The BRR or Buy, Refurbish, Refinance strategy has become one of the most sought-after techniques among property investors who want to build a large portfolio. It not only helps them expedite the growth of your property portfolio but you can pull out some or all of your actual investments as well. If you too are a property investor and have got the determination to build an enviable portfolio, continue reading as we are going to take a detailed look at the Buy, Refurbish, Refinance strategy.
The Buy, Refurbish, Refinance strategy
This strategy involves three simple steps – you buy a property at a negotiated price, add value to it through refurbishment, and apply for refinancing to take your initial investment, rent out the property and repeat. But to make the most out of it, you need to apply your judgment and invest some serious efforts.
First, you purchase a property to which you can actually add value by refurbishment. Here, realistic judgments need to be made on the amount of refurbishment you can genuinely do and how much money you can spend on that work. You also need to figure out the potential increased value of the property after the refurbishment is completed. Be sure not to invest more time and money than you’ll be able to regain.
The next step is to have the property revalued by a surveyor to know its new value. You should understand that the refurbishment of a property to increase its value doesn’t necessarily need to involve a lot of work. Minor works such as including a new kitchen or bathroom or replacing the windows or just giving a fresh coat of paint can increase a property’s value dramatically. Since the success of this strategy depends on how much significant value is added to a property and its refinancing, you must provide the surveyor with everything you can, related to the refurbishment. These essentially include a schedule of works, before and after pictures, and before and after comparisons. The key objective of this step is to get the accurate new value of the property.
The third and final step is to refinance according to the new value. It’ll help you pull out the initial funds and refurbishment costs, and reinvest that money in purchasing your next property.
The BRR strategy – A simple example
Assume the purchase price of your chosen property is £80,000. And you’ve managed to negotiate a 75% mortgage, which means you’ll be getting £60,000 from the lender.
Now, you’d need to make up the 25% of the purchase price which is £20,000. You’d also need to bear the purchase costs (£5,000 for example) and say, a refurbishment cost of £5,000.
So, your total investment (25% of the purchase price plus purchase costs plus refurbishment cost) becomes £30,000.
Let’s consider the property, after refurbishment, gets revalued at £125,000 and you still manage to get a 75% mortgage after renegotiation. So, now the amount you’ll receive from your lender is £93,750.
You’ll be left with £33,750 once you’ve repaid the original mortgage. So, through the process, you’ve successfully recouped your actual investment of £30,000 while still having some profit.
You can re-use the recouped amount to purchase another property while receiving a standard rental income from the first one and having your equity in it.
Though the Buy, Refurbish, Refinance is a highly effective strategy that works almost all the time, there’s a downside to it as well. For example, when mortgage finance is restricted or property prices are going down, you may not be able to refinance, which might make this strategy an unsuccessful one. To avoid this situation, it’s extremely important to understand the local market, where you are going to buy the property, thoroughly. You also need to have an effective plan B and a substantial contingency fund to handle any unexpected eventualities.