BRR - What does it really mean?
What is BRR?
BRR means Buy, Refurbish, Refinance. It is a technique and not a strategy, the main strategy it is often paired with is Buy To Let.
The BRR or Buy, Refurbish, Refinance is a popular strategy for Buy to Lets whereby investors purchase properties, carry out refurbishments, refinance them with a mortgage and then rent the property out. This strategy can be used not just into BTLs but also alongside other property strategies like HMOs and commercial property projects.
BRR is a very popular technique among investors as it allows them to add value to a house and rapidly scale up their property portfolio by increasing their Return On Investment (ROI) significantly. This also allows them to reutilize their money to purchase more investment properties and release equity from them through re-mortgaging.
The principle of BRR strategy is very simple--
· Buy a property for below market value and in need of repairs and additional works.
· Refurbish the property to a higher standard.
· Refinance the property according to the new higher value and get (all or some of) your money back to enjoy a higher rate of ROI.
· Repeat all over again as many times as you can and grow your property portfolio.
Buy, Refurbish, Refinance: Tips for Each Step
The first step to BRR strategy is “B”, which means to buy. You need find and purchase a property Below Market Value (BMV). When searching through property listings, keep in mind that a property that is distressed and rundown tends to be of a lower value and has a higher chance to negotiate a better deal.
Location is also a variable in buying a property. Make sure you do thorough research in your investment area to get an idea of what the property could be revalued at and how much rent it could achieve.
In this initial step, remember exactly what your end goal is with regards to numbers and offer and purchase according to your numbers. Be sure on exactly what you can offer and negotiate to the best of your ability. Always remember to be lead by numbers rather than emotions to ensure you make a sound property investment. There is no such thing as the perfect deal, there is however, well calculated deals that hits several your criteria which will help you reach your goals.
The refurbish stage is where you can increase the value of the property. Make sure you have a solid understanding of the works require to get the house up to scratch in order to rent it out for the highest rent possible, before you purchase the house. You might need to take your builder with you before you buy the property to ensure the numbers work.
Property investors are advised to select refurb projects that will yield a high return. These works may include:
· Kitchen update
· Updating bathrooms
· Roof repairs
· Additional bedrooms
Every upgrade or repairs, low-cost or high-cost, will boost the appeal of your property and will worth your property more than when you bought it. Just be cautious enough that you do not overspend on refurbishment where you will not see a return on your investment.
It is also really helpful to get a local letting agent to advise you on what tenants in the area look for and require, to ensure you can rent the room out quickly and reduce voids over the coming months and years. Make sure the work you do is what tenants want, it is for them to live in, not you, and it is far too easy to get personal taste, desires and requirements confused with that the actual tenant in the area wants and needs.
This is the third and final step in BRR process - refinance based on the new value of the property. A property may increase in value when:
· Property values in the area have increased over time.
· The property may have originally been purchased below market value.
· The owner added value to the property (more bedrooms, extensions, additional garages etc)
Refinancing after refurbishment will allow you to acquire loan at a percentage of the property’s appraised market value. It will let you cash out and utilize the initial funds and refurb costs, and reinvest the money to purchase your next rundown properties with the benefits of a long-term mortgage.
This step can be the most challenging part of the BRR method as certain lenders will have specific requirements for the refinancing process. Each lender will have a different criteria which will differ as well if you buy in a company name or your personal name. Here are a few points to consider:
· You must own the property
· Your property may have to be rented out for a certain period of time before they consider the revaluation and ASTs (tenancy agreements) might need to be provided
· A good credit score is often an important factor
Pros and Cons of the BRR Strategy
Before diving into this particular technique, weigh up the pros and cons to make sure that this is the right investment choice for you:
· You can use this leverage build a property portfolio.
· You’ll have the ability to make a passive income.
· You can potentially achieve high ROIs
· Possible reduced maintenance fees for the years following as the property has been newly refurbished.
· You can repeat the process with newly released funds
· BMV properties might require major works and refurbishment might be costly.
· Refurb of the property can be stressful or expensive if you haven’t factor all costs and obtained a proper build quote before purchase
· The potential of a longer than expected timeline to renovate.
· The risk of being unable to refinance at the desired amount – lenders are often unpredictable, especially in the current market and you might not achieve the revaluation that you have hoped for.
Though the BRR technique is known to be a highly effective strategy, there are drawbacks to it as well. It is therefore important to consider all possibilities before planning your next move. These potential risks can be mitigated through proper research and due diligence. It’s important to understand the local market where you are going to buy your property.
Once you get familiarized with this model and understand how this works, you will surely see its efficacy and will be able to grow your portfolio efficiently in this way.