What is the BRRR Strategy?
Buy, Refurbish, Refinance, Rent (BRRR) is a very powerful property investment strategy that allows you to rapidly grow your property portfolio, often using small amounts of initial start up capital. We will run through each step of the model, some worked examples, and also the pros and cons of this property investment strategy.
Buy – The first step is purchasing a property. The criteria tends to be a lower value property where value can be added through additional works such as a refurb. The money in BRRR is really made on the purchase therefore you need to be sure at the time that your numbers stack up.
Refurbish – The refurbishment stage is where you add value to the property, this could be a light refurb to make the property clean and modern. Alternatively it could be a complete reconfiguration of the property with extensions possibly added. The aim of the refurb is to only carry out key works that will directly add rental value, or value to the price of the house.
Refinance – Once the works have been completed and in theory the property should now be worth more as a result it’s time to refinance. Refinancing after works allows you to borrow money as a % of the property’s uplifted market value.
Rent – Get a tenant in the property so that the mortgage is covered, sit back and enjoy the net cashflow.
Alan Johnson purchased for £80,000 (using cash), he incurred costs of purchase including legal fees and SDLT of around £4,000. This particular property needs a full refurbishment before it can be let out, this will cost £16,000.
Alan estimates that as a result of buying the property cheap (or BMV, below market value) and the high quality refurb the property should be worth £140,000.In the process of applying for a long term buy to let mortgage a lender appointed valuer will assess the property to confirm the market value, in this instance the valuer agrees with Alan that the property is worth £140,000.
For the majority of borrowers they should be able to borrow around 75% LTV of the uplifted property value. Here 75% of £140,000 is £105,000. Alan is thrilled and goes ahead with the mortgage.
When the mortgage completes Alan will get £105,000 paid into his account, this covers the total costs of the property and all of the refurbishment costs which totalled £100,000, and an extra £5,000.
So with all of his original cash out of the property Alan is left with ownership of the house and the benefit of the monthly rental income.
The advantages of BRRR
- You can build a large portfolio with a limited initial pot of cash
- Because of the reduced amount of money left in deals this strategy can offer a really high return of capital
- As the property has been freshly refurbishment there should be reduced maintenance for the years following
The disadvantages of BRRR
- All money out deals are difficult to find, even full-time seasoned investors may only find 1 or 2 of these a year
- Managing the refurb of a property can be stressful as unexpected things go wrong
- Financing BRRR deals may be a challenge where you do not have initial capital or cannot find investors
At JSM Partners are BRRR property investment specialist accountants and tax advisors, as a result we can help ensure you have the best possible structure and pay the least amount of tax possible. Book a call today and see how we can help your business prosper.