Explained: How to quickly build a property portfolio with the buy refurbish refinance rent strategy
Let’s delve into the fascinating world of the Buy Refurbish Refinance Rent (BRRR) strategy – a powerful approach that savvy property investors use to quickly build a property portfolio and maximize their returns.
The BRRR strategy is like a well-choreographed dance, where each step contributes to building a robust property portfolio. Let’s break it down:
- Buy: The journey begins with purchasing a property, ideally at a price “below market value”. This strategic entry point sets the stage for future gains.
- Refurbish: Once you’ve secured the property, it’s time for a makeover! Renovate, upgrade, and enhance its value. Whether it’s a fresh coat of paint, modernizing the kitchen, or improving the overall aesthetics, your goal is to increase the property’s value and appeal to prospective tenants.
- Refinance: With the property now shining like a gem, it’s time to refinance. You’ll work with lenders to assess the property’s new value post-renovation. By refinancing, you can pull out a significant portion of your initial investment. This newfound capital can be reinvested in more properties.
- Rent: The final act involves finding reliable tenants and renting out the property. The rental income becomes a steady stream, contributing to your cash flow. Remember, the goal is to hold onto the property long-term.
So how is the finance for the BRRR strategy structured?
The most tax efficient structure for a buy to let portfolio is through a Special Purpose Vehicle Limited Company, also known as a SPV Limited company. SPV Limited Companies can be easily formed for around £150 and limited company buy to let mortgages are readily available for this type of structure.
Let’s deal with each of the 4 points noted above individually
- Buy: Once you have formed your SPV Limited company and identified a suitable property to purchase for your buy to let portfolio you would finance the purchase with cash if you have it, in the form of a directors loan to your SPV limited company, or a bridging loan arranged via an experienced commercial finance broker.
Bridging loans are readily available for this type of transaction and borrowing can be from 70% – 85% of the purchase price, depending on whether you are proposing to carry out any refurbishment works to the property. In some circumstances, if the purchase price of the property is below the open market value it can be possible to borrow up to 100% of the purchase price. - Refurbish: This is where your creative juices come into play, however it’s important to note that when carrying out a refurbishment or ground up new build for the rental market it’s imperative that it’s done to the current legislative requirements in a professional and timely manner, as the saying goes “time is money”.
- Refinance: Once the refurbishment has been successfully completed it’s time to call your experienced commercial finance broker again, at this stage it is time to refinance to a longer term Buy to Let Mortgage based on the new higher property valuation, this will allow you to recoup most of the cash and in some cases all of the cash you have invested for the purchase and refurbishment or repay the bridging loan along with the cash you have invested in the refurbishment of the property allowing you to re-invest in the next property.
- Rent: With the buy, refurbish and refinance now complete or the refinance in the process of completion it’s time to find and have your tenant move in. The rental income from the tenant will cover your buy to let monthly mortgage payment and hopefully leave you with a nice cash flowing, profit making buy to let property.
Why BRRR?
Cyclical strategy: You repeat the process. As you refinance and recover your initial investment, you use that money to buy another property. Rinse and repeat!
Portfolio building: Perfect for investors aiming to build a substantial property portfolio. It’s not about one property; it’s about creating a network of income-generating assets.
Buy-to-let basics: Before diving into BRRR, let’s touch on the basics. Buy-to-let (BTL) involves buying a property, renting it out, and collecting rent. It’s straightforward and suits those looking to complement their income or add to their pension.
Cash or mortgage: Decide whether to buy with cash or a mortgage. While 100% cash purchases are rare, most investors opt for mortgages.
Interest-only or capital repayment: Understand the nuances. With an interest-only mortgage, the rental income should at least cover 125% of the monthly mortgage payment and your mortgage balance remains roughly the same throughout the term of your mortgage.
With a capital repayment mortgage the rental income again should at least cover 125% of the monthly mortgage payment, keeping in mind that the monthly mortgage payment will be higher as you are also paying towards the capital balance, however your mortgage balance will reduce each year.
Below market value: Negotiate the best price. Buying below market value enhances your return on investment.
Paying the asking price: Not surprisingly in a buoyant market, some pay the asking price. However, savvy investors aim for better deals.
Conclusion
The BRRR strategy isn’t just about bricks and mortar; it’s about financial orchestration. With each successful cycle, you’re not only growing your wealth but also fine-tuning your property investment symphony. So, put on your investor hat, step onto the dance floor, and let the BRRR rhythm guide you toward prosperity!
