Updated: Jul 20, 2021
Todays blog is all about having the right knowledge and leveraging creative finance options to 10X your investing journey.
Many people are sitting on a sum of money that could enable them to invest in property, but they don’t know where to get started… and the idea for today’s blog came about because…
I had a call yesterday with a member of our Property BaseCamp programme, where we discussed how he could invest and not only invest but fast-track his own growth and add multiple properties to his portfolio each year. So today… I’m going to share with you – how you can invest in property with limited funds and which strategy to apply so you can power-charge you’re investing and build your portfolio.
So let’s talk investing and start by making some assumptions…
You have a pot of money let’s say it’s around £60K and you want to invest in a buy to let but you only have enough money to obtain one property with your £60k. Your long-term plan is to grow a portfolio and use that as your pension pot in the future… but you’re not sure how to do that with one relatively small amount of capital.
The good news is… you can apply a strategy and leverage alternative lending to recycle that £60k and buy more than one property over a period of time and then keep on repeating and growing a portfolio.
Ok so let’s look at a timeline of events and build this out…
In January (it could be any month; this is just an example to give you an idea on timescales). So in January… you see a property that needs some work doing to it. You know from analysing the local market if you carry out a refurb you can add substantial amount of value and you also know what it will rent for too.
For this strategy to work the numbers need to stack, so what strategy am I talking about here? Of course I’m talking about B.R.R.R. which stands for buy, refurbish, refinance and rent.
So let’s move through each part of this strategy…
Buy – A lot of people assume the first B stands for Buy but I like to think of it as ‘Bridge’ because you are going to use something called bridging finance to buy the property and not a mortgage.
You could use cash if you had enough to buy the property outright but for this example and most people out there you would be utilising finance and using less of your own money. (that's the idea)
So you would bridge the purchase using what's called a bridging lender. Now most bridging companies will lend you around 70% of the purchase price by way of a short-term bridging loan. So that leaves you needing to find enough money to cover the remaining 30% and enough to also cover any fees and legals too.
So in summary you lend 70% on a bridging loan and you put in 30% and this buys you the property.
Refurbishment - with the refurb you could be looking at sizeable costs depending on how much work is needed on the property.
Typically the type of property you would be looking for would need substantial works and not just a lick of paint here and there. Remember the key is to add as much value as possible and that happens by usually gutting the property from top to bottom, fixing any issues with electrics, leaks, damp etc and also possibly installing new kitchens and bathrooms and decorating to a good standard to achieve the maximum uplift in value.
You’re probably thinking this sounds expensive and your right it probably will cost a fair amount of cash. So you need to view the property and cost up the intended works properly to see if the deal stacks up for you or not.
So who funds the refurb? Well if you have enough money from your initial £60k you can fund all the refurb or potentially part of the refurb costs.
This is where you could leverage more finance called a ‘development loan’ this is separate to the bridge but bridging lenders typically also offer development loans too. But there is one big difference. In the right circumstances you can lend up to 100% of the cost of the works.
The two options are you obtain a 100% development loan OR you put some money in toward the refurb and you need a smaller development loan. Or the third option you cover the cost of the refurb yourself.
So let's recap... so far, we have bought the property, and now refurbished the property - the next part is refinancing the property and that’s really where the magic happens!
Once you have refurbished the property you will want to have a lender lined up to get a traditional buy to let mortgage on the property. Now the idea is ultimately you will refinance for a much higher amount as you added all that value with the refurbishment.
What you need is as high a valuation as possible from the valuer – the higher the valuation the more you can lend and the more cash you can pull out.
So when people say they pull cash out let me explain what they mean…
When you refinance onto a mortgage you get a lump sum of money that is then used to pay down all your lending, so you pay back what you lent on the bridging loan, the development loan and any broker fees and legals etc. You also pay your initial capital back (if possible).
What’s left after this is what you cash out and effectively withdraw to yourself.
(In the example below you can see cash out is just over £3,000 but that is in addition to pulling out 100% of the initial capital in the deal.)
So if you’re still with me.... you will now understand why people call B.R.R.R. the best strategy to recycle cash. Because what you are trying to achieve here is to pull back out as much of your initial money as possible and by doing so this means you can reuse that as a deposit to go again and repeat the process.
Example B.R.R.R. Investment Break-down (PSN Property Education Deal Calculator)
The last part of the strategy is of course to rent out the property to tenants. This will give you a recurring monthly income.
So remember that timeline – we mentioned earlier? We purchased the property in January, the refurb gets underway as soon as you get the keys, and your refinance is done when the refurb is completed, and the value has been added.
This could take 3 to 6 months to get to the point where you are ready to refinance. Just remember to factor into your costs the monthly costs of your lending and if a refurb takes longer you are eating into the amount of money you will cash out.
I really want to draw attention to this... there are some huge misconceptions with the B.R.R.R strategy and I want to just touch upon those as many people get the wrong idea on what they can and cannot do with this strategy.
Many YouTube property guru types will tell you B.R.R.R is all about pulling ALL your money back out the deal.
So you put £60k in and you pull £60k back out when you refinance. They often make it sound like this is the 'only outcome' possible but a lot of the time, it’s actually not the case.
Of course, in an ideal world... you would love to pull all your money out and maybe even more too. But sometimes you have to be realistic and sometimes you may have to leave some money in the property. At the end of the day, you might not get enough of an uplift in value to enable you to pull it all back out, but so what!
If you end up leaving in a small amount of money, the reality is you will eventually get the money back out via the net rental income. So when you’re looking at these types of opportunities always look at how long it will take for you to pull out any money you leave in the property.
In the end, only you can decide if the deal stacks up for you or not. Some people won't touch a B.R.R.R if they leave in more than 15% some are happy with leaving more in and some people want to pull as much as humanly possible out. It all comes down to your own personal preference and getting the exit your happy with.
Another thing with B.R.R.R. is affordability on the refinance. You may have had a pot of money to invest that enables you to bridge the purchase, but you need to be credit worthy enough to get a buy to let mortgage on the assumed value of the property post works.
The refinance is your exit strategy – you need to refinance to pay down the expensive lending you used. So don’t assume you will be able to get a mortgage, speak to brokers and understand your level of lending that will be open to you.
I once knew a guy who managed to get a bridging loan and then was unable to get a mortgage due to bad credit – his bridging fees were astronomical and stacking up month after month. The deal also did’nt stack up so it was a case of he spotted a strategy... but not failing to understand it fully meant he was left in a hole.
When analysing B.R.R.R opportunities the key parts are the variables – what can you buy it for, how much value can you add and how much can you pull out when you refinance it.
These are the core elements you should understand.
B.R.R.R enables investors to invest, recycle that capital by pulling it back out and then repeating the process and it’s without doubt the quickest way to build a portfolio with limited funds.
Leveraging the right finance and picking the right property is the bottom line.
Other things to consider are obviously things such as the contingency on the refurb works and also another exit is you sell it instead of tenanting the property – but that is more akin to flipping and not about building a portfolio for yourself.
So when investors ask me on our Property BaseCamp programme (where I help people 1 to 1 in their business) how can I build a portfolio quickly?? I explain B.R.R.R. is the way to go and I put them in touch with lenders and specialists who understand the model fully and what you’re trying to achieve.
B.R.R.R is without doubt a very powerful strategy and is heavily used with great success by many investors. I always say to have a property with none of your initial capital involved is the holy grail of investing, you are getting an infinite return forever.
Yes, you have a mortgage, but you have no capital in the property, so it’s a fantastic position to be in and it opens up the doors to you building your portfolio, not saving rental income for years and years so you can buy property number 2!
With traditional buy to let lending you are tying up your capital (deposits for a long, long time.) Quite clearly there is a lot more to using bridging loans and development finance and the strategy as a whole, and so if you want to speak to one of the best alternative finance brokers in the UK have a chat with the highly experienced - Mr Kevin Wright.
Here are his contact details:
If you would like to learn more about property, investing or other strategies we provide free training and paid online courses too… and what makes us different to others is - we charge lower fees and give you maximum value and we don’t harp on about daft things like chasing financial freedom and giving people unrealistic ideas. If you want down to earth, affordable training and support, check out what we offer on the link below.
We also offer 1 to 1 mentorship and support on our Property BaseCamp programme.