Buy to Rent or Fix and Flip

The world is an ever-changing place, particularly when it comes to the economics of real estate.

If the majority of your income is tied to the housing market and you care about maximizing your potential profits, then it’s vitally important that you watch the trends.

That’s why today, we’re talking about the most popular methods for making money through real estate in 2022.

The classic fix and flip have been around for years and operate on a pretty basic set of principles.

Houses need renovation every decade or so, and renovation takes a lot of time, money, and effort. When people fix and flip, they find a third party – like a bank or a hard money lender – willing to put up most of the money while putting up a small percentage and their time and effort. Some are skilled workers who do most of the renovations themselves, while others contract people/companies to do those renovations. When the renovations are complete, they sell the house to turn a profit.

There’s a fair amount of work involved in fixing and flipping properties, but it also allows buyers to pay back their loans quickly, minimizing interest repayments.

Of course, the problem here is that it doesn’t generate any passive income. That being said, the more you do this, the more of a portfolio you’ll build, demonstrating to lenders that you have experience. Lenders will be willing to give you more lucrative terms, and if you’ve managed to accrue some capital, you won’t need to borrow so much on your first rental property.

Now it’s worth saying that not all fix and flippers will want to move on to a buy to rent model and that not all who buy to rent will need to start with fix and flip.

Although buying to rent is, for the most part, a source of passive income, it does have a few major drawbacks.

For one thing, you run the risk of bad tenants.

Now, bad tenants are far from a given, and there are plenty of ways to deal with them if a negative situation arises, but that doesn’t change the fact that if you’re not much of a people person, then you might want to avoid renting unless you have enough income to hire a property manager.

The other drawback to renting, as we mentioned earlier, is that the output is long-term. When you buy to rent, you’re essentially investing a lot up front in the interests of long-term gain.

So if Fix and Flip mean selling a house before you’ve made a major profit and buying to rent runs the risk of handing over a large percentage of your profits to that third party we mentioned earlier, what’s the best way to maximize your profits in the current housing market?

Well, it turns out there’s a third method – one that combines the benefits of both fixes and flip and buy to rent, with far fewer drawbacks – and it’s called BRRRR.

Buy, Renovate, Rent, Refinance, and Repeat – that’s the name of this game. The trick here is that once you’re renting out one property, the value of that property will be much higher, and third parties will be willing to accept that property as collateral on loan. That way, you can either use the property as leverage to get a better deal on your next investment or sell at a far better price than you would’ve been able to before. Once you’re done, you can start over again with more capital (it is good idea to have your hard lender money lined up and ready for the next real estate investment project).

It’s not perfect because it does still require enough capital to invest upfront without excessive loan repayments, but many experts now agree that the BRRRR method is one of the best ways to maximize your real estate profits.