One of the most common property investing strategies today is the BRRR method - which stands for ‘Buy, Refurbish, Refinance, Rent’. This strategy has been around for a very long time and only over recent years has the commoditised BRRR phrase become widely used.
Some refer to it as BARR which stands for Buy, Add-Value, Refinance, Rent, - as there are many ways to increase a property's value other than refurbishment. In any case, due to the strategy being available on properties with values in the tens of thousands and thus requiring low initial capital, it is considered one of the best ways for first-time investors to get started in property.
Additionally, many seasoned investors focused on growing portfolios implement this approach consistently which enables them to amass significant wealth in the form of an income-generating property portfolio combined with long term capital growth.
How Does BRRR Work?
The BRRR strategy consists of buying a property, adding value to it by refurbishing it, refinancing the deal (to recycle the cash initially invested) and then renting out the property to generate regular cash flow. Additionally, for investors that decide to keep the property long-term, there is also the chance of benefiting from capital appreciation.
As the name entails, BRRR consists of the following four phases:
Purchasing the right property is crucial for the BRRR method to work. Essentially, you need to add value to the property so purchasing at the right price is vital for the numbers to stack up. The best properties for this method are rundown properties that require anything from light to significant refurbishment. How much you purchase the property for depends on a variety of factors such as the location, the level of the work required, the end value of the property and the monthly cash flow it is likely to generate.
Many investors fund the purchase using personal funds, releasing equity from their home or most commonly - using short term finance such as a bridging loan or BRRR finance (LINK TBC).This is fast, flexible finance that be used for a variety of reasons. In this scenario, it is often used to purchase the property and pay for the renovation work. It is then repaid once the property is refinanced.
After the purchase is complete, it is time to add value to the property. This can consist of a full refurb or improvements in certain areas. The key here is to complete the refurb as quickly as possible in order to refinance the deal, get your money out of the deal and start generating a rental income. Given this, it is important to avoid getting carried away by adding additional details and overspending in areas that are not necessary. The goal here is to add as much value to the property while spending as little as possible.
Many first-time investors often make the mistake of making decisions based on personal tastes and emotion rather than what is best for the deal. While extra touches and fancy interiors may be appealing, they do not always correlate with a higher return on investment.
Before carrying out a refurbishment, agree on the full cost of the work with any contractors involved. Calculate the budget you have to work with and make sure all parties stick to it. There will always be unexpected costs and issues that arise so having an emergency buffer is also advised.
Once the property has been updated or refurbished, it is time to refinance onto a long-term product such as a buy to let mortgage. This will allow you to rent the property out in order to generate a monthly income. Additionally, as the property has been improved, the value of the property will have most likely increased.
Refinancing at this point is based on the new value of the property, not the original purchase price. This means you can typically recycle the initial capital you invested into the deal, allowing you to move on to your next project and further grow your portfolio.
The final stage of the BRRR method is renting out the property to tenants and generating a monthly income. If the purchase price, renovation and refinance numbers all stack up, the rental income should cover the costs of the property including the buy to let mortgage and provide a healthy profit.
Finding a tenant quickly is important to prevent void periods. While a lettings agent will be an additional cost, they can find a tenant and manage the property on your behalf thus removing stress and allowing you to focus on finding your next deal to grow your business.
BRRR is a very effective property investment technique that, when done correctly, allows you to rapidly expand your real estate portfolio using little initial funds. However, like all investments, there can be challenges and it may take time to find the right property, refurbish it, refinance the deal and find a paying tenant.
Leveraging the right funding and securing the best rates is crucial for this method to work well and if you are new to investing, it can be daunting to take the first step.
At Merryoaks, our team has 40+ years of property experience and can guide you on your journey offering bespoke consulting and funding solutions.
To find out more about how you can use the BRRR method to start or scale your portfolio, speak to our funding specialists today.