By Moolah List
By Moolah List
- The initial steps of the BRRRR and Fix and Flip strategies are very similar
- Both strategies require you to find an undervalued property and renovate it
- The key difference is the exit strategy
Not every real estate investor has the same goals and not one strategy is optimal in every scenario.
Real estate investors are often faced with a strategic decision, should they Fix and Flip a property to generate quick cash flow in the short-term, or should they use the BRRRR method and hold onto the property for the long-term?
Read on to find out which investment strategy is best for you.
Fix and flipping (aka house flipping), is the buying of a distressed or undervalued property, renovating it and selling it in the short-term for a profit.
It takes the average real estate investor in the United States about 6 months to complete a fix and flip.
Fix and flipping is big business.
Flipped homes accounted for 6.2% of all U.S. home sales in 2019 according to ATTOM Data Solutions.
Flipping homes can provide investors with a nice side income to supplement their day job, while others may be full-time professional flippers.
Here are a few pros and cons of the fix and flip strategy to consider:
- Allows you to keep your money moving
- Avoid having to maintain the property
- Avoid having to deal with tenants
- Faster return on your money
- Usually a safer investment because money is only at risk for a short amount of time
- Short-term capital gains if sold within a year
- Greater risk of short-term market fluctuations
- Can’t perform a 1031 Exchange
- Big risk in the rehab process with time and cost
- Transaction costs, brokerage, financing and closing fees eat into profits
The BRRRR Strategy (buy, renovate, rent, refinance and repeat), is focused on building a portfolio of properties.
Once an investor has purchased an undervalued property, they renovate it, aiming to increase the appraisal value.
Investors then use the value added equity created from the rehab to refinance the property.
With the excess capital from the refinance they repeat the process by purchasing another property.
When an investor sells after a few years of ownership they have the ability to 1031 Exchange into a more expensive property.
- Less upfront cash
- Property will appreciate over time
- Positive cash-flow from rental income
- Can withstand short-term market fluctuations
- Tax benefits to owning property
- More properties, more problems
- Can take time to find tenants
- Time and budget risks
- Ongoing maintenance costs
With a fix and flip the key is maximizing the potential, refinancing, then paying off the hard money loan used as a down payment.
The BRRRR Strategy is more complex to figure out since it’s more dependent on long-term market trends.
Before making a decision we recommend calculating the projected ROI of each strategy.
There may even be circumstances where pivoting from one strategy to the other makes sense.
For example, if the short-term real estate market went sideways during your renovation, you could convert your Fix and Flip into a BRRRR and rent it out until the market recovers and then sell it for a profit.
Depending on the timeline you could qualify for a 1031 exchange.
The real estate game has made more millionaires in history than any other asset class.
Many investors have achieved great returns using both the Fix and Flip and BRRRR strategies.
Executed properly, either strategy will work and choosing between the two is really in the eyes of the beholder.