BRR vs. BRRRR: Key Differences for Investors to Understand
What separates the BRR from the BRRRR method, and which one builds wealth faster.
Austin Beverigde
Tennessee
, Goliath Teammate
As a real estate investor, navigating the nuances of financing strategies can be overwhelming. You might have heard of the BRR and BRRRR models, but understanding their differences and applications is crucial for maximizing your investment potential. This article breaks down these two refinance models to help you make informed decisions.
Quick Answer
The BRR model stands for Buy, Rent, and Refinance, while the BRRRR model adds a fourth step: Repeat. The primary difference is that BRRRR emphasizes the cycle of reinvesting equity from one property into another. Investors should choose BRR for a single investment strategy and BRRRR for scaling their portfolio over time.
Understanding the BRR Model
The BRR model is a straightforward approach for real estate investors looking to build wealth through rental properties. Here’s a breakdown of its components:
Steps in the BRR Model
Buy a property at a low price.
Rent it out to generate income.
Refinance to pull out equity for future investments.
Example Scenario
Imagine you purchase a duplex for $200,000. After making improvements, you rent it out for $1,500 a month. After a year, you refinance the property, increasing its value to $250,000. You can now pull out $50,000 in equity to invest in another property.
Exploring the BRRRR Model
The BRRRR model builds on the BRR strategy by emphasizing the importance of repeating the process to grow your portfolio. Here’s how it works:
Steps in the BRRRR Model
Buy a property at a low price.
Rent it out to generate income.
Refinance to pull out equity.
Repeat the process with the new equity.
Example Scenario
Using the same duplex example, after refinancing and pulling out $50,000, you buy a second property for $150,000. You repeat the process, renting it out and refinancing again to continue building your portfolio.
Cost Considerations
Both models involve costs that can impact your profit margins:
Closing costs for purchasing and refinancing.
Property management fees if you hire someone to manage rentals.
Maintenance and repair costs for the properties.
Tools and Resources
To effectively implement either model, consider using the following tools:
Real estate investment calculators to assess profitability.
Property management software for efficient rental management.
Financial planning apps to track your investments and expenses.
Timelines for Each Model
Understanding the timelines involved can help you plan your investments better:
BRR: Typically, the entire process can take 6-12 months.
BRRRR: Expect a longer timeline as you repeat the process, usually 12-24 months per cycle.
Checklist for Investors
Research local real estate markets for potential properties.
Calculate your budget, including purchase and renovation costs.
Identify reliable contractors for renovations.
Find a trustworthy property management service if needed.
Keep track of your expenses and income to ensure profitability.
Stay updated on market trends to make informed decisions.
Common Mistakes to Avoid
Here are some pitfalls to watch out for:
Overestimating property value after renovations can lead to poor refinancing outcomes.
Neglecting to factor in all costs, including hidden fees, can erode profits.
Failing to research rental demand in the area may result in prolonged vacancies.
Frequently Asked Questions
What is the main difference between BRR and BRRRR?
The main difference is that BRR focuses on buying, renting, and refinancing a single property, while BRRRR emphasizes repeating the process to build a larger portfolio.
Can I use BRRRR with any type of property?
Yes, BRRRR can be applied to various property types, including single-family homes, duplexes, and multi-family units, depending on your investment strategy.
How long does it take to see returns with these models?
Returns can vary based on the property and market conditions, but typically, investors can expect to see returns within 6-12 months for BRR and 12-24 months for BRRRR.
Is it necessary to hire a property manager?
While not necessary, hiring a property manager can save time and ensure that your properties are well-maintained and rented out efficiently.
What should I do if my property value doesn’t increase as expected?
If your property value doesn’t increase, consider reevaluating your renovation strategy, improving marketing efforts, or adjusting rental prices to attract tenants.
