Real estate investing is a type of investment where you need to know your exit strategy before you even get into it. And it’s with an eye on the exit strategy that many investors weigh up the pros and cons of the BRRRR method versus fix and flip. Both of these have their own benefits, but the lines between the two are increasingly blurred. So we’re going to look at the differences between the two to help you decide which is best for you.
The Pros of the BRRRR method
First, we’re going to look at the reasons why you might want to use the BRRRR method.
What is the BRRRR method?
Over the last 5 years, the BRRR method has been the new investment strategy on the block.
What does BRRRR stand for?
- Buy – purchase a property that has the potential to increase its value through repairs. Often, investors will do this through short term financing, such as hard money loans
- Rehab – fix up the property to increase its value and make it rentable
- Rent – the property to the tenant
- Refinance – using longer-term, more traditional financing
- Repeat – this is a great method if you’re looking to build up a real estate portfolio
Now, let’s take a look at some of the reasons you’d want to use the BRRRR method.
Very little money down (or maybe none)
BRRRR can be a great investment opportunity as it can enable you to invest without using a lot of cash (or maybe none at all!).
If the numbers add up, you can get into BRRRR investing with very little money out of your own pocket. This makes it easier to finance projects through quick, hard money loans. It goes without saying, the less money you put down initially, the more you’ll make on your investment in the long run.
Enables You to Quickly Build and Then Cash Out Equity
BRRRR real estate investing allows you to build equity by quickly increasing the value of the property, beyond the amount you spend on renovations.
While the fix and flip method lets you pocket this increase in the property value once you sell it, you can also access some or all of this increase in value using the BRRRR method.
Once you get to the refinance part of the process, you can use a cash out refinance loan, borrowing against the increased value of the property, then cashing out the difference in value between the new and the old loan. You can then put this cash towards the repeat part of the process and start on your next BRRRR project.
A steady source of income
An advantage BRRRR has over fix and flip is that it provides a steady source of income. After you’ve rehabbed and begun renting out a property, you’ll have a continuous stream of income entering your account on a monthly basis.
Of course, the risk here is whether you’re able to secure occupants or not. However, with rental demand at an all-time high, your BRRRR property’s occupancy rate is a calculated risk you could take.
The Pros of Fix and Flip
Now, we’re going to look at the reasons in favor of fix and flip.
What is fix and flip?
Fix and flip is the original ‘fixer upper’ real estate investment. A fix and flip investment is when an investor buys a home with the intent to resell it a short time later at a higher price. Pretty straightforward. Now let’s get into the pros of fix and flip investments.
Less of a numbers game involved
The calculations involved when measuring your ROI on a fix and flip investment are a lot less complicated.
With BRRRR, your exit strategy is ongoing. There are a number of variants that can affect your cash flow on a monthly basis. However, with fix and flip, you borrow the money for the purchase and repairs, and then you ‘flip it’.
Exit strategy is quicker
The exit strategy of a fix and flip loan is quick.
If you did your research and renovated the property to its maximum potential, you’ll be able to gain some instant equity when you sell it and also be able to pay off your original hard money financing quickly.
That being said, if your exit strategy is to flip the property, you will need to have a clear understanding of real estate market trends. Otherwise, any unexpected shift in the market may cause you to sell in panic. That’s why many savvy investors calculate both a fix and flip and BRRRR strategy when purchasing an investment property; mainly because the BRRR strategy may be the more profitable alternative in the event that the fix and flip strategy fails for any reason.
All types of property investment are great for your own personal and professional development. A real estate investment project gives you a deeper understanding of so many new things. Such as:
- The local market
- Wealth building
That’s before you even take into account the different people involved in the process and everything you can learn from them, such as lawyers, contractors, realtors, insurance brokers, and inspectors.
On top of that, it’s deeply rewarding to ‘rehab’ a dilapidated property. As soon as you finish a project it’s likely you’ll want to do the process all over again!
So, which is better for you?
As you can see, BRRRR and fixing a flipping are both different and similar in a lot of ways, and may compliment each other.
BRRRR may suit the investor who is ready to build wealth by creating a property portfolio as quickly as possible. Furthermore, it may suit someone who is looking for a steady supplement to their initial monthly income.
On the other hand, fix and flip may suit the investor who needs to flip properties until they’ve built enough cash reserve to be able to withstand the ability to purchase properties without having to flip them.
However, even if this type of investor doesn’t have the cash reserves, you could still consider refinancing the property with a rental loan after fixing it, as it may be possible to cash out the equity that was added, and therefore reach the same goal had the property been flipped.