Cracking the BRR Property Strategy in the UK Market

Nikka Sulton

Cracking the BRR Property Strategy in the UK Market

The Buy Refurbish Refinance (BRR) strategy is a widely used property investment method in the UK. It merges the advantages of buy-to-let, optimizing returns by minimizing invested capital through refinancing while increasing monthly rental income.

If you’re new to BRR, don’t fret. It’s not overly complicated, especially if you’re acquainted with buy-to-let fundamentals. Beginners can begin with buy-to-let guides. In this piece, we’ll examine BRR, its mechanics, provide a property illustration, and explore variations like the BRRRR method.

What’s BRR? And what is the difference with the BRRRR Method?

The Buy Refurbish Refinance (BRR) strategy involves purchasing a property in need of upgrades. Post-renovation, the property is refinanced at a higher value, enabling the recoupment of a substantial part of your initial investment. Additionally, the enhanced property has the potential to generate increased rental income.

What about the BRRRR method?

The BRRRR method, which stands for Buy Refurbish Refinance Rent and Repeat, is essentially the same as the BRR strategy. It involves renovating a property, refinancing it at a higher value, and then renting it out. The only distinction is the inclusion of the “Rent and Repeat” steps in the acronym. It’s important to note that while BRRRR is a common term in the United States, in the UK, we typically refer to it as BRR.

How does BRR work?

1. Find a property in need of updates:

Start by locating a property requiring modernization. It should be livable with basic utilities in order, like water, a working boiler, and electricity. However, updates are needed to meet modern standards.

2. Crunch the numbers:

Property research is crucial for any investment, ensuring you’re comfortable with potential returns. BRR properties involve more complexity. A spreadsheet in our BRR property example later in this guide can help you visualize the numbers.

Estimating refurbishment costs may be challenging at first, but with experience, your estimates will become more accurate. In my experience, a complete renovation of a 3-bedroom property in the northern region typically ranges from £15,000 to £20,000.

However, if you have ample free time and possess various trade skills, you could potentially reduce refurbishment costs to around £6,000 to £8,000 by doing the work yourself. It’s important to note that self-renovation should only be pursued if you have the necessary experience or are willing to invest time in acquiring the required skills.

3. Acquire the property:

The property purchase process can be complex, so I won’t delve into it here. I recommend checking our comprehensive guide on this topic. When buying with a mortgage, you’re likely to pay the property’s actual value, and the process will take longer compared to a cash purchase. Once you’ve successfully acquired a property in need of modernization, we can proceed to the next phase – refurbishment.

4. Renovate the property:

The refurbishment phase within the BRR strategy is often considered the most critical and, at times, stressful for achieving a remarkable return on investment. This stage should primarily focus on interior enhancements, with limited structural changes unless absolutely necessary. Key tasks include updating kitchens and bathrooms, installing new flooring throughout the property, and applying a fresh coat of white paint to the walls.

Balancing renovations is essential to avoid overindulging in luxurious features like real hardwood floors or extravagant marble bathtubs.

How much will the refurbishment cost?

Refurbishment costs vary by location. For instance, refurbishing in Liverpool might cost around £15,000, while a similar project in London could run you £30,000. Since many novice investors tend to focus on properties in the North, particularly in Liverpool, the following cost estimates for a two-bedroom property refurbished in 2023 should be helpful:

Skip hire and rip-out = £850
Exterior doors = £1,300
Plastering: £1,000
Interior doors = £900
Painting = £1,600
Flooring = £900
Kitchen and installation = £2,900
Bathroom and installation = £2,200
Other general expenses = £520
Contingency fund (20%) = £2,400

Total Refurbishment Costs = £14,600

How to add the most value to your property?

Adding value to your BRR property involves essential refurbishments like new kitchens and bathrooms. Additionally, cost-effective methods, such as garden decking or upgrading radiators and light fixtures, can enhance property value. Effective ways to add value include:

Convert garage or attic into a bedroom = +15%
Install new flooring and paint = +10%
Upgrade the kitchen = +8%
Revamp the bathroom = +8%
Add garden decking = +7%
Create a driveway = +5%
Freshen up exterior with paint = +2%
Incorporate high-quality fittings = +2%

Once your property is ready, the next step is renting it out. Streamline the process with a letting agent, especially considering legal paperwork and tenant screening. Generating rental income promptly is preferred for many investors.

The final step is refinancing the property, obtaining a new mortgage at a higher value to pay off the old one and potentially leaving you with extra funds. Keep in mind that the lender won’t determine the property’s value; you provide your estimation, which they will assess. It’s better to be optimistic, as they won’t offer more than your value, but they may down-value it if they believe your estimate is too high. If dissatisfied, seek another valuation.

Tip – Make the valuer’s job easier with a ‘valuation pack’ including local comparables, a list of property changes and dates, and before-and-after pictures.

How to buy a property using the BRRR method?

When seeking to purchase a property in poor condition or for a quick acquisition, traditional mortgages may not be the best choice. Such properties are often labeled “uninhabitable,” and the timelines for auction purchases don’t align with traditional mortgage processing. In these cases, investors often opt for bridging loans to swiftly secure funds alongside their deposit.

Bridging finance provides short-term funding to acquire a property, undertake renovations, and then either sell or refinance it with a buy-to-let mortgage for long-term rental purposes. To navigate this process successfully, it’s essential to have a clear understanding of property financing and a well-defined exit strategy, whether that involves a sale or a mortgage. Collaborating with a broker is vital to comprehend the full spectrum of financial considerations in this endeavor.

Pros & Cons of BRR

Pros of Buy Refurbish Refinance (BRR):

Increased returns, as shown in the example above.
Ability to recycle a significant portion of invested capital for buying more rental properties after refinancing.
Ownership of a high-quality property post-refinance, attracting better tenants and commanding higher rent.
Reduced tenant turnover.
A mix of robust rental income and asset appreciation.

Cons of Buy Refurbish Refinance (BRR):

Higher costs compared to a standard buy-to-let property due to refurbishment and refinancing expenses.
Responsibility for utility and council tax payments during property void periods.
Renovation process can be highly stressful, but hiring a good project manager can mitigate the stress.
Risk of down-valuation, potentially impacting your Return on Capital Employed (ROCE).

Is buy refurbish refinance (BRR) a risky strategy?

Investments inherently come with risk, making it vital to perform extensive due diligence on the property you intend to work on. It’s essential to anticipate and prepare for potential surprises during the refurbishment. For beginners, a prudent approach involves setting aside a contingency fund of approximately 20%. This means inflating your initial estimated refurbishment costs by 20% to accommodate unforeseen circumstances. Additionally, we advise investing in an RICS property survey, which identifies major property issues. Following these steps is a sound way to mitigate risks associated with a BRR project.