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If there’s one strategy that property investors love, it’s the BRRRR strategy! Why is that? Once you can master the BRRRR strategy, you can recycle your deposit forever. BRRRR stands for buy, renovate, rent, refinance, repeat. Those five words define the strategy – easy to describe, harder to implement!
Once you master this strategy, a world of opportunity opens up. As you recycle your deposit, you don’t need external sources of funds to build your property portfolio.
In this article, I’ll explain exactly what the BRRRR strategy is. I’ll give a simple example to show why this strategy is so powerful. I’ll also provide tips for how to successfully apply out this strategy.
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The BRRRR property strategy originated in North America and has grown in popularity in recent years. It’s seen as the holy grail by many investors, as you can recycle your deposit forever. What’s not to like?! But as with everything in life, nothing comes for free. You’ll need to learn your trade, in order to apply this strategy well.
To show the power of this strategy, let me give an example.
- Buy a rundown property for £50,000
- Spend £20,000 renovating the property
- New property value is £100,000
- Remortgage the property, and take out £70,000 of your money
- Rent the property out, and earn a monthly income
In the above example, you’ve invested £70,000. Once you Remortgage your property, you’ve taken out the entire £70,000 you put in. That money is now available to reuse for other property transactions (maybe to repeat the trick!). You’ve created £30,000 of equity and you’re now free to enjoy the monthly rent you earn. It’s a pretty great strategy!
To successfully apply the BRRRR property strategy, you need to be picky with the properties you buy. You’ll need to purchase your property at a low price. This typically means buying a rundown property.
The 2nd letter in BRRRR is R, and that stands for renovate. You’ll need to carry out a high quality renovation. In the above example, the renovation increased the value of the property from £50,000 to £100,000. Think about how you can boost the value of the property. Can you add an extra bedroom somewhere? Is there scope for a loft conversion or an extension? New kitchens and bathrooms are great ways to add value. For inspiration on how to refurb your property, check out this article.
You need to be smart and get your numbers right. Know exactly how much the refurb will cost, and exactly what the property will be worth at the end. If you get your numbers wrong, it can destroy your deal. Assume that your refurb costs £30,000, rather than £20,000, and that your property is worth £85,000 rather than £100,000. Suddenly you’ve created £5,000 of equity, rather than £30,000. Probably not worth the effort! I’ve seen deals where the numbers don’t work, but the investor fudges the numbers and hopes for the best. This rarely works. You need to picky and choose the right property. If you do that, you’ll become the master of all you survey!
The 4th letter of BRRRR is R, and it stands for refinance. This is another key component of the strategy and is crucial to your deal.
Let’s return to the above example. You go to a mortgage lender are say your property is worth £100,000, but you need to convince a valuer! This can be tricky as they’ll ask why the property value increased in a short space of time. Valuers are often reluctant to agree to big increases in property value. It can be really frustrating to deal with valuers, especially aften you’ve done so much work on your property.
One common strategy is to meet the valuer at the property and provide proof of property value. Show before and after photos of the property. Provide details of comparable properties, that are worth £100,000. Also provide invoices for the refurbishment work you carried out. If you’ve paid your builder ‘cash in hand’ to avoid VAT, then this will be a problem! You need to have actual invoices of money you spent!
If you want to legally avoid tax, read these articles instead:
If you want to apply BRRRR property strategies over time, then you should think about how to fund your deals. In the above example, you need £50,000 to purchase the property and £20,000 to renovate it. So where will you get this £70,000 from? You might think a mortgage is best, but not so fast… Mortgages are fantastic tools for property investors. Indeed, mortgages probably provide the cheapest loans you can get.
However, mortgages come with many conditions, that you may not have thought about. When you leave the world of buy to let, and apply advanced strategies, you’ll see that many tools are no longer available. One condition of mortgages is that they’re designed for long term investments. Banks are happy to charge low rates, as they expect to get paid mortgage fees for 25 years. If you refinance your property after 6 months, the bank won’t be pleased and may blacklist you from future deals. You may have got a 2% mortgage rate for 6 months, but if the lender blacklists you, it’s not so smart! Mortgages are great tools in the right circumstances. Check out this article, which compares interest only vs capital repayment mortgages.
To fund BRRRR deals, you can use development finance, bridging loans or cash. Development finance rates start at 5%. To get the best deals, it helps to have experience with renovations. Bridging Loans are designed for short periods, but they come with higher rates. Rates range from 0.75% to 2% per month.
There are different options available. But I recommend to think deeply about what’s the best option for you.
The BRRRR property strategy is terrific when done right. It’s popular with people that are graduating from buy to let and looking for higher returns. The major attraction is that you can recycle your deposit. It’s definitely an advanced strategy, but it’s well worth taking the time to master it.
If you’re interested in other advanced property strategies, check out these articles below.