either have to do bigger (and likely longer) flips, or get better at sourcing deals.  Otherwise, it makes sense to grow the passive side of your investing portfolio.

Right now you've got the luxury of refinancing out, getting 100% of your money back and being in a position to do the exact same thing.  But what if after doing six of these as flips and not cash-out refis, with $25K profit each, you had another $150K and could do two flips at once?  (Yeah, yeah, I know it doesn't have to be your money to begin with but you get the idea.  It's nice to have cash, let me tell you.)

As my cash position gets "bloated" I look to pick up more rentals, but I love keeping my flipping business going.

John Fortes · Answer

Personal preference really. Those that flip, do it for extra income while holding some properties on the side. I know some that keep after the fact and even consider keeping flips to move into and sell their current home. Some have properties that they hold as well. It's about what you want to do at the end of the day as each of us have our own reasons why we do things. Not apples to apples.

Chad Haubrich · Answer

@Patrick Menefee great topic! My parents and I are getting back into REI, and they usually flip, but I always thought what if we kept those properties with 10 years of cash flow building each year. I think there’s been great points about some properties are better flips than rentals.

Dan Gamache · Answer

Everything is great as long as the market stays strong. People who lived through the subprime crash are cautious about holding properties leveraged to 75-80LTV without very strong cash flow. If market has downturn you could be left holding properties underwater, real trouble if you have adjustable rate. If stong cashflow and you feel good about rental market than I agree the Brrrr method is more desirable.

Jason D. · Answer

Not all people are made out to be landlords, and not all properties make good BRRRRs.

Sometimes that decision is market and/or goal driven.

Alvin Uy · Answer

In a market like mine (Los Angeles), its not easy to find a property that doesnt require 20-40% downpayment to break even or cashflow.  Not to say those properties dont exist.... but its a war just to acquire them.   So I do a couple of quick JV flips to harness enough $$$ for downpayment for the 3rd one that I buy and hold for myself in areas that i know rents are good... if the number makes sense of course.

Lately though, the prices are so overinflated in Los Angeles and I predict a correction is over due... so Im thinking of waiting until it swings down a bit before I induce my buy and holds strategy so I dont lose value... and capitalize on appreciation while enjoy rent increases every year.

Patrick Menefee · Answer

@Kris L. Great point. The reverse could apply too...you could cash flow with a BRRRR but the market may be slower with a flip where you see your profit disappearing to holding costs as it sits on the market

Patrick Menefee · Answer

@Larry T. Bloated cash position is a terrible spot to be in isn’t it?? :) i like your points, especially about scale which is a bit of a catch 22. As you said you can take that $150k profit and do 2 flips concurrently, and keep going along that path exponentially, but then you also run into the larger scaling issue you mentioned.

There’s no denying that flips are the better way to generate up front cash

BRRRR vs flip - selling your equity to uncle sam & realtor?

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