Which is the better strategy?
The flip side of real estate investing
If you want to generate money with a fix-and-flip, then you have to actively find and work a new investment. It can be time consuming finding a good deal and is certainly highly market dependent, although both strategies do require this. But once a property is purchased, you have the ability to create large sums of money in a very short time frame with the fix-and-flip approach. If the work is hired out to professionals, you could easily be looking at five-figure returns in less than six months, depending on your profit margins, market, and expertise.
Fix-and-flip properties can be a lot more straightforward to manage as well, particularly for those who have experience working and managing rehab projects. The BRRRR strategy still requires the ongoing management and oversight of a construction crew in the desired rehab timeline, with the additional ongoing management of a tenant once the project is complete. Being a landlord isn't for everyone. Ongoing maintenance of the property, rental turnover, and the time and attention rentals require may not provide enough a return for the effort.
While national or worldwide recessions will certainly put a squeeze on many investors' plans and properties regardless of the scenario, the fact is, economies are cyclical -- what goes down will eventually go back up. However, what can have lasting and somewhat permanent effect is a local or regional change. If a large company leaves a small town, its main industry is lost, or if other issues arise, a market can stall indefinitely. With a fix-and-flip, you're able to exit your position in a short time frame and it would likely allow you to stay ahead of any long-term impacts like this. With BRRRR you could be stuck holding a rental in a market that has no demand and a property that won't sell for what you need.
When opportunity knocks
Cash flow is king in real estate, and for that reason BRRRR has the potential to provide better opportunities for many investors. Since both strategies begin with finding distressed, below- market real estate and adding value, the cost to acquire is relatively comparable. The big difference, however, is the ability to cash out on the investment while still benefiting from long- term cash flow from rental income and tax benefits of owning rental real estate.
With fix-and-flip, you're limited by both cash and time. Managing multiple rehabs can be done, but it can be stressful and will require a lot of management and a qualified team to help. Not to mention, if you want to generate money, then you have to actively find and work a new investment. The BRRRR method does have an active component to it, but it eventually allows the investor to build a portfolio of cash flowing real estate that can supplement any active investing you may have had to previously do. Plus you have the added bonus of tax benefits of owning long-term rental real estate.
The BRRRR strategy takes a long-term approach to real estate investing, which means short- term market impacts, such as a recession or decrease in real estate values, doesn’t hinder your investment as it would with a fix-and-flip. Negative market changes can result in negative returns with a fix-and-flip that's reliant on a set market value. While you can always hold it as a rental property, it may not be profitable if you didn’t intend to hold it long term or if you put more money into the property than makes sense for a rental.
There are always two sides to the coin
With any real estate investment, care must be taken to perform proper due diligence because any deal can turn into a bad deal if a critical component is overlooked. That being said, both BRRR and fix-and- flip can offer a great opportunity to investors who are looking to generate large returns in a short time frame. However, as always, it's essential to weigh your personal situation and your goals against the pros and cons of a given real estate investing strategy.