Many property investors have a desire to grow a property portfolio. The biggest barrier is having available funds to continue buying property.
Many investors would buy one, save up another deposit and then buy a second and so on.
The problem is this could take many years to build even a small portfolio of 3 to 5 properties.
So what can you do to speed up that process and do it with less capital?
The answer is.... B.R.R. (Buy refurbish, refinance)
Here's a detailed guide to the Buy Refurbish Refinance (BRR) investment model
What is the Buy Refurbish Refinance (BRR) Model:
The Buy Refurbish Refinance (BRR) investment model is a strategy commonly used in property investing. It involves purchasing a property in need of some serious TLC.
The idea is you renovate and refurbish it to increase its value, and then you refinance the property to release equity or generate cash flow for further investments.
Think of it as recycling your deposit, so you use it on one property and then when you have refinanced the property you should be able to pull out most of your money you used as a deposit, purely because you added so much value during the refurb process.
1. Research and Analysis:
Before embarking on a BRR project, conduct thorough market research to identify areas with strong rental demand and potential for property value appreciation. Look for properties that are undervalued, distressed, or require renovation. Evaluate the potential rental income and capital growth prospects in the area.
2. Financial Planning:
Determine your budget and investment goals for the BRR project. Consider costs such as the purchase price, renovation expenses, legal fees, stamp duty, finance costs, and contingency funds. Calculate the expected return on investment (ROI) to assess the viability of the project.
3. Financing the Purchase:
Secure financing for the property purchase. This is usually in the form of a bridging loan. A bridging loan is short term finance that is costly. You lend the money to purchase the property up to 80% loan to value (with most lenders.)
It's costly however bridging finance enables you to buy quickly and many people use them to buy auction properties. I'm sure you have seen Homes Under the Hammer before... where an investor buys at auction and refurbs the property over a couple of months and then either sells it or tenants it. Many of these investors would use bridging finance or cash.
Ensure you meet the lender's requirements and consider the terms, interest rates, and repayment structure that align with your investment strategy.
Typically you would only have the bridging loan until you refinance the property so its very short term lending (less than 6 months in most cases.)
4. Property Acquisition:
Identify properties that meet your investment criteria and negotiate a purchase price below market value where possible. Conduct thorough due diligence, including property inspections, surveys, and legal checks. Once the purchase is complete, obtain appropriate insurance coverage for the property.
5. Renovation and Refurbishment:
Engage with experienced contractors and professionals to carry out the necessary renovations and refurbishments. Obtain multiple quotes, establish clear timelines, and ensure all work adheres to building regulations and planning permissions. Monitor the progress regularly to ensure the project stays on track.
You can sometimes lend 100% of the cost of the refurb using a development loan - speak to brokers to understand criteria.
Another way to use less of your own capital is to lend the money from an angel investor and offer them a return on their money.
6. Valuation and Refinancing:
Once the property has been renovated, arrange for a professional valuation to assess the increased value. Work with a mortgage broker or lender to refinance the property based on the higher valuation. The refinanced amount should ideally cover your initial investment and provide additional funds for future investments. Sometimes you do have to leave money in the deal, but as long as your happy with the amount you get back then it stacks!
7. Property Management:
Consider whether you will manage the property yourself or hire a property management company to handle tenant sourcing, rent collection, maintenance, and other landlord responsibilities. Property management ensures efficient operations and maximizes the return on investment.
We advise you get a professional to take care of it as self management is no picnic these days due to heavy legislation surrounding tenants.
8. Cash Flow and ROI Analysis:
Evaluate the property's cash flow after refinancing, taking into account rental income, mortgage payments, property management costs, maintenance expenses, and other associated costs. Calculate the return on investment to determine the profitability of the project.
So imagine you have pulled all your initial investment back out - If you have managed to do this you have an infinite return on your money. You have acquired a property and have no money involved in the deal!
Yes of course you have a mortgage on the property but the tenants rental income is covering it so you have an infinite return and a property cash-flowing money. Not bad at all.
9. Repeat and Scale:
With the refinanced funds, you can repeat the BRR model by identifying and acquiring additional properties for renovation and refurbishment. As you gain experience and build a portfolio, you can scale your investments and increase your potential returns.
Investing using creative finance like 'bridging' allows you to grow a portfolio much quicker than investing the traditional way.
10. Risks and Considerations:
It is crucial to recognize the risks associated with the BRR model.
These may include unexpected renovation costs, delays in completion which means paying for bridging finance for longer period of time than expected, changes in market conditions, and potential difficulties in refinancing.
Conduct thorough due diligence, have contingency plans in place, and seek professional advice when needed.
The Buy Refurbish Refinance (BRR) investment model can be a lucrative strategy for property investors in the UK. By purchasing undervalued properties, renovating them to add value, and refinancing to release equity, investors can generate cash flow and build a profitable property portfolio.
However, careful research, financial planning, project management, and a comprehensive understanding of the market are crucial for success in implementing the BRR model.
One of our mentees, Rhian from Wales, specialises in this strategy and she has built up an impressive portfolio doing just this, she even appeared on the latest series of 'Homes Under the Hammer'.
If you would like to be mentored one to one and have lifetime access to genuine support for your property business - join the waiting list today to ensure you don't miss out.
Work with Paul and have him advise you on every step of your property journey.