You’ve probably asked yourself this question before, and we all have. That’s a long-standing question. “Is a large amount of cash today better than a steady, small source of income?”
Investors have been wrestling with this concept forever. BiggerPockets Forum Please show me the proof. Every day, investors post posts that make you wonder if cashing out your stocks is your best bet, or if you should play the long game.
There’s really no wrong answer, and I’ll admit I’m pretty biased, but I’ve had conversations over the years with chronic flippers, especially those who regret not keeping parts of their projects. Especially after that.
Comparison of BRRRR and flipping
Burururu and flip In fact, real estate investment is two sides of the same coin. Of course, much of this is specific to your market and property, but the main difference is that you may be spending a little more on high-end finishes with a flip than with a BRRRR.
In any case you are forcing capital Deal with deferred maintenance or upgrades in hopes of paying off at some point. If you live in District B, you might splurge on stone countertops and tile accent walls in the bathroom. If you rent in District B, you may not need these upgrades. Plus, if you rent your property for 10 years, you can always add upgrades later if you decide to sell.
Yes, it’s true that BRRRR can fund you in small increments indefinitely if done properly, but flips are one-and-done. But at the end of the day, these are both strategies for getting cash quickly and (hopefully) leveraging. You want to force the stock and take advantage of its profits.
How to decide
So how do you decide whether to sell or keep your property? There are several factors to consider.
Cash flow
First, my rule of thumb is that an ideal BRRRR will cover everything for less than 75% of the post-repair price (ARVs). If you can create at least 25% equity, you should be able to: Refinancing When you buy a property, you get almost 100% of your money back.
That doesn’t mean you should sell if you have less money, but you’ll probably keep some of your own cash in the transaction. I’ve done things like that many times before and been completely satisfied with the results, but I planned this as a possibility. Some people don’t hold on to real estate if they have to leave cash behind. For me, that is not the deciding factor, nor should it be the only criterion to consider unless there are special circumstances.
If you can BRRRR the property, more It’s a good start in deciding whether you should keep it rather than paying it yourself every month. How much cash flow you accept each month is completely up to you, but my market is an aggressively appreciating market, so even if I don’t make much, someone else will be able to cover the costs. If you give it to me, I’ll be happy to ride that wave. monthly.
If you live in Area C, you’ll need a decent amount of cash flow to weather the inevitable storms of owning those properties. If you’re seeing regular and reasonable price increases and rent increases, it shouldn’t be so important to go all cash or have your property perform like a dream right away. That asset can become more efficient over time and eventually become a cash cow.
If you’re in a market that traditionally has low appreciation rates, such as parts of the Midwest and South, selling may be a better option. This is because the velocity of the equity you have may be better utilized in another project (this is the leverage part I mentioned).
If your rent is only increasing by an average of 2% each year, and the rate of increase is similar to historical rates or barely keeping up with inflation, there are many other ways to save that cash instead of storing it in a property and renting it out. It can and should be leveraged in much better ways. Keep in mind that you will need to budget for the taxes you will pay on that income.
I think it’s really fascinating that so many people are investing in real estate, and it really speaks to how dynamic real estate investing is. One And it does it really well. However, they have very limited knowledge of other types of investments within real estate and the pros and cons of each.
I’m talking about chronic flippers. I can’t tell you how many professional and really talented flippers I know who have never owned a single house as a rental.
tax
Additionally, I know many people who write checks to the IRS for hundreds of thousands of dollars each year because of how well they “get done” flipping houses. Fast forward a few years, they learn about tax strategies and expense separation, and suddenly the CoC returns on holding rentals don’t seem as important as the tax benefits of those paper losses.
Flipping is a very active form of income, both literally and figuratively. If you don’t buy, renovate, or sell real estate, you won’t make money. Since they are always active, it can be stressful when they run out of gas. The IRS recognizes it all the same as earned income/wages and it is taxed as such.
It may sound like I’m saying it’s not a good idea to flip your house, but that’s simply not the case. If you do it right, there’s no better way to build up your immediate capital, especially if you’re just starting out. There are also lots of properties that make great flips that would be terrible rentals.
There is definitely a time and place for flipping houses. Our team works with many flippers to bring you deals and buy them. turnkey Once the rental is complete.
That being said, I think it’s safe to say that everyone reading this article is using BP because they’re looking for: fire and passive income. An inverted house is, and can be, a waypoint on that path, but it is not a destination.
One of the biggest challenges for beginners is Tax incentives Buy and hold investing. It can be truly life-changing and almost impossible to see or understand until you experience it. If you are strictly flipping a home, you will never get these tax benefits and will actually end up with a higher tax liability.
Don’t get me wrong. It’s never a good idea to pay a lot of tax just because you earn a lot of money. bad thing.But I don’t pay much tax and Is it objectively better to make a lot of money?
By considering BRRRR on a flip that might make sense, you’re gifting your future self a little freedom. If you do it repeatedly, small future gifts can change your family tree forever.
conclusion
Flipping is a really great way to build capital and start your real estate journey. However, if you are looking for long-term wealth and FIRE, we recommend looking at BRRRR and analysis differently. His BRRRR may not seem like a lot today, but in 5 or 10 years, there’s little chance he’ll regret keeping and depreciating that asset. You can always sell your property if things don’t work out in the future, but once you sell it, it’s gone forever.
It may seem counterintuitive, but in real estate, you can get rich by: do not have sale. Be patient, take your time, and enjoy the passive fruits of your labor in the not too distant future.
real estate podcast
Would you like to build long-term assets through real estate investment? This podcast details strategies suitable for different fields and experience levels. Listen to the #1 real estate investing podcast every Tuesday, Thursday, and Sunday.
Note by BiggerPockets: These are the opinions expressed by the author and do not necessarily represent the opinions of BiggerPockets.
