The Buy Refurbish Refinance (BRR) strategy is a popular property investment approach in the UK. It combines buy-to-let benefits, maximizes returns by reducing invested capital through refinancing, and boosts monthly rental income.
New to BRR? No worries. It’s not overly complex, especially if you’re familiar with buy-to-let basics. For beginners, start with buy-to-let guides. In this article, we’ll delve into BRR, how it works, offer a property example, and explore variations like the BRRRR method.
What’s BRR? And what about the BRRRR Method?
The Buy Refurbish Refinance (BRR) strategy is an investment method that entails buying a property in need of upgrades. After renovation, the property is refinanced at a higher value, allowing the recovery of a significant portion of your initial investment. Furthermore, the improved property can generate a higher 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?
Find a property in need of modernization:
Your initial task is to locate a property requiring modernization. The property should still be livable with basic utilities in working order, such as water, a functional boiler, and electricity. However, it should require updates to meet modern standards.
Crunch the numbers:
Property research is crucial for any investment, ensuring you’re comfortable with the potential returns. BRR properties involve a bit 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.
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. What’s crucial to understand is that, 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.
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 they are 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 typically involves fundamental refurbishments like new kitchens and bathrooms. However, there are also cost-effective, less-discussed methods, such as adding garden decking or upgrading radiators and light fixtures, which can still enhance your property’s value. Effective ways to add value include:
- Convert the 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 the exterior with paint = +2%
- Incorporate high-quality fittings = +2%
Once your property is ready, the next step is renting it out. This process can be streamlined with the help of a letting agent, especially considering the legal paperwork and tenant screening involved. Starting to generate rental income as soon as possible is a preferred approach 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 in your estimation, as they won’t offer more than your value, but they may down-value it if they believe your estimate is too high. If you’re dissatisfied with the valuation, you can seek another one.
Tip – Make the valuer’s job easier by providing a ‘valuation pack’ with 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 demonstrated in the example above.
- Ability to recycle a significant portion of your invested capital for purchasing more rental properties after refinancing.
- Possession of a high-quality property post-refinance, attracting better tenants and demanding higher rent.
- Lower tenant turnover.
- A combination of strong 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.