When investing in real estate, you must have an exit strategy before entering it. While there are many options, investors focus on the fix & flip method and the BRRRR method more closely as both can provide a diverse statement on their portfolio along with a high ROI at the end of the day. With real estate investing being a great way to build wealth and broaden your investment portfolio, understanding the different strategies available to you is essential before taking your first steps. So, let’s gain a better understanding of the fix & flip and BRRRR method before you get on the road to financial independence.
Understanding the Fix & Flip Method
Essentially, the fix & flip method involves purchasing a property quickly, renovating it, and then putting it back on the market at a higher price than what you bought it for. House flipping involves a high level of risk as you take on major repairs and renovations in the hope of selling it in the coming months. Before jumping into this method, you must have a risk level decided upon, so you are not investing in a sinking ship. Fortunately, if the fix is successful, the flip part of the method will be profitable.
The Pros
- It can be a fast way to build wealth. Most projects under this method take a matter of months to a year, allowing you to move on to the next one in no time.
- You have a quicker exit strategy. With how short-term these investments are, you can get out quicker if you are prepared to sell once renovations are done.
- You can be a newbie or experienced. Fix & flip investments can be done by anyone at any level of experience and bring success when appropriately planned.
- You can access financial help from private loans, bank loans, or business partners. This can lower your overall risk and raise your profits.
The Cons
- Anything can happen. You can plan for renovations, and the selling process all you want, but new damage can be found or made, and the real estate market can fluctuate. Like an investment, life can affect the outcome.
- Legal issues can occur. Problems such as zoning laws, contracts, and title searches can lengthen your process and cause disruption.
- Involvement in the project can change. Finding contractors to take over the renovations in your price range can become challenging, and it could lead to you being more hands-on in the process.
Understanding the BRRRR Method
BRRRR stands for buy, rehab, rent, refinance, and repeat. This entails buying an income-generating property that can give cash flow while providing equity over time through refinancing. Compared to the above method, this is more of a long-term investment as you work to renovate and refinance it. The renovation will increase the property’s overall value, allowing for a higher profit when renting it out and then refinancing it. Investors will choose to do this repeatedly with multiple properties to get significant returns while lowering risk from only focusing on one property.
The Pros
- You can purchase properties with cash. This can help minimize risk as you don’t need to rely on a mortgage or other options.
- Refinancing allows you to access your original capital plus the rental income. This can get you higher profits as you earn an additional income through consistent rent payments for as many years as you want.
- You keep all the properties you invest in. You gain access to a long-term real estate investment rather than a short-term flipping project.
The Cons
- You rely on tenants. This can cause you to go periods of time without tenants, leaving you with a gap in earnings for a time and forcing you to pay necessary costs.
- There is no certainty that it will be cash flow positive in the beginning. Certain properties might be more than they are worth initially, from mortgage, insurance, and a tenant gap.
- It is much more time and energy-intensive. You now have a long-term investment on your hands as well as tenants to manage. From the initial renovations to the consistent upkeep, you will have your hands full.
Which Investment Method Should You Consider?
Before choosing this method or a property, you will want to focus on a few specific factors.
Regarding the flip & fix method, you want to focus on the location. If you choose a property in a less-than-ideal location, it will be more challenging to sell later—secondly, the house’s condition.
While you are going to repair it, you don’t want to choose a property that will drown you in renovations you can’t afford or don’t have the time for. Lastly, understand what your funding options are. Seeking out a business partner or a separate financing option can help reduce the risk on your end, allow you to start the process quicker, and earn a higher profit in the future.
When it comes to the BRRRR method, you are facing a much longer-term investment in your portfolio. However, there is the possibility of holding multiple properties under this method, and this can bring in more wealth if the properties are successful after the renovations and renting.
The risk of this investment type is higher as you become reliant on outside forces such as tenants and their lifestyles within your properties. Your time and energy might also be needed more in this method. However, this could be the best option if you are looking for higher profits and to widen your portfolio.
Both methods depend on your budget, risk levels, and the time you are prepared to invest in it. Before choosing, it is important to consider these factors to ensure you select the right one for your portfolio. If you seek to lower your risks and obtain a loan or have further questions, contact the team at KC Investor Funding.