So you may of heard of a type of property investment strategy call Buy Renovate Rent Refinance (BRRR). However how does it actually work in reality and how can you use finance to implement this property investment strategy?
A shorter version of this you may of come across is Buy Renovate Refinance (BRR) and is essentially the same thing as BRRR. It also may be referred to as Buy Refurbish Rent Refinance.
The concept is fairly simple enough to understand, you buy a property that requires refurbishment. Then you complete the refurbishment, with a view to increasing the properties value. Then you get a tenant in paying a monthly rent and refinance at the new higher valuation.
Most investors would look to get some or in some cases even all their money back out. Read on below to see how this might work and what finance you can potentially use. This short video will explain how it works:
Disclaimer: This is not investment advice and is purely for educational purposes only. We are not financial advisors.
How Does The Buy Renovate Rent Refinance (BRRR) Method Work?
Lets break down the components of the BRRR method and see what is involved. I will also discuss the different finance options available at each stage if the process. This handy infographic below set out the key steps in the process.
1. Buying With Finance
The first thing you need to do is find a property to purchase. This could be with an estate agent, online via Zoopla or Rightmove or even via auction.
If you don’t have enough cash to purchase the property outright, then you could consider using Bridging Finance. You can use a Bridging Loan towards the purchase cost, usually up to a maximum of 75% LTV.
It may even be possible to use bridging for 100% of the purchase cost, if you have additional properties to provide as security to the lender. This could be on a first or even second charge basis and may mean you don’t need to contribute any cash as a deposit.
Note: You cannot use a standard Buy to Let Mortgage to purchase a uninhabitable property. If you wish to purchase using a BTL mortgage the property must be in a good state of repair, working kitchen and bathroom.
2. Renovating With Finance
Once you have completed the property purchase, you need to get to work renovating it straight away. You can either use your own cash to complete the renovation or you can finance part of the works.
If you are adding substantial value to a property, you may be able to use finance to cover some of the refurbishment costs. The amount available is usually based on a maximum Loan To Gross Development Value (LTGDV).
- Option 1: Fund up to 100% costs in arrears with Bridging Finance. This will give you access to additional funds on top of the finance used for the purchase, with the same lender.
- Option 2: Some funders will offer higher LTV funding upfront, where a refurbishment is taking place. This could be up to 85% LTV (maximum 75% LTC).
Read more about Option 2 in are recent article 85% LTV Bridging Loan  Residential Buy-to-Let Refurbishment.
3. Secure A Rental Tenant
This part is fairly self explanatory, once finished your Buy To Let refurbishment you can now get a paying tenant in the property.
If you are planning to keep the property as a long term investment then tenants will provide a monthly cashflow.
You can also start the refinance before a tenancy is agreed, you don’t have to wait until an AST is signed.
4. Re-Financing The Property
As soon as the work has been complete, the property can be refinanced to a Buy To Let Mortgage.
You can potentially secure a BTL mortgage for up to 80% LTV of the new market value. This will be subject to meeting the required criteria and also a survayor carrying out a valuation.
Example of Buy Renovate Rent Refinance In Action
To Help you understand the finances, lets look at a worked example. This is using a bridging loan without contribution towards renovation costs. There may be other costs not included below and will vary from project to project.
This is just made up numbers for explanatory purposes, you will need to calculate your own numbers for each deal.
|Legal & Other Fees||£3000|
|Gross Bridging Loan||£75,000|
|Arrangement Fee (2%) + Other Fees||£1675|
|6 Months Retained Interest (0.85%/m)||£3825|
|NET BRIDGING LOAN||£69,500|
|TOTAL DEPOSIT & CONTRIBUTION||£66,500|
|TOTAL COST (6 Months)||£141,500|
|New Market Value||£165,000|
|Mortgage 75% LTV||£123,750|
|Money Left In The Deal||£17,750|
Summary: Buy Renovate Rent Refinance Repeat?
Like all businesses and investments there is risk and this strategy is no different. You need to consider both the upside and downside potential.
If you are using a Bridging Loan during the refurbishment, then each extra month you take will cost you more interest.
However this is a property investment strategy used successfully by many people to grow a buy to let property portfolio.
Apply For BRR Finance Today
Here at Bolton Business Finance, we are independent property finance brokers.
We can source both bridging loans and BTL mortgages from a wide range of banks/lenders.
Please get in touch to discuss your finance options on 01204 860113
Alternatively please fill in the form below and we will be in touch straight away.