BRRRR vs flipping - IRR calculation tells me flipping is better?

Question

Hi All,

Question from a newbie here on the strategy of BRRRR vs Flipping.

My wife and I bought a condo in Metrowest Boston in March 2020 for $132,000 in cash, rehabbed it for approx $20,000 and its current value is approx $200,000. It is currently renting for $1,800 a month. When we bought the place, we intended to just rent it, not flip it. However, through BP, I found the IRR calculations and that shows that every year we hold the property we are losing IRR? Wouldn't that mean it would be better not to BRRRR and always flip from a pure money growth standpoint?

Currently looking at getting a HELOC on the property for $156k for use when/if we find the next deal but the IRR number has made me think maybe it's better to just sell it now with the hot RE market that is still here. How do other BRRRR investors view this? Why go one way or the other?

Thanks in advance!

Dan Weber · Answer

There isn't a right or wrong answer to this. It's purely based on what your goals are. Putting the spreadsheet aside, do you want to flip going forward or do you want to BRRRR property? What do you want to spent your time and effort doing? In regards to your specific situation, what is your current Return On Equity for the condo? If you think you could get a better return on that equity by selling the condo and putting it into another investment, then I don't believe there's anything wrong with selling and doing that.

Maurice Horton · Answer

Love this response & strategy.

Steve Vaughan · Answer

Flipping for most of us is little more than a job with high transaction costs and high taxes.

You will pay self-employment,  federal and state (all but 7) taxes on profit of roughly 35%.

Then you have the work and stress of sourcing your next job, I mean flip, and the pressure to re-invest it at your target IRR.

Sounds like you have a dynamite rental depending on HOA cost and terms.  Growth, tax advantages, no hunting, etc.

Takes more than an attractive short term iRR to convince me to flip, but I would consider exiting by offering a year+ lease with option to buy.  Now its a long-term cap gain with no vacancy as the buyer gets a mortgage and no realtor commissions.

Mike Dymski · Answer

Well said.  IRR factors in both the amount and the timing of cash flows.  If you speed up the velocity of your cash inflows (i.e. flipping), it drives up the IRR.  Or selling a BRRRR at year 3 versus at year 10...will drive up IRR for the same reason.  But there is a trade off...the churn of flipping (or selling early) can be time consuming...and it generates taxable income.  More work, better IRR...less work, less IRR.

Andrew Postell · Answer

@Alex D'Anjou wow, I have never seen that article before.  Glad I never saw it - needless to say there is more to it than what that article is describing.

If I only took into account the cash flow a property generates I would be missing HUGE income elements of owning investment properties.

If I spent $100,000 to purchase a home then there's no way I could scale personally.

Now, the author does address this 2nd point.  The author does admit that he usually buys with $0 out of pocket.  This post is 8 years old at this point and while rare, it is still possible to purchase homes with zero out of pocket.  When using my own calculators I put in $1 if I come out of pocket $0 because otherwise "infinity" is not a measurable number.  So using $1 will at least present to you some reasonable number that is measurable.

Now, flipping is a great method.  You have some good responses above on why/why not do it.  If you want to be a real estate investor - why not be a wholesaler?  You'll make more money faster.  Why not be a flipper?  You'll make more money than a wholesaler.  Why not be a builder?   There are lots of builders that make multi-million salaries per year.   Or how about just put all your money into a REIT....you won't have any of the risks that any of those other methods contain.  Or just be a passive investor in multi-family properties?  Good returns and no work!

There's TONS of strategies to real estate.  Most of these strategies will rotate around how much money you have, what your abilities are, and what you are willing to do to invest your time and money.  I started my career in $30k homes.....because that's all I could do.  I had no other choice.  People usually implement the BRRRR method because they don't have any other options.  If you have $2million to invest in then your mentality SHOULD be different than someone who has $2k to invest.  It's all about what you feel comfortable with.  And there's plenty of reasons to invest in other forms completely - I can buy a stock for $5 on the regular.  That's pretty obtainable.  Sometimes these other investment methods are not obtainable to some people.  Which is why they choose one over the other.

I hope all of this makes sense.  Feel free to keep posting.  Certainly here to help in any other way.  Thanks!

Larry Turowski · Answer

@Alex D'Anjou I wouldn’t say this is a question of what you want to do, unless you hate being a landlord. If the work os the same whether you keep or flip and you do better flipping, then flip it.

I’d prefer to always flip, but I do both. Why?  Because flips are difficult to come by, difficult to scale and are not passive. As long as you can find deals, find the people to get the work done, and don’t mind the active role you’ll need to take, keep on flipping.

Once you have more money than you can find flips to fund or you can’t find the crews or can’t manage all the crews or you want to be more passive then start keeping rentals.

Dan Onofrio · Answer

@Alex D'Anjou This really depends on your values, goals, and investment strategy. Are you wanting steady income and invest the remaining 156K into other properties? If making money quick is the goal, yes, flip the heck out of every property, but don't do it simply because a calculator tells you to do so. It has to fall within what makes sense for where you want to be in the future.

Buying and holding makes sense for me right now, most of that is due to the amount of time I'm allocating for real estate. If I was looking to do this full-time, I would have a different approach.

Hope this helps, Alex!

Alex D'Anjou · Answer

@Dan Weber@Andrew Postell I replied to both of you but the "@" thingy didn't work apparently. Just calling your attention back to the post here.

Alex D'Anjou · Answer

@Dan Weber Hi Dan, thanks for the reply.

You mention what do you want to spend your time doing? Can you clarify what the two approaches entail?

Thanks!

Alex D'Anjou · Answer

@Andrew Postell Hi Andrew, Thanks for the reply.

IRR can be explained here https://www.biggerpockets.com/blog/2014-07-08-irr-use#

The long and short of it (to my understanding) is that IRR is similar to CoC ROI but it takes into account the time factor. So what if you had taken your money and used it elsewhere over whatever time-frame you choose.

What I've seen is that with BRRRR, you're doing a reno up front and therefore adding a ton of value right upfront and after that you are just spreading/diluting that equity when you hold it longer over time.

Hence my original question, how do BRRRR investors justify and make the argument to hold the property instead of just flipping?

BRRRR vs flipping - IRR calculation tells me flipping is better?

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