Originally posted by @Account Closed:
BRRR takes some skill- building a forced equity position is something one should capitalize on. Many new investors make the mistake of trying to build low risk/low yield passive income and save tax money too early in their investing careers. If you're going to be an active investor that WORKS on your deals- force equity, liquidate, pay the taxes, and move on to the next deal. That 30% in ordinary income tax you pay will be WELL worth generating revenue that will contribute directly to the growth of your portfolio when it's small and needs to grow.
If you INSIST on BRRR'ing- BRRR a property in a market where the cash flow is high enough to compare to the equity position you have.
EX:
***I would much rather keep a BRRR that's 30k in forced equity on a 100k ARV duplex that NETS 4k/yr cash flow after realistic expenses and debt service. Your options here are take the 30k or take the 4k passive per year. Not a terrible ratio.
***I would NOT keep a BRRR that's 90k in forced equity on a 300k SFR that nets 1200 a year cash flow after realistic expenses and debt service (maybe not even that lol). Your options here are take the 90k or 1200 passive a year. I would question the fundamental business competence of someone who didn't take the 90k...
ESPECIALLY in a peaky 2019 where that equity position could be diminished by an amount significantly greater than the short term capital gains taxes you pay after selling it. If you sell after 3 months, you pay 27k in taxes on that 90k profit, and maybe 15k in realtor fees (if you use a realtor) and 2500 in closing costs. That's 40k taken out of your cut. If the market softens and value is reduced by 20% (which is very optimistic for inland empire based on historical volatility), you lose 60k of your equity. If it is reduced by 30%, your equity is buh bye, and you make $100 a month.
Don't forget- you pay taxes on rental income as well. And the rate is comparable to the short term capital gains tax rate. You pay taxes on the debt paydown portion of your mortgage too.
The big lesson here is if you're going to buy and hold something, hold an asset that isn't going to lose much value during economic correction, and one that cash flows well enough to make it worth holding through a whole market cycle.
