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OK so we've all played Monopoly where we race around the board trying to avoid jail and building up a property empire. But how do you do that for real and how can you do that with limited money?
The answer is in our guide to the BRRR investment strategy (buy, refurbish, refinance, rent)
The BRRR strategy is a hugely popular property investment strategy that involves buying a property, renovating it, and then refinancing it to pull out your initial investment.
Imagine being able to use one deposit and you’re able to buy multiple properties, instead of just one... that’s the real attraction to the buy, refurb, refinance, rent model.
What if you don’t even have a deposit saved up and you have a limited amount of money?
We will also discuss how you can get started as a complete newbie and with little to no cash too!
In this guide, we’ll also look at how you can structure a BRRR project too and what you should be aware of, so you don’t make any costly errors.
Meet Rhian, who is one of my mentees on our Property Basecamp Premium mentoring program. She is a lovely lady based in Wales and she is something of a BRRR expert these days having appeared on the last season of Homes Under the Hammer on the BBC.
Rhian, has a portfolio in double figures and is showing no signs of stopping.
If you would like to follow in Rhian’s footsteps, you can by mastering property strategies that can change your life – we are very different, we mentor people one to one and provide support ongoing forever, without the huge price tags others charge for education.
We are not a property course seller or a guru - we provide real and personalised property mentoring and you only pay one fee.
CLICK BELOW TO SEE MORE ON OUR MENTORSHIP PROGRAM
So How Can You Find Ideal Properties that Work as a
BRRR Deal!
The first step with the BRRR strategy is to find an ideal property. This means finding a property that is 100% in need of some TLC but it crucially has the potential to increase in value once it has been renovated and fully refurbished.
I like to call these ugly duckling properties – doer uppers or fixer uppers!
Some of the things you should look for include:
A property that is in a good location with a strong rental demand.
A property that is below market value so that you can make a profit by renovating it.
A property that has good bones, meaning that it’s structurally sound and doesn't need any costly major repairs.
You can find plenty of fixer uppers on property portals and also at auctions. This makes actually getting started with this strategy relatively straight forward.
How to Make Sure the Deal Stacks Up!
You need to follow these steps to ensure the numbers stack up and make a BRRR viable.
1. What is the cost of the property
2. What is the potential DUV (done up value)
3. What is the cost of works to refurbish the property
4. What are the finance costs if using bridging finance
5. What is the rental income potential
6. What are the buy to let mortgage options open to you
And finally…
7. How much money can you pull back out of the project!
The above will allow you to analyse the projects costs and the desired outcome. Using property deal calculators to crunch the numbers and costs is a must. We provide deal calculators for most creative strategies within our training to make life easy.
How to Structure a Purchase Using Bridging Finance
Once you have found an ideal property, you will need to structure the purchase using either your own cash or the bridging finance option we mentioned earlier.
Bridging finance is effectively a short-term loan that is used to bridge the gap between the purchase of the property until after you have refurbished the property and you then take out a buy to let mortgage on the property.
When structuring a purchase using bridging finance, you will need to work with a mortgage broker to find a bridging lender who will offer you a loan. The lender will assess your financial situation and the project itself to determine how much money you can borrow.
They will also require you to provide a deposit, which is typically 10 to 20% of the purchase price depending on the lender and the size of the project.
Once approved, access to the money is usually very quick. Which means you can proceed and move forward with a quick purchase.
You will also need some capital to pay for the refurb costs OR you could look at a development loan which is a short term loan similar to bridging that you can use to cover the cost of the works on the property.
What About Buying with Your Own Cash
If you were buying with cash, then it’s even more straight-forward and much quicker. The other obvious bonus with using your own cash is you have zero finance costs.
However, you’re unlikely to pull out all your money in the cash purchase scenario. But it still benefits you massively as you can then lend 70% of the increased done-up value (DUV) when you refinance the property, which will potentially get you most of your money back out upon refinancing.
This would be a huge sum to then go and jump into another project and your new tenants would be paying the mortgage.
Dont forget... once you pull out every bit of capital you put in - you are then generating an infinite return on investment and thats unheard of in most other scenarios of investing! BRRR is powerful when done correctly i'm sure you'll agree.
How to Add Enough Value to the Property to Enable You to Refinance and Pull Your Capital Out:
Once you have purchased the property, you will need to renovate it to add value.
The amount of value you need to add will depend on the purchase price of the property and the amount of bridging finance you have used. (we are going to assume you have used bridging finance)
As a rule of thumb you should aim to add at least 20% of the purchase price in value.
There are a number of ways to add value to a property, such as:
Cosmetic updates, such as painting, flooring, and new fixtures and fittings.
Structural repairs, such as fixing a leaky roof or replacing the tired windows.
Functional improvements, such as a new modern bathroom or kitchen.
Small extensions to improve layout and usability.
New skirting boards and internal doors can make a world of difference.
Things to watch out for:
1. What is the ceiling price as in the most the property would be valued at?
2. You cannot overspend on the cost of works, think about its end value
3. Don’t get emotionally attached making the property perfect in every way
4. Don’t just assume builders will project manage themselves!
5. Keep a tight grip of the schedule of works and cost of works during the process.
Once you have completed the renovations, you can then refinance the property, by that we mean you obtain a buy to let mortgage on the property.
Once this is in place and funds are released, you pay back the bridging lender.
This will allow you to pull out your initial investment and use it to buy more properties.
But What If You Don’t Pull All Your Capital Back Out?
It’s not always possible in the current market to pull all your cash back out of a BRRR project but that doesn’t mean it’s not a good project!
Think about it this way…. The whole point of a BRRR is first to acquire property and secondly to recycle your cash deposit so you can purchase more property and add to your portfolio more quickly than the traditional method.
But the end result is also to rent the property out to tenants. So, if you have to leave a few thousand pounds in the property, you will eventually get it back out in rental income profits.
The BRRR strategy is very forgiving because of this and its why many property investors look to grow their portfolios this way.
Why Investors Choose the BRRR Strategy
The BRRR strategy is a popular choice for investors because it can be a relatively quick and easy way to build a property portfolio. By following the steps outlined above, you can buy a property, renovate it, and refinance it in a matter of months.
This can help you generate a profit on your investment and free up capital to buy more properties.
In addition, the BRRR strategy can be a relatively low-risk investment strategy. By using bridging finance, you can finance the purchase of the property without having to put down a large deposit.
However, it is important to note that the BRRR strategy is not without its risks. You need to be prepared to do your research and find good deals on properties.
You also need to be prepared to do the work to renovate the properties. If you are not willing to put in the time and effort, then the BRRR strategy may not be right for you.
Overall, the BRRR strategy can be a great way to build a property portfolio quickly and easily. However, it is important to do your research and understand the risks involved before you get started.
I Have no Cash So How Do I Get Started??
If you're looking to get started but you don't have enough money to put into a BRRR project then you could work with an investor that does have the capital and cut yourself in on the deal.
Many investors have the cash but simply don't have the time to manage a project like this. Many investors will lend you money to do a project in the form of a joint venture.
This means you agree to do the project together, they typically provide the cash and you arrange and manage everything else for an agreed percentage of the profits.
To do this I would suggest you are the type of person who is very methodical and analytical, someone who is detail focused and motivated with a keen eye on the numbers at all times.
Project managing a refurb for a newbie is a huge undertaking and we suggest you go into it with your eyes wide open. You also need to have any joint venture set up correctly to protect all parties.
Let's break it Down Into A Step by Step Process!
Step 1:
Find a property you can afford to buy up to 70% of its value – so if you have £70k to play with then your top line property you should be looking at is around the £100k mark.
Step 2:
Do your analysis! Look at the current value, the cost of the works, the done up value at the end and the cost of the finance. You also need to factor in how long the work will take and what any holding costs will be during that time (utility bills on the property, finance costs etc)
Step 3:
If you find a viable project and property… It’s time to speak with brokers about your lending options. Bridging finance lenders will want to know about the project as well as you, so make sure you’ve done your numbers and costing and you have a builder lined up that has a track record of doing similar jobs.
Step 4:
Bridging is approved and you can purchase the property! It’s go time!!!
Step 5:
Once you get the finance the clock is ticking. Bridging lending is expensive so you need to get the refurb done as quickly as you can. You will have spoken to builders and already accounted for a window of time for the refurb, now you need to manage that process and make sure things stay on schedule. A project taking a month longer than expected means another month of lending fees that strip away profits.
Step 6:
The second the property is finished you need to find tenants, you should be advertising the property prior to it being completed and have them lined up and ready to move in. The whole point of this is you start generating rental income as soon as you possibly can.
Step 7:
Get three different agents to give you a valuation and speak to them about the work you have carried out. Show before photos so they can see the process visually to impact there valuation. Once you have these you could go get your own RICS valuer out to give you a valuation for a few hundred pounds. This will give you some idea of what you can then lend as in obtaining the buy to let mortgage.
Step 8:
Speak to ‘buy to let’ mortgage brokers and lenders to see what types of mortgage offers you can get. Then choose a lender and apply for a mortgage. They will then send their own RICS valuer to the property to value it and then the lender will tell you what you can lend based on the valuation. This then tells you what you are able to pull back out in capital.
Step 9:
Once you have pulled out all or most of your capital you are left with a property that has been refurbished and is tenanted giving you rental income and…
You have cash in the bank ready to repeat the process again!
Property portfolio building is under-way! You’re playing real life monopoly and recycling that one deposit you had in and out of properties as you add assets to your portfolio.
You don’t need hundreds of thousands to build a portfolio, you just need the knowledge of how to utilise lending and how to structure the process.
So if you want to get into property but have a mentor who can help you and advise you ongoing forever – there’s only one option in the UK to consider.
