Introduction to BRRR Strategy
The buy-refurbish-refinance-rent is the classic property strategy that continues to rake in lucrative benefits for many investors. The buy refurbish refinance strategy is a property investment method aimed at rapidly expanding a property portfolio by acquiring a property, adding value through refurbishment, then refinancing to release equity for further property purchases.
The BRRR strategy is a popular property investment strategy. It is a cyclical strategy where you keep repeating the entire process: getting your deposit back and using the money to buy another property. This strategy is perfect for investors looking to build a great property portfolio.
What are Buy-to-Lets?
When you invest in property, it is always advisable to follow 3 or 4 strategies instead of sticking with just one. The market is ever-evolving, the laws are changing, and people are always looking to do things differently. It is better to keep an eye on new and budding strategies and not dismiss any.
The most basic level of investing in property is the buy-to-let. It is fairly straightforward. You buy a property, let it out to tenants and collect the rent. It’s perfect for people who are not looking to build a huge portfolio of, say, 50 or 100 properties. It works for those looking for ways to complement their income or add to their pension.
You’ll have to think of many ways in which buy-to-let can work:
Mortgage or cash
The first thing to think about is whether you’ll be buying the property using cash or mortgage. Purchasing a property using 100% cash is next to impossible for many since you’ll have first to save up the money. Saving up so much money is a tough ask for many.
So you are probably looking at buying using a mortgage. In which case, you should first start saving money for the deposit.
Interest-only or Capital Repayment Mortgage
Most of us think that the best way to buy a property is using an interest-only mortgage. In the case of a capital repayment mortgage, your tenant is actually purchasing the house for you. How? The rent you get from your tenant goes into paying off the mortgage.
If you take a 10-year capital repayment plan, then by the end of the 10 years, you’ve paid off for the property. It is one nuance of buying a property that you’ve got to think of.
Below market value
When discussing the below market value, we will not consider the exact ‘textbook’ definition of it. Market value is the amount of money people are willing to pay for the property.
It is a better idea to try to buy a property below market value. We should try to negotiate the best possible price to purchase a property so that the return on the money invested increases.
Paying the Asking price
You’d be surprised to know that many people pay the asking price for a property. When people only want to invest in property to store their wealth in, they usually buy it at the asking price.
Taking the buy-to-let further ahead, let’s get into the BRRR strategy of acquiring properties. Although BRRR is not a completely buy-to-let strategy, it is one way of building a portfolio and making money from properties.
Basics of BRRR Strategy
The basics of buy-to-let are buying a property, putting your money in, renting it out to tenants, and collecting the rent. You could do this with total cash or go in for a mortgage. The initial investment in the BRRR strategy involves purchasing and refurbishing a property. The purchase price is crucial as it determines the amount needed for a deposit and the total investment.
BRRR strategy lets you buy a property as cheaply as you possibly can, refurbish the property to increase its market value, refinance it, get back the money you put in, and then rent it out to tenants. After refurbishment, the property is revalued at its new value, which can be used as a basis for securing a new mortgage or refinancing.
It is slightly different from the usual buy-to-let, and it comes with its own set of pros and cons. Let’s get to that later in this article. We’ll first talk about how the BRRR strategy can be put in place with a bridge loan.
Bridge Loan
When you are buying a property in the conventional method, you will be going in for a traditional mortgage plan. Whereas in BRRR strategy, you don’t go in for the mortgage immediately, but you take something called a bridging loan. As the name suggests, a bridge loan fills the gap between getting a mortgage and buying a property.
In addition to the refurbishment expenses, you should also allocate funds for purchase costs involved in acquiring the property. You’ll be able to buy the house with your money and the bridge loan and then get a remortgage after a few months.
It is a short-term loan that helps you buy the house, refurbish it, increase its market value and get a greater mortgage on the property. Using this increased mortgage, you’ll now be able to pay yourself back and also pay back the bridge loan.
Pros of BRRR Strategy
Get Better Deals with Bridge Loan
You’ll get better deals with bridge loans than you would if you went the traditional mortgage way. Many bridging companies are actually supported by private finance. These are not typical banks meaning they can be very flexible in giving loans.
They are not going to be too bothered about your salary or your credit. Moreover, since you are buying the property cheaply, the house may be inhabitable. Banks won’t be too willing to provide a mortgage on inhabitable houses. With the bridge loan, you can refurbish the house – add a kitchen or build a better porch – and get a suitable mortgage.
Reinvest the Money to Grow Rental Income
If you want to use this strategy like a pro, you should consider reinvesting the same money into growing more money. It would help if you thought about buying a house, refurbishing it with a bridge loan, repay yourself with the higher mortgage, and use it as seed money to buy more properties.
Cons of BRRR Strategy
More Hard work is Required
You should be willing to put in a lot of hard work, invest time and energy if you want to refurbish a house. You’ll have to find the right contractors for refurbishing. Before getting into the BRRR strategy, you should first know if the property has demand and if its value will increase after refurbishing.
Bridging Loan can be Expensive
Although you might get a bridge loan quickly, you should also know that it might get a tad bit expensive. Before you get into a bridging loan, you’ll have to plan how you might get out of the loan. It would be best if you had an exit strategy planned to get trapped in paying off the bridge loan.
If you have agreed to pay back the loan by, say, 12 or 18 months, and if you aren’t able to pay back the loan within the agreed time, you’ll incur heavy penalties. You can only imagine how high the penalty rates will be if the interest rates are 1 or 1.25% per month.
Wrapping Up:
BRRR strategy is a fantastic model – if you know how it works and willing to put in the hard work needed. Before going head first into BRRR strategy, make sure the figures stack up, invest with knowledge and skill, and start slowly to create wealth.
Frequently Asked Questions
What is the Buy, Refurbish, Refinance, Rent (BRRR) strategy?
The BRRR strategy is a real estate investment approach where an investor buys a property, renovates it to increase its value, refinances to pull out equity, and rents it out for ongoing income.
How does the BRRR strategy differ from traditional real estate investing?
Unlike traditional investing where you buy a property and hold it, the BRRR strategy involves a cycle of buying, renovating, refinancing, and renting to maximize returns.
What are the key benefits of implementing the BRRR strategy?
The BRRR strategy allows investors to leverage their capital efficiently, increase the value of their properties, generate rental income, and build a portfolio of cash-flowing assets.
What factors should I consider when selecting a property for the BRRR strategy?
When choosing a property for the BRRR strategy, factors such as location, potential for value appreciation post-renovation, renovation costs, and rental demand should be carefully evaluated. The BRRR strategy can also be applied to commercial properties.
It is important to consider the type of valuation needed for different property types, such as standard buy to let, HMO, or holiday let properties.
How can I finance the purchase and renovation costs of a property for the BRRR strategy?
Investors can use a combination of personal funds, traditional mortgages, renovation loans, or private financing to fund the purchase and renovation of a property for the BRRR strategy.
What are the potential risks associated with the BRRR strategy?
Risks of the BRRR strategy include unexpected renovation costs, changes in market conditions affecting property values or rental demand, and challenges in securing refinancing at desired terms. Potential risks of the refinance strategy include being unable to refinance if property values decrease.
How can I ensure a successful BRRR project?
To increase the chances of success with the BRRR strategy, conduct thorough market research, accurately estimate renovation costs, work with reliable contractors, and have a solid refinancing plan in place.
What are some common mistakes to avoid when implementing the BRRR strategy?
Common mistakes to avoid in BRRR investing include underestimating renovation costs, overleveraging, neglecting market trends, and not having a clear exit strategy for refinancing.
Is the BRRR strategy suitable for beginner real estate investors?
While the BRRR strategy can be profitable, it is highly effective for a property investor looking to build a property portfolio and achieve job-replacing income. The BRRR strategy is a popular property investment strategy used by property investors to purchase distressed or uninhabitable properties, renovate them, refinance the loan, and then rent them out to generate passive income. However, it may involve higher risks and complexities compared to traditional buy-and-hold investing, making it more suitable for experienced investors or those willing to research and learn extensively.
How can I learn more about implementing the BRRR strategy effectively?
To deepen your understanding of the BRRR strategy, consider reading books, attending seminars, joining real estate investment groups, and seeking guidance from experienced professionals in the field.