BRRRR Method for Beginners

Nikka Sulton

BRRRR Method for Beginners

The buy refurbish refinance strategy, often referred to as the BRR method, is a popular approach to property investing. It combines buy-to-let benefits with increased returns by reducing the invested amount after refinancing and boosting rental income.

If you’re new to this strategy, it’s understandable. Understanding the buy refurb refinance method isn’t too complex, especially if you’re familiar with buy-to-let basics. If not, consider reviewing our beginner’s buy-to-let guides first.

In this article, we’ll explore what the BRR method involves, how it works, provide an example, and discuss variations like BRRR (Buy refurbish refinance rent) and BRRRR (Buy refurbish refinance rent repeat).

What is the BRRRR property method?

The BRRRR property method, which stands for Buy, Refurbish Refinance Rent and Repeat, offers a clearer description of the commonly known BRR property investing method.

Usually, when property investors talk about BRR, they involve renting the property before or after refinancing and then repeating the process with another property. However, they often exclude the extra ‘Rs’ when naming the strategy.

Properties purchased through the BRRR strategy are typically acquired below market value and in need of refurbishment. After completing the project and adding value, the property is mortgaged based on the new valuation, allowing you to withdraw your initial investment and rent out the property.

The essence of BRRR is to use your initial investment to facilitate the deal and retrieve it after project completion. The beauty of this strategy? With careful deal selection, you can repeatedly recycle your cash, extracting your funds each time.

BRRR buyers often employ bridging finance for the purchase, repaying the bridging loan once the property is refinanced with a buy-to-let mortgage.

The Types Of BRRRR Properties In Real Estate

The BRRRR method’s strength lies in its versatility. It’s applicable to various property types, such as:

Single-family homes
Townhouses
Condominiums
Apartment units
Duplexes, triplexes, and fourplexes

Pros of BRRR

One of the advantages of employing the BRRR strategy is the ability to recycle the same pool of funds repeatedly, provided you make prudent deal choices and conduct thorough due diligence. By extracting your capital from each deal, you can rapidly expand your property portfolio without leaving your initial investment tied up.

Many BRRR investors opt for bridging finance for this strategy, which can offer a negotiating edge. Bridging finance is designed for speed, often allowing you to complete purchases faster compared to traditional mortgages.

It’s essential to note that the property must experience a significant increase in value to make this strategy financially viable. The post-refurbishment market valuation should leave you with at least 25% equity based on the new value. This equity should cover the repayment of the bridging loan, including any accrued interest and fees, and ideally, leave you with funds to reinvest in your next deal.

Another benefit of the BRRR strategy is its capacity for rapid property portfolio growth compared to conventional buy-to-let purchases, where you typically save a 25% deposit, leave the funds locked in, save another 25% deposit for the next property, and so forth.

Utilizing bridging finance also allows you to acquire properties that are currently unmortgageable, such as those in need of extensive repairs or lacking essential amenities like a functional kitchen or bathroom. This approach demonstrates how value can be added through refurbishment before refinancing with a buy-to-let mortgage once the property is in suitable condition.

Cons of BRRR

Generally, BRRR deals demand more effort, time, research, and due diligence compared to turnkey buy-to-let investments. Locating suitable deals can be challenging as you seek properties below market value that require renovation to increase their worth.

Managing BRRR projects can be time-intensive, involving coordination and oversight of a team of tradespeople to ensure satisfactory work quality. Additionally, unexpected property issues may arise during refurbishment, underscoring the importance of thorough financial planning and contingency allowances.

In summary, BRRR represents a valuable property strategy that, when executed wisely, can accelerate the growth of your property portfolio compared to certain other investment approaches.

How does Buy Refurbish Refinance work?

I’ve simplified the BRR strategy into clear steps:

1. Find a property needing updates:

Locate a habitable but outdated property that requires modernization.

2. Crunch the numbers:

Research property returns, including estimating refurbishment costs. Typically, a 3-bedroom property in the north may need £15,000 to £20,000 for refurbishment. If you have time and skills, you could reduce costs to around £6,000 to £8,000 by doing some work yourself.

3. Purchase the property:

Acquiring the property involves a detailed process, which I recommend exploring in our guide. Buying with a mortgage may take longer than with cash.

4. Refurbish the property:

This phase is crucial for a good return. Focus on interior updates, like kitchen and bathroom replacements, new flooring, and fresh paint. Balance improvements with cost-effective choices, avoiding excessive luxuries.

Buy, Rehab, Rent, Refinance, Repeat (BRRRR): Tips For Each Step

Executing the BRRRR Method involves a specific sequence of steps, each with its considerations:

Buy:

The initial step involves acquiring a distressed property requiring renovations. Securing traditional mortgage financing for such properties can be challenging due to difficulties in property valuation and meeting loan requirements. Alternative options like home equity lines of credit (HELOCs) or hard money loans may be explored but entail higher risks.

When buying a distressed property, it’s crucial to calculate the after-repair value (ARV). ARV estimates the property’s value post-renovation by comparing it to recently sold similar homes (comparables) in terms of size, bedrooms, bathrooms, age, build type, and condition. Adhering to the 70% rule is advisable—don’t invest more than 70% of the property’s ARV. For example, for a $300,000 ARV home, the purchase price should not exceed $210,000.

Rehab:

During the rehabilitation phase, prioritize safety and code compliance improvements. Subsequently, focus on upgrades that genuinely enhance property value, such as kitchen and bathroom renovations, enhancing curb appeal, and installing energy-efficient features. It’s essential to establish a realistic budget and timeline before commencing the project.

Rent:

Before proceeding to the next step of refinancing, it’s crucial to secure tenants for your property, as lenders typically require occupancy before refinancing.

When selecting tenants, prioritize qualities like a history of timely payments, stable employment with consistent income, a positive credit report, absence of criminal or eviction records, and positive references. Gathering this information involves meeting potential tenants, having them complete applications, checking their credit reports, seeking references, and conducting background checks while ensuring compliance with housing laws.

Determining the rent should strike a balance between being fair to tenants and generating positive cash flow for you. Calculate this by deducting total homeownership expenses from the monthly rent. For instance, if the rent is $1,500, and the mortgage payment is $800, the monthly cash flow is $700, barring additional costs. Consider rental rate comparisons to set the right price.

Refinance:

In the BRRRR method, a cash-out refinance on your investment property enables you to acquire funds for purchasing another distressed property to renovate and rent out. To proceed, find a lender offering cash-out refinancing and meet their loan requirements.

While specific lender criteria may apply, you generally need to meet minimum credit score (typically around 620), maximum debt-to-income ratio (usually around 50% or less), and have equity in the property. Some lenders may also require a minimum ownership duration before approving a cash-out refinance. Prepare for an appraisal and potential additional expenses, such as closing costs.

Repeat:

The final phase of the BRRRR Method involves repeating the previous steps in the same sequence. To maintain efficiency, document your experiences and learn from any past mistakes if you intend to continue applying this strategy.

What deposit do I need using the BRRR strategy?

If you’re not buying with cash and require financing, consider bridging finance. This short-term solution often demands a 30-35% deposit. You should also have funds for property renovations. In certain cases, the lender might cover up to 100% of the refurbishment costs.

Can First Time Buyers use the BRRR strategy?

Yes, it’s possible, but trust and experience in your team are crucial. Do you have a reliable builder? How will you oversee the project? Have you selected the right tradespeople? Is your property research thorough, and are refurbishment cost estimates accurate? Confirm rental income and demand in the area by consulting estate agents. Thorough research is key to project success.

Is buy refurbish refinance (BRR) a risky strategy?

Every investment involves risk, so thorough due diligence is crucial. Assess the property carefully, and budget for potential refurbishment surprises. For beginners, consider a 20% contingency fund to account for unforeseen circumstances. An RICS property survey is advisable to identify major issues. These steps minimize risks in a BRR project.

The BRRRR Formula & How To Use It

How do you calculate BRRRR? Real estate investors should target an all-in cost, which covers the purchase price, repair costs, closing costs, and carrying costs, equal to or less than 75% of the After Repair Value (ARV) of the property. To simplify this analysis, you can use the BRRRR formula:

Maximum Purchase Price = (ARV x 75%) – Repair Cost

For example, if the projected ARV of a property is $100,000, your total investment should stay within $75,000.

It’s crucial for your deal to meet this criterion. Subsequently, you must assess it as a rental property. Using the projected ARV as the new purchase price, crunch the numbers to ensure the expected rental income can cover all your projected expenses, ensuring the property’s long-term sustainability.

When purchasing a distressed property, it’s essential to accurately calculate the ARV, which estimates the property’s value after renovations. To determine a reliable ARV, compare the property to recently sold similar ones in the area, considering factors like size, age, condition, and room count. This prevents overinvestment.

What Is The 70% Rule For BRRRR?

A commonly-used guideline in real estate is the 70% rule, suggesting you should not invest more than 70% of the property’s ARV. For instance, if a home’s ARV is $300,000, you should aim not to pay more than $210,000.

The “Buy” phase demands careful financial planning and an objective approach. It’s crucial to view this property as an investment and base decisions on solid financial reasoning rather than emotional attachments. With these considerations, you’ll be better prepared to pursue profitable real estate investing.

In the following sections, we will delve into the subsequent stages of the BRRRR method, starting with “Rehab,” to provide an in-depth understanding of how each step contributes to this potent investment strategy.