The buy refurbish refinance strategy, often referred to as the BRRR 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.
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.
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.
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