The “Fix and Flip” investment strategy involves buying a property, fixing it up, and then flipping it for a profit. Sounds easy enough, right? But what happens when your flip won’t sell? Don’t Worry! Many investors facing a flailing flip are turning to the BRRRR Method, transforming their projects into cash-flowing machines! Keep reading to learn your all your options in navigating the current market.
Exploring your Options
When it comes to investing in real estate, it’s best to keep as many options open as possible. Being unable to sell off a property that you have dumped a significant amount of capital into is every flipper’s worst nightmare. Even the most experienced investors can find themselves in this situation. What separates the pros from the amateurs is adaptability in the face of adversity.
Typically, investors will use a bridge loan (shorter term, interest only payments, balloon payment at maturity). If you pigeonhole yourself into one strategy, you may be setting yourself up to lose a lot of money if things go south. The most successful real estate investors are dynamic investors – capable of pivoting and making the most of an unideal situation.
Realistically, if your flip won’t sell, you have three options:
- Expend more time, money, and effort into marketing the property and finding a buyer. This could still prove to be a fruitless endeavor!
- Cut your losses. Lower the asking price, sell at a loss, give up and accept that you may have made a poor investment.
- Convert your Flip into a Rental Property. Pivot and operate your investment as either a long-term or short-term rental. Refinance your bridge loan into a 30-yr mortgage, keep the property, and let it become a passive income stream.
While everyone’s situation is unique, more and more seasoned investors are turning to Option 3.
Salvaging your Flip with a Cash-Out Refinance
Now that you’ve made the decision to hold on to your investment rather than flipping, it’s time to address the maturity date of your bridge loan that’s rapidly approaching. You don’t want to get caught up with late payments, fees, and extensions on your existing loan. The best way to pay off your existing debt is a cash-out refinance with a relatively new loan product known as a DSCR Loan.
DSCR stands for Debt Service Coverage Ratio. These loans, designed specifically for investment properties, are primarily focused on the property when it comes to underwriting and not you as the borrower. This means no income verification (no DTI), no tax returns, no mountains of endless paperwork!
A cash-out refinance DSCR loan allows you to tap into the equity you’ve put into your home (purchase price + renovation costs), payoff your existing short-term bridge debt – replacing it with a 30-yr fixed rate mortgage loan (in most cases), and walk away with cash in your pocket – 100% tax-free!
The money you take out with a cash-out refinance, known as cash-out proceeds, is the difference between your new DSCR loan amount and the balance of your bridge debt + closing costs. As long as the expense is for business purposes, cash-out proceeds can be used however you see fit. This can mean additional renovations on your investment properties, or even as a down payment to acquire more properties.
Using cash-out proceeds from one investment property to purchase another is a key component to the BRRRR Method – a new lucrative real estate investing strategy employed to create a cycle of growth for your portfolio.
Reinvesting with the BRRRR Method
You are beginning to see the light at the end of the tunnel. You have turned your failed flip to a successful investment property and have cash to boot. Modern investors who find themselves in this position look to the BRRRR Method. If you’re unfamiliar, check out our article outlining 7 critical tips for BRRRRR newbies to get acquainted.
The beginning of the BRRRR Method is not too dissimilar from a normal fix and flip. Find a distressed property to buy, use a short-term bridge loan to make the acquisition, and then rehab the property. Now, instead of flipping and selling the property, you opt to rent it out. Decide if it makes the most sense for your property to be a long-term, short-term, or even a medium-term rental.
Once you’ve determined how your rental will operate, it’s time to refinance your bridge loan into something long-term. Take advantage of favorable DSCR underwriting and close quicker, and with less paperwork, as compared to conventional financing. With another cash-flowing rental added to your portfolio, you now have the option to repeat!
Benefits of BRRRR vs Flips
There are a number of benefits afforded to BRRRR investors that are unavailable to flippers. The BRRRR strategy can be thought of as a long-term strategy focused on building up a passive income stream. Flipping, on the other hand, is a shorter-term strategy, with investors looking to make as much as they can in the shortest period of time.
Given the current state of the market, it’s no surprise that investors are opting to BRRRR rather than flip. In a report on U.S. Home Flipping released in December by ATTOM, a firm at the forefront of real estate data nationwide, found that although overall flipping activity in Q3 2022 was “among the highest on record, gross profits and profit margins declined significantly.” Gross profit on typical flip transactions fell to $62,000 in Q3 2022 – down 18.4% from Q2 2022, and down 11.4% from Q3 2021. This is the lowest the typical flip profit has been since Q4 2019, and the worst quarterly rate of decline since early 2009.
Market conditions aside, some of the key advantages to BRRRRing rather than flipping include taxes, relative stability, and a passive income stream:
- Taxes –There is absolutely 0 tax on proceeds for your cash-out refinance! No capital gains tax. Flipping typically incurs high tax rates as it is taxed at ordinary income rates – especially if the property is bought and sold within a year. Property depreciation is another tax benefit that rental investors can take advantage of. Please consult with your tax professional for specifics on tax treatment for these types of deals.
- Rents – Rent is generally more stable than property values, even with lower property values. External market factors can drive rent up, even if property values are stalling
- Long-term value capture – Instead of making a one-time profit, you are able to set up an income stream that lasts decades. Holding these properties in your portfolio long term allows you to capture the appreciation in value of your property.
Easy Street Capital: Loans to Meet the Needs of All Investors
Easy Street Capital is the best lender for adaptable, savvy real estate investors. For those looking to BRRRR, our EasyFix and EasyRent lending programs are complementary to one another and allow you to do both the bridge and DSCR loan in-house. Save time, money, and grow your portfolio as quickly as you want!
Ready to get started? Request a quote today!
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