The weather may be finally warming up, but ‘BRRRR’ is still the word on everyone’s lips. Even though summer is just around the corner, you may have heard people talking about ‘BRRRR’, and they don’t mean the temperature outside. BRRRR is a property investment method and stands for ‘Buy, Refurbish, Rent, Refinance, Repeat’.
So, what exactly is the BRRRR method UK? What are the risks? What are the gains? And is it the right step for you? In this article, we will be answering all these questions and more…
- How Risky Is BRRRR?
- What are the advantages of the BRRRR method?
- Is BRRRR right for me?
The first step in the BRRRR method UK is ‘Buy’. A big part of this step is finding the right location for your investment property. You should look in working-class neighbourhoods that need some repairs and refurbishment. In order to make sure that you are properly exploring all your options, you should seek assistance from an experienced sourcing agent.
In order to get the most out of the BRRRR method UK, you should look for a house that is in a state of disrepair (an under-market-value property) and whose value can go up through renovations.
However, this presents its own set of challenges. As the house will be in a state of disrepair, it will make it harder to take out a loan and get a traditional mortgage.
The value of an investment property can be hard to gauge, due to the state of disrepair that it will be in and most lenders require an appraisal. In addition to this, the property may need to pass additional guidelines to qualify for the loan, depending on the type that you get.
Purchasing an investment property in cash will allow you a quick and painless transaction but you will need sufficient funds in order to use this route.
It is a good idea to talk to a lender before you rule out financing as it may be possible to get a hard money loan or a home equity line of credit to finance the purchase of your investment home. However, these options are not recommended as they are high risk.
What to look out for in an investment house?
When looking for an investment house, it is important to look for a house that requires big enough repairs that other investors are scared away from it and sellers can be motivated to drop their price, but not so big that it ends up costing you too much.
When hunting for your potential investment house, these problems are the best ones to look out for:
- Damage To Drywall – If the drywall in your potential investment home is damaged, it makes it ineligible for financing whilst also keeping most potential home buyers at bay. However, it’s not all bad news, drywall is a fairly cheap fix.
- Old Fashioned Bathrooms – A new, modern bathroom can add value to your investment home whilst also keeping costs low as most bathrooms aren’t massive in size.
- Not Enough Bedrooms – Homes with less than three bedrooms but more than 1,200 square feet are common. By adding a third or fourth bedroom to your property, it allows your investment home to compare to nicer homes within the neighbourhood.
- Half-completed Kitchens – Houses where the kitchen is not yet complete also cannot be financed and so make them a much easier buy.
- Poor Landscaping – An overgrown garden can frighten people away but it is a relatively cheap fix. You don’t have to be a great gardener to cut back an overgrown hedge or de-weed a garden.
Once you have found your investment property you are ready for stage two of the BRRRR method UK: refurbish. When you are refurbishing your property, there are two main points that you want to keep in mind throughout every step of this stage.
1. What are the changes that need to be made to this property to make it liveable for future tenants?
2. What changes can I make that will add more value to the property than the cost to make them?
The one mistake that most people make when refurbishing their investment property is going overboard with unnecessary changes. Unless you are buying and holding luxury rentals, you will not need to bother with expensive items like skylights, bay windows, or hot tubs.
For an investment property to rent out to tenants, it is rarely worth finishing a garage or cellar. If you think that some changes need to be made, you could consider trying two-tone paint, refinished hardwoods, and a new tile.
If you have refurbished your property correctly you will make money back on the investment but the house needs to be in good shape.
Once you have purchased your investment home and refurbished it to your standard, it is time to rent it out. The sooner you put your house up on the market, the sooner you can get your tenants in.
When finding your tenants, it is important to look for qualities that will ensure that rent will be paid on time and that the home will be kept in a good condition.
Some qualities that you can look out for are:
- A good record of on-time payments
- A job with a steady income
- Positive references
- No history of eviction
- A good credit report
One thing to bear in mind at this stage of the BRRRR method is that your mortgage will be slightly higher than with a traditional method as you are borrowing against the house.
Step four of the BRRRR method UK is to refinance the investment property. When the investment property has been rented out to tenants, you can start looking into refinancing it. Some banks may offer a cash-out refinance, while others may only offer to pay off outstanding debt.
Out of these two options, it is recommended that you take the former option. It is also worth noting the banks ‘seasoning period’. This is the amount of time that you must own a property before a lender considers financing against the appraised value of the house.
The final step of the BRRRR method UK is to repeat it all again. The more you repeat the process, the more profit you will make and the more skilled at it you will become.
How Risky Is BRRRR?
As with any investment plan, there are risks involved. Below are some of the most common risks to be aware of if you are considering trying out the BRRRR method.
- The BRRRR method is not without risks, there are chances that you may get bad tenants, and there could be repeated maintenance issues and unexpected repair costs. All of these things can eat away at your profit and can result in a loss.
- Renovation Time – If you have never tackled the BRRRR method before, then you will be working with a new renovation team. As you have not worked with that team before you run the risk of building work being delayed if the team prioritises another project over yours, leading to delays in the project and opens you up to a whole other host of issues such as break-ins if word spreads that the property is empty.
- Renovation Costs – There is no guarantee that extra problems with the investment property won’t crop up. And if they do this can not only delay the renovation time but can also add up quickly, leaving you putting more money into the project than you originally wanted.
- Appraisal Risk –Refinancing is typically based on the appraisal of the property; not how much money investors have put into the property. However, you run the risk that the property will not be appraised for as much as expected.
What are the advantages of the BRRRR method?
The flip side of the coin is the positives that the BRRRR method brings are plentiful.
- Potential for returns – One of the biggest advantages of the BRRRR method is the chance of high returns on investments. If you do the BRRRR method correctly, you can purchase a property that is in a state of disrepair fairly cheaply, renovate it and then rent it out for a high cash flow.
- A good chance to build equity – With the BRRRR method, equity is built up during the refurbishment phase.
- Good tenants – If you have been successful in the refurbishment phase of the BRRRR method, you will be left with a quality home that people will want to live in. A quality home will attract good tenants who are willing to pay more money and take better care of the property.
- Economies Of Scale – If you are successful in your BRRRR journey and decide you want to build up your real estate portfolio, you can reach a stage called economies of scale. This is where owning and renting multiple investment properties at the same time can help to lower the costs overall by lowering your average cost per property and spreading out your risk.
Is the BRRRR method right for me?
The main way that you can decide if the BRRRR method UK is for you is by whether or not you are willing to take on a refurbishment project. A refurbishment project is a big commitment and is the most intensive out of all of the stages.
If you do not have the time or the commitment to take on a renovation, you run a bigger risk of a loss.
This covers everything you need to know about the BRRRR method UK. If you have any questions or queries or experience on the subject, please feel free to get in touch!
Alexandra is a junior content producer who enjoys writing articles and finding out more about the property market.