If you are looking for a way to invest in property and generate passive income, you might have heard of the BRRR strategy. BRRR stands for buy refurbish refinance rent.
It is a method of acquiring properties, adding value to them, and then refinancing them to pull out your initial investment and use it for the next deal. In this article, we will explain what the BRRR method is, how it works, and what are the benefits and challenges of using it.
The BRRR strategy is a cyclical process of buying, refurbishing, refinancing, and renting properties.
The idea is to find properties that are undervalued, distressed, or in need of renovation, and buy them at a discount.
Then, you refurbish the property to increase its market value and appeal to tenants.
Next, you refinance the property with a new mortgage based on the higher value, and use the cash-out to pay off the original loan and any renovation costs.
Finally, you rent out the property and collect monthly income, while also benefiting from capital appreciation over time.
The BRRR method allows you to recycle your money and use the same capital to buy multiple properties. By refinancing the property, you can get most or all of your initial investment back, and use it for the next deal. This way, you can build your property portfolio faster and with less money than traditional buy-to-let investing.
The BRRR strategy involves four main steps: buy, refurbish, refinance, and rent. Here is a breakdown of each step and what you need to consider:
The first step is to find and buy a property that has potential to add value. This could be a property that is below market value, in a good location, or has scope for improvement. You want to buy a property that you can add value to by refurbishing it, and that will attract tenants and buyers in the future.
To buy a property, you will need some cash for the deposit and the purchase costs, although in certain situations it will be possible to borrow up to 100% of the property purchase price.
You can use your own savings, or borrow money from a lender, such as a bank, a bridging loan company, or a private investor. Or an experienced commercial finance broker can arrange a short-term bridging loan that is designed to bridge the gap between buying a property and refinancing it. It is usually easier and faster to get than a mortgage, but it also has higher interest rates and fees.
When buying a property, you should do your due diligence and research the market, the area, the demand, and the potential return on investment. You should also inspect the property and get a surveyor to assess its condition and value. You should negotiate the best possible price and terms with the seller, and aim to buy the property as quickly as possible.
The second step is to refurbish the property and increase its value. This could involve cosmetic changes, such as painting, flooring, and decorating, or more costly works, such as installing a new kitchen, bathroom, or heating system. The extent and cost of the refurbishment will depend on the condition and size of the property, and your budget and goals.
The aim of the refurbishment is to make the property more attractive and functional for tenants and buyers, and to increase its market value. You should plan the refurbishment carefully and hire reliable and qualified contractors to do the work. You should also keep track of the costs and the timeline, and ensure that the work is done to a high standard and complies with the building regulations.
The third step, upon completion of the refurbishment is to refinance the property and get a new buy to let mortgage based on the higher value.
This is where you can pull out your initial investment and re-use it for the next deal. The goal of the refinance is to cash out enough money to recover your initial investment, have a positive cash flow from the rental income and create and leave equity within the property.
The amount of money you can refinance and cash out will depend on the new value of the property, the loan-to-value ratio, and the interest rate. The loan-to-value ratio is the percentage of the property value that the lender is willing to lend you.
For example, if you bought the property for £50,000 and spent £10,000 on the refurbishment then your initial investment is £60,000.
If the new, higher value of the property after refurbishment is £85,000 and the buy to let mortgage loan-to-value ratio is 75%, the lender will lend you £63,750.
After refinancing for £63,750, you would recoup your initial investment of £60,000 plus £3,750 more than your initial investment and you would have cerated £21,250 of equity within the property.
The interest rate is the annual cost of borrowing the money, expressed as a percentage.
For example, if the interest rate is 5%, your interest only mortgage payment would be £266 per month.
If the rental income from the property is £600 per month, and the monthly mortgage payment is £266 per month, you would have a positive cash flow of £334 per month less your monthly buildings insurance and letting agents fees which would be approximately £75 per month leaving you with a profit in the region of £259 per month.
The final step is to rent out the property and collect monthly income. This is where you can enjoy the passive income and the capital appreciation of your property. To rent out the property, you will need to find and screen tenants, prepare the tenancy agreement, and manage the property. You can do this yourself, or hire a letting agent to do it for you. A letting agent is a professional who can help you with the marketing, administration, and maintenance of your property, for a fee.
When renting out the property, you should set a fair and competitive rent that reflects the market value and the condition of the property. You should also comply with the landlord regulations and responsibilities, such as protecting the deposit, providing a safe and habitable environment, and paying the taxes. You should also maintain a good relationship with your tenants, and deal with any issues or repairs promptly.
The BRRR method has many benefits for property investors, such as:
• You can buy more properties with less money, by recycling your capital and using leverage.
• You can increase the value and equity of your properties, by adding value through refurbishment.
• You can generate passive income and capital appreciation, by renting out your properties and benefiting from the market growth.
• You can diversify your portfolio and reduce your risk, by investing in different types of properties and locations.
• You can scale up your business and achieve your financial goals faster, by repeating the process and buying more properties.
The BRRR strategy also has some challenges and risks that you need to be aware of, such as:
• You need to have some cash and access to finance, to buy and refurbish the properties.
• You need to have the skills and knowledge, to find, analyse, and manage the properties.
• You need to have the time and patience, to complete the refurbishment and the refinance.
• You need to have a contingency plan and a buffer, to deal with any unexpected costs, delays, or problems.
The BRRR strategy is a powerful and proven method of investing in property and building your portfolio. It involves buying, refurbishing, refinancing, and renting properties, and repeating the process. It allows you to recycle your money, add value to your properties, generate passive income, and achieve your financial goals.
However, it also requires cash, finance, skills, knowledge, time, patience, and planning. If you are interested in using the BRRR method, you should do your research, educate yourself, and seek professional advice. You should also start small, test the strategy, and learn from your experience.
The strategy is not a get-rich-quick scheme, but a long-term investment strategy that can help you create wealth and financial freedom.
The buy-refurbish-refinance-rent strategy is a popular property investment technique that has been gaining traction in recent years.
The strategy is a great way to build a property portfolio and maximize return on investment. However, it requires effort and expertise to execute successfully.
A bridge to let mortgage is a short-term bridging loan to finance the cost of buying a property for the rental market prior to refurbishment.
Upon completion of the refurbishment the same lender will provide the longer term Buy to Let mortgage to repay the short-term bridging loan.
A company mortgage is a specialist type of mortgage for landlords who would like to purchase a property or refinance existing properties through a limited company.
Some of the benefits are the ability to claim 100% mortgage interest relief and lower Corporation Tax on profits.
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