The BRRR Property Strategy Explained
BRRR stands for Buy, Refurbish, Refinance, Rent. The BRRR Method is a real estate investing technique that entails purchasing a property, fixing it up and adding value, refinancing it and then renting it out for a high return on the initial investment.
Older or poorly maintained properties with restoration potential are examples of properties that may be purchased or rehabbed with this technique.
BRRR is a very effective property investment method that allows you to develop your portfolio quickly using little initial investment. The steps in the process are as follows.
Buy: The first step is to acquire a property. The criteria usually include properties with a lower value that can be improved through additional work, such as a refurbishment. The money required to get into a BRRR deal is largely based on the purchase, therefore you must be confident that your figures add up at the time of purchase. Many investors fund the initial purchase with personal cash, from releasing equity from their home or by using a bridging loan.
Refurbish: During the refurbish stage, you improve the value of the property by adding features or upgrading systems. The objective of this stage is to perform only the essential improvements that will immediately increase the properties capital appreciation and/or rental value.
Refinance: When the work on the property is complete, it’s time to refinance onto a longer-term product such as a buy-to-let mortgage. Refinancing after the work is done allows you to borrow at a rate based on the property’s improved market value – so you can borrow at the higher price and recycle the capital you put into the deal. This can then be used as a deposit to purchase the next property.
Rent: When the property is ready to rent out and you have refinanced onto a longer-term product such as a mortgage, it’s time to find a tenant and rent out the property. The rental income of the property should cover any costs (mortgage, insurance etc) as well as provide you with additional monthly cash flow.
Benefits of the BRRR Strategy
1. Low Initial Investment
BRRR investing allows you to start a property business without having to put up a large sum of cash upfront. Investors will only need enough cash for the deposit and, if necessary, any fees associated with the purchase. This makes it a good option for those who are looking for low-risk endeavours.
2. High Returns
Because the out-of-pocket cash required for this technique to succeed is so small, the return-on-investment (ROI) can be enormous. Even better, as long as the investor owns the property, the ROI could be infinite. High demand for rental property can also make these properties easy to rent out for the best price possible.
3. Less Upkeep
As the property has been freshly refurbished, there should be reduced maintenance needs for the years following. This is one of the primary reasons why investors pursue BRRR. In general, a BRRR property is a lot easier to maintain than an old property in constant need of repair. The nature of the process essentially improves the property’s functions from the get-go, thus making it less of a repair concern in the long term.
4. Potential To Recoup Initial Investment
After refinancing the property, investors are typically able to return their original investment. But even if the refinancing doesn’t yield this total, the property’s value could rise significantly. This potential for a significant increase in property value makes the BRRR method an appealing way to build wealth over time.
Disadvantages of the BRRR Strategy
1. Renovation Issues
The process of renovating the property can take as little as a few weeks, or it could be as long as six months. Time is money and you run the risk of losing a lot of money if the renovation phase goes over schedule and budget. It’s vital you agree on the costs and time frame with your contractor from the get-go. This is particularly important if labour and materials are affected by supply and demand constraints such as those during the pandemic.
Additionally, issues can arise during the renovation process that is costly or time-consuming. This can be the discovery of something that needs to be repaired or replaced or potential damage that occurs during the refurbishment process. Even if inspected prior to purchase, it is very common for unexpected costs to occur during the renovation period.
2. Down Valuation
This is without a doubt the most significant risk when adopting the BRRR approach. You’re putting all this money into buying a property with the aim of getting the money back out of the property once the work is done and you refinance. But what if the valuation doesn’t come back the amount you expected it to? While this is not common if you are adding significant value to a property, an experienced finance broker such as Ramsay & White will be able to advise you on the best way to avoid this situation.
3. Void Periods
Once the property is ready to rent, it’s important a tenant moves in as soon as possible. If the property is empty, you’re missing out on income and the costs will fall on you. Most letting agencies should be able to rent a property out within two weeks. You can also manage the property yourself if you have the time and knowledge on how to do so.
How to Finance A BRRR Project
Bridging loans are a popular BRRR finance choice for a variety of reasons, including supporting commercial and residential property transactions, auction purchases, and renovation and development projects. Bridging finance is also an appealing choice for new investors as it means they can access deals quicker than it would take to save up the cash for a deposit. Bridging finance is fast and flexible and can be secured in a number of days.
The BRRR method is a popular technique for both developers and investors. It can be complicated and a fair amount of work, but it can be a great way to get started in property or grow your portfolio as it allows you to gain momentum quickly.
Additionally, there are other property methods that can be used in accordance with the BRRR strategy that enhances its overall effectiveness.
Not sure which property strategy you should undertake? Or maybe you’ve got a question about the best finance to get started in property?