What would you do on 1st property? Brrrr or Flip

Question

First of all, thank you in advance for any feedback.

To keep it short and to the point.  My 1st property i am fortunate to have the opportunity to flip or Brrrr. Here is my question.

I have $50k, which is most of my savings. This property requires an all in for me at $50k.  If I flip, i will gross $100k, so get my $50k back plus $50k net profit.   If i Brrrr, i can get about $60k cash out, so $50k back plus $10k, and cash flow $400 a month.

What would you do?

My thought is to flip this first one so i can get my savings back, and put it away, then have $50k "play money" to start Brrrring.  I want to build wealth so Brrrr is my long term stratagey.

Im 80% sure i will flip and recoup all my money, but curious is anyone else has been in this situation and wish they kept the property?

Thanks

Allan Smith · Answer

BRRR

any veteran investor I've heard says they wished they kept more and sold less. If you get your cash back and it still cash flows, seems like a no brainer. Unless you need the extra cash for marketing, investing in rapid growth,  or to keep the lights on.

JD Martin · Answer

Depends on what else you might do with the money and what your long term plans are. Long-term money is made by buying and holding the property, unless you are buying in an area with no real historic appreciation. Flipping is a job. When the flips stop, the money stops.

That's not saying it doesn't make sense to "flip" a house, but most real money is made by patience and on what I call a "slow-motion flip". Meaning you hold the house long enough to A) Realize market appreciation, B) Achieve favorable tax sales status, C) Realize immediate tax benefits, D) Recover some funds through renting. Let's just use your house and your numbers as an example:

You buy it at $250k, put $50k into it. You sell it 3 months later for $350k, so you gross $100k (100k-your 50k into the house). Unless you're an agent or you sell it yourself, you will net $28k on that flip, ignoring any other closing costs. 35% capital gains tax will cost you another $9k, so you will net $19k.

OR: you have the same $300k in it. You refinance out and after paying your costs and renting it out you net $400/month cash flow and have $10k in your pocket (beyond your original 50k). With your tax writeoffs, you will likely pay $0 in tax on that cash. So you will net $4800 per year. You keep the property 2 years and let's assume appreciation of inflation at maybe 2%. So 2 years from now you sell the house for $365k (using your numbers, above). You pay $22k in agent fees and you pay back the $310k mortgage (the $250+your 50k+the 10k you pocketed), which is really about $300 after principal pay down for 2 years. So you walk with $33k, of which you pay 15% LTCG, so you will net $28k. Plus the $9600 in rent. That's about $38k in 2 years, vs $19k in 3 months. By holding for 2 years you doubled your money. If you had rapid appreciation, maybe you tripled or quadrupled it. If appreciation sucked, maybe you only made a 75% return in 2 years instead of 100%.

It takes a whole lot of flips to double your money every 2 years.

Evan Polaski · Answer

@Vincent Silva, I am actually on the other side of that, but my goals and focus have changed.  I used to be a BRRRR investor, then I realized my ROE of my rentals was paying less than I could make doing passive investments.  So I sold and started investing passively.

My flips will make more in a few months than my rentals would create in free cash flow in about 10 years.  And before we start talking about "what about the appreciation..." "what about the tax benefits", well that is A) not guaranteed over the long term, and B) I am more than making up for the appreciation by looking for another flip when the prior one sells.  So typically do 1-2/year and the profits I have been able to make still more than offset the rental income I make by many times over.

The risk is that with flips, the deals dry up.  The risk with rentals are that you have major repairs that come up and no way to pay for them, or tenants do damage.  Additionally, particularly with BRRRRs, the workload is the same at the front end.  But with a flip you are out and no more work for that particular project.  With rentals the work continues in definitely.  Bookkeeping, managing managers or managing the property yourself, bills to continue paying, etc.

Allan Smith · Answer

I like JDs way of putting it. I also like hearing from the flip perspective. It seems to me that the bottom line is a flip makes money faster, but a BRRR is more passive. Once your money is in it, taxes and appreciation start working for you with hardly any involvement from you.

V. Anthony Silva · Answer

Brian, great point, yet not using my savings is why i havent been back in the market in 15 years!  Also, i do have 2 pretty decent 401ks if in a complete pinch. Plus 2 "investors" that i have lined up for future properties that have cash and want in ASAP.  But, that is why id like to flip and get that savings back and not use again!

Darius, I do know Pittsburg very well, and the plan is to invest and hold there in the future.  I have talked with the City which controls their own permits and such, not county.  I have also talked with 2 flipping buddies about Pittsburgs permit processes. So have a pretty good feel for that.

JD, I do understand the benefits of Brrrr both long and short (2year hold) and why that is the main strategy for me. Thats why i struggle and have asked all of you advice on this 1st property with my savings involved.  I want that initial investment back ASAP ao i can play with "house money".  I am a poker player, pretty deep in it years ago, i started with $2000 of my "own" money and once i doubled it, i took mu initial $2k out and played with "house money" for the next 10 years, always keeping that poker bankroll separate from house budget.  Thats what i want to do in this business.  So that is why my thought is to flip the first and recoup!  Agent commissions are already accounted for, so i should net $50k, $30k after taxes on this first deal. To have $30k "house money" plus other investors coming. As for possibly flipping future properties, you have helped me understand that is not my future goal. Thank you!

i thank all of you, i need these other eyes on this and different perspectives and experiences. Much thanks!  My next question is going to be what to do to start my business.  Do i go LLC, to i get a book keeper? If i was your 21 year old son starting off, what would you tell me and what would you do differently?  Im going to go start a new thread in the appropriate forum.  But if any of you could share some time and advice please do. Im not sure if we can inbox each other on here?  Very new to BP.

Darius Ogloza · Answer

Full disclosure - I have a natural bias toward buy and hold, especially in the Bay Area.

If you know Pittsburg well (I do not) and can manage being a landlord, then I would keep it and consider using a HELOC to pull funds when necessary (unless your acquisition financing was really expensive).

Also, does the city/county do resale inspections out there?  Are you comfortable that the county/city is going to allow you to get a retro permit for the garage conversion + master bath addition?  Easier to rent than to sell if these could pose issues.  That's another factor to consider (unless these permits are already in the bag).

Brian Garlington · Answer

Putting all your eggs in one basket regarding savings on your first flip?

Marinate on that thought for a moment and ask yourself as a lender would you ever advise your clients to do that when they are buying their very first house and they know it's a complete fixer upper.

V. Anthony Silva · Answer

Caleb, yes those costs are factored in!  I used both the fix n flip and the brrrr calculators on here!  Ive been in the RE biz as a lender for 18 years, so have a lot of connections.  Ive passed deals to friends that flip, but now its my turn!

Curt, you are right it is easy to get spoiled on this deal, which is why i jumped on it to be my first investment in 15 years.  I am in East Bay area, CA.  Same area as David Greene, he is a buddy!

Property is in Pittsburg CA. 2/1 880sq, bought for $285k with $7500 in seller credits. Appraised as is for $350k.  Seller wanted quick off market sale, its a 1948 home all original. The 1 car garage is 80% converted into a bedroom, i am getting that permitted and adding a bath to make it a master.   So i will be selling a 3/2 1250 sq home with $35k in rehab, my brother is a general contractor, (10k down, $5k holding cost) so in it for about $50k.  ARV $430 to $450k.  4% realtor fees, 1.5% for listing agent ( long time friend and associate and the one that found property for me)  2.5% for selling agent which is standard in our area.

At $430k this is the ENTRY LEVEL price for a decent home is this area!  I am 90% now leaning towards flipping to get my money back ASAP, plus some extra money in the profit to use.  I have 2 other properties in my sights, but need to buy by the end of 2020.  If I Brrrr, i need to wait 6 months to cashout refi, which is something that is not mentioned too often when people talk Brrrr's!

Caleb Genry · Answer

@Vincent Silva It's nice to have options! I would say be flexible when you get to the end when deciding what you want to do. However, you absolutely need to factor in realtor fees and closing costs when selling as well as tax implications. Those will take from the extra $50k you make on the flip.

What would you do on 1st property? Brrrr or Flip

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