You’ve asked yourself this before, and we all have. It’s the age-old question: Is a stack of cash today better than a steady but smaller stream of income?
Investors have struggled with this concept forever, and the BiggerPockets forums show evidence of that. Daily, investors post, wondering if cashing in their equity is the best play or if they should play the long game.
There truly isn’t a wrong answer, though I’ll admit, I am quite biased, especially after years of conversations with chronic flippers who are filled with regret about not having kept some of their projects.
A Look at BRRRR vs. Flipping
BRRRR and flips are really two sides of the same coin—the real estate investing coin. Of course, much of this is market- and property-specific, but the main differences are that with flips, you might spend a little more on higher-end finishes than you would a BRRRR.
Either way, you are forcing equity in your property and addressing deferred maintenance and upgrades in the hopes of profiting at some point. If you plan to flip and are in a B neighborhood, maybe you spring for the stone counters and tile accent wall in the bathroom. If you are going to rent in a B neighborhood, maybe those upgrades are unnecessary. Besides, if you rent the property for 10 years, you can always add those upgrades later if and when you decide to sell.
Yes, sure, the BRRRR, if done properly, will allow you a trickle of funds indefinitely, whereas a flip is once and done. However, at the end of the day, they’re both strategies for quick(er) cash and (hopefully) leverage. You are forcing equity and hoping to leverage that profit.
How to Decide
So, how do you decide to sell or keep the property? Here are some factors to consider.
The cash flow
First, my rule of thumb is that an ideal BRRRR will have you all in at 75% or less of after-repair value (ARV). If you can create at least 25% equity, you should be able to refinance the property and get close to 100% of your money back out.
It doesn’t always mean that you should sell if you have less, but you will likely leave some of your own cash in the deal. I’ve done that many times before and been perfectly happy with the results—but I planned on this as a possibility going in. Some people won’t keep a property if they have to leave any cash in it. That’s not a dealbreaker for me, and unless you have unique circumstances, it shouldn’t be the only criteria you consider either.
If you can BRRRR a property and it will more than pay for itself every month, that’s a good start to deciding if you should keep it. The monthly cash flow that you are willing to accept is totally up to you, but my market is an aggressively appreciating market, and I’m happy to ride that wave if someone else is footing the bill, even if I’m not making much every month.
If you are in a C area, you’ll need decent cash flow to weather the inevitable storms that come from holding those properties. If you are seeing regular, reasonable appreciation and rent increases, it should be less important that you fully cash out or that the property performs like a dream right away. That property will become more efficient over time and can eventually become your cash cow.
If you are in a market that traditionally sees lower appreciation, say the Midwest or parts of the South, selling might be a better option. This is because the velocity of the equity you have could be put to better use in another project (this is the leverage piece I mentioned).
If rents average only 2% increases every year, and appreciation is historically similar, or barely keeping up with inflation, you can and should take that cash and do much better in many other ways than keeping it in a property and renting it out. Just keep in mind that you need to budget for the taxes you’ll pay on that income.
I find it fascinating, and it really speaks to how dynamic real estate investing can be, that there are so many people doing one thing—and doing it really well. However, they have very limited knowledge of other types of investing within real estate, as well as the pros and cons of each.
I’m talking about chronic flippers. I’ve lost count of the number of professional and truly talented flippers who have never kept a single property as a rental.
The taxes
In addition, I know many people who have been writing checks to the IRS for hundreds of thousands of dollars every year because of how much they’ve “killed it” flipping houses. Fast-forward a few years, and they learn about tax strategy and cost segregation, and suddenly, CoC return when holding a rental doesn’t seem anywhere as important as the tax benefits of those paper losses.
Flipping is extremely active income—both literally and figuratively. If you aren’t buying, renovating, and selling properties, you aren’t making money. You are constantly active, and it can be stressful to let up on the gas. The IRS sees it exactly the same way—as an earned income/wage—and you’ll be taxed as such.
It might seem like I am saying that flipping houses isn’t a good idea, which is absolutely not true. If done correctly, there’s not really a much better way to build immediate capital, especially as you are starting out. Also, there are many properties that make for fantastic flips that would be terrible rentals.
There’s absolutely a time and place for flipping houses. Our team works with lots of flippers, both bringing them deals and buying them as turnkey rentals once they are done.
That being said, I think it’s fair to say that everyone reading this article is on BP because they are looking for FIRE and passive income. Flipping houses is, and can be, a stepping stone on that path, but it’s not the destination.
One of the biggest challenges for newbies is wrapping their heads around the tax benefits of buy-and-hold investing. It can truly be life-changing, and it’s nearly impossible to see or understand until you experience it. If you are strictly flipping homes, you’ll never see those tax benefits and are actually creating a higher tax liability for yourself.
Don’t get me wrong—paying a bunch of taxes because you made a boatload of money is definitely not a bad thing. But isn’t paying little to no taxes and making a bunch of money objectively better?
By considering a BRRRR on flips where it might make sense, you are giving a gift of a tiny bit of freedom to your future self. Do that repeatedly, and those tiny future gifts can change your family tree forever.
The Bottom Line
Flipping is truly a great way to build capital and start your real estate journey. However, I would encourage you to change the way you look at BRRRR and analysis if you are looking for long-term wealth and FIRE. That BRRRR might not look like a great deal today, but five or 10 years from now, you are very unlikely to regret keeping and depreciating that asset. You can always sell a property in the future if it doesn’t work out, but once you sell it, it’s gone forever.
It might seem counterintuitive, but in real estate, you get wealthy by not selling. Be patient, give it some time, and enjoy the passive fruits of your labor in the not-so-distant future.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
