Should you BRRRR it, or Should you Flip it? Breaking down two real estate investing strategies.
We are torn. One of our projects took longer than expected and it made us think – should we BRRRR it instead of flip it?
For those of you who may not know, BRRRR is an acronym for Buy, Renovate, Rent, Refinance, Repeat. It is basically flipping – except you keep it and rent it out at the end instead of selling it. Ideally, it is a great way to acquire an income-producing asset with little to no money when all is said and done.
I wanted to take you along my thought process and break down how each strategy works. For simplicity sake, I am going to use fake numbers, but it will give you an understanding of what each situation looks like.
Buckle up - it's about to get real....numbers-y....?
The below snip is my deal analysis breaking down a flip example. It provides the purchase price, reno costs, lending terms, holding costs and the selling costs.
To summarize the analysis above, we bought the property for $100,000 and renovated it for $60,000. The hard money loan is for 12 months at 10% interest with 2 points. The flip would take about 8 months to complete from purchase date to sold.
You can see the all-in cash investment to acquire and maintain the flip is $43,133.33 and the hard money loan amount is $140,000 (80%).
We have the ARV (after repair value) at $250,000.
In this scenario, if we were to flip the property, the profit would be $48,466.67. A 26.47% ROI (return on investment). Not bad!
If we were to BRRRR, we would use a no-doc loan for a cash-out refi with a hard money lender. The cost to refinance is about $7,000 – this includes lender fees, appraisal, transfer taxes etc. This loan would require a 30% down payment. Here are the lending terms:
I used a mortgage calculator to determine the monthly payment. If the house appraises at $250,000, then the monthly payment would be $1,134. This includes homeowners insurance and taxes.
The rental income that the house would produce is $2,000/month. We would subtract the mortgage payment from the rental income.
$2,000-$1,134= $866/month in passive income.
Next, we would need to consider the costs of refinancing and paying off the current loan.
$140,000 owed on the flip loan + $7,000 to refinance = $147,000 owed
If the value of the home appraises at $250,000, then
$250,000-$147,000 = $103,000 remaining
Subtract the 30% down payment,
Cash out $28,000 + $866/month is passive income
Keep in mind that in this example we have about $43,133 cash invested into the flip if it were take the full 8 months.
$43,133-$28,000 = $15,133
To BRRRR this house, we would have invested a total of $15,133. With the passive income of $866/month, that investment would be returned in 17.5 months ($15,133/$866).
This is how you buy real estate with little to no money. BRRRR’ing is a brilliant strategy. In this scenario, you not only walk away with $28,000 from the cash-out refi, but you will also get $866/month in passive income from the rent. The other plus? The cash you collect from a cash-out refi isn’t considered income, it’s considered a loan. Therefore, you don’t need to pay taxes on that cash. Mind. Blown.
To recap, if we were to flip this, we would get a taxable $48,466 profit – a high return of 26%. If we were to BRRRR it, we would get a non-taxable "loan" of $28,000 + taxable $866/month + an asset with $75,000 of equity in it. An infinite return.
When you put it this way, it’s a no brainer, isn’t it? What would you do?