The buy refurbish refinance (BRR) strategy is a renowned property investment approach in the UK. It merges the advantages of buy-to-let with enhanced returns by reducing the total invested amount post-refinance and increasing monthly rental income. If you’re new to this, understanding BRR isn’t overly complex, especially if you’re familiar with the basics of buy-to-let. For those unfamiliar, I recommend checking our beginner’s guides to buy-to-let investments first.
In this article, we delve into what the BRR method entails and how it operates. We showcase an example of a property using the BRR approach, providing practical insights. Additionally, we explore variations of the strategy, including the BRRRR method, offering a comprehensive understanding of these popular property investment techniques. Whether you’re a seasoned investor or new to property ventures, gaining insights into these strategies can be beneficial for maximizing returns in the real estate market.
The BRR strategy involves a systematic approach – buy a property, refurbish it to increase its value, and then refinance to unlock equity. This method is particularly attractive for investors looking to recycle their capital and reinvest in more properties. The article breaks down the steps involved in the BRR process, making it accessible for readers at various stages of their property investment journey.
What Is Buy Refurbish Refinance (BRR)?
The buy refurbish refinance (BRR) strategy is a property investment method where you acquire a property in need of renovation. After making the necessary upgrades, you refinance it at a higher valuation to extract a significant portion of your invested capital. A notable advantage is that the renovated property allows you to command a higher rental income. This approach combines property appreciation with enhanced rental returns, making it a popular choice for investors seeking to optimize their financial gains in the real estate market.
What is the BRRRR method?
The BRRRR method, an abbreviation for buy refurbish refinance rent and repeat, mirrors the buy refurbish refinance (BRR) strategy. It involves renovating a property, increasing its value through refinancing, and subsequently renting it out. The only distinction lies in the extended acronym, incorporating the rent and repeat steps. While commonly used in the United States, in the UK, we typically refer to it simply as BRR, emphasizing the fundamental aspects of buying, refurbishing, and refinancing properties for optimal returns.
How does Buy Refurbish Refinance work?
- Identify a property in need of modernization: that remains habitable but requires updates to meet contemporary standards, such as modern utilities and overall aesthetic improvements.
- Conduct thorough property research: particularly crucial for BRR investments. Utilize a spreadsheet, provided later in the guide, to analyze and visualize returns. Estimating refurbishment costs might initially pose challenges, but practice enhances accuracy. In the northern region, a complete refurbishment for a 3-bedroom property typically falls between £15,000 to £20,000. However, if you possess time and diverse trade skills, self-performing the refurbishment could reduce costs to around £6,000 to £8,000. Undertake DIY work only if experienced or willing to invest time in learning the necessary skills.
- Property Purchase: Navigating the intricate property purchasing process is beyond the scope here, but our detailed guide can offer insights. Crucial to note, buying with a mortgage entails paying the actual property value, elongating the process compared to cash transactions. Once a property in need of modernization is acquired, proceed to the next step – refurbishment.
- Property Refurbishment: Considered the most crucial yet challenging phase for a successful return on investment in the BRR strategy. Focus on interior touch-ups over structural changes, unless essential. Key tasks include kitchen and bathroom replacements, new flooring installation, and repainting walls in a clean white colour.
Maintain a balance and avoid excessive luxury features like real wooden floors or extravagant marble bathtubs.
Costs vary based on the property’s location. For instance, a refurb in Liverpool might cost £15,000, while the same in London could be £30,000. Assuming most beginner investors target areas outside London, especially in the North, the figures below provide an estimate for refurbishing a two-bed property in Liverpool in 2024:
- Skips and Rip out = £850
- Exterior doors = £1,300
- Plastering = £1,000
- Interior doors = £900
- Painting = £1,600
- Flooring = £900
- Kitchen and Install = £2,900
- Bathroom and Install = £2,200
- Other general costs = £520
- Contingency fund (20%) = £2,400
Total Refurb Costs = £14,600
How to add the most value to your property?
To enhance your BRR property’s value, focus on fundamental refurbishments like a new kitchen or bathroom. Additionally, consider cost-effective methods often overlooked, such as adding a deck in the back garden or installing high-quality radiators and light fittings. These approaches, while affordable compared to major renovations, can contribute a few extra percentage points to the property’s value. Here are effective ways to add value:
- Convert garage or attic to a bedroom: +15%
- New flooring and paint: +10%
- New kitchen: +8%
- New bathroom: +8%
- Garden decking: +7%
- Add a driveway: +5%
- Paint the exterior: +2%
- Add high-quality fittings: +2%
- Renting out the property: Some investors wait six months post-purchase before refinancing and renting. Concerns about tenant impact on property value are valid, but my preference is to start cash flow ASAP, ensuring everything works before the valuer’s visit. Renting is simplified with a letting agent handling legalities, screenings, and viewings.
- Refinancing the property: Refinancing, or remortgaging, involves securing a new mortgage at a higher value, using it to pay off the old one. After repayment, surplus cash remains. Note, you dictate the property’s perceived value to the lender. If dissatisfied with the valuation, seek alternatives. Simplify the valuer’s task with a ‘valuation pack,’ offering comparables, changes made, and visual documentation.
Pros & Cons of BRR
Pros of Buy Refurbish Refinance:
- Increased Returns: Implementing the BRR method enhances overall returns, as exemplified in the detailed example earlier. The strategy allows for maximizing profitability.
- Capital Recycling: With the ability to extract a substantial portion of invested capital during the refinancing stage, investors can recycle these funds to acquire additional rental properties, thereby expanding their portfolio efficiently.
- Quality Property: Post-refinancing, investors are left with a property that has undergone significant improvements, leading to higher rental yields and increased appeal to a more desirable tenant demographic. This adds a long-term value to the investment.
- Low Tenant Turnover: The BRR strategy tends to result in more stable tenancies. The upgraded property, combined with strategic investment decisions, contributes to tenant satisfaction and reduces turnover, ensuring a consistent rental income stream.
- Rental Income and Appreciation: The synergy of robust rental income and potential property appreciation positions investors for dual financial benefits, contributing to overall profitability and asset growth.
Cons of Buy Refurbish Refinance:
- Higher Costs: The BRR strategy entails more significant upfront costs compared to a straightforward buy-to-let approach. The need to finance both the refurbishment and additional expenses related to refinancing makes it a more expensive investment method.
- Vacancy Expenses: In periods of property vacancy, investors are responsible for ongoing utility bills and council tax, adding to the holding costs during non-revenue-generating phases.
- Stressful Refurbishment: The process of refurbishing a property can be inherently stressful, with potential challenges and unforeseen issues. Engaging a skilled project manager can help mitigate stress and ensure smoother execution.
- Down-Valuation Risk: There’s a inherent risk of the property being down-valued during the refinancing process, where the lender assesses the property’s value lower than anticipated. This risk can impact the Return on Capital Employed (ROCE) and should be carefully considered and managed.
Is buy refurbish refinance (BRR) a risky strategy?
Investing always involves risks, making thorough due diligence crucial. Before undertaking a property project, especially for beginners, it’s advised to have a contingency fund of about 20%. This means inflating the estimated refurbishment costs by 20% to cover unforeseen circumstances. Additionally, investing in an RICS property survey is recommended. These surveys identify major issues with the property, offering a comprehensive understanding of potential challenges. Taking these precautions is essential to minimize risks associated with a BRR project and ensure a more informed and secure investment.