Strategies

KPS X – BUY REFURBISH AND REFINANCE

Buy-refurbish-refinance or BRR is a property strategy similar to buy to let. However, it has the additional killer element of forcing or accelerating the valuation of the property following purchase.

You force the appreciation by adding value to the property by refurbishing it. 

After refurbishing the property, you refinance it with the objective of taking out the entire amount of money you put in to buy and refurbish.

You are then free to rent out the refurbished property, gaining an ongoing rental income, and use the money you have taken out to go again and buy-refurbish-refinance another property. 

If all goes well, this is a strategy you can use indefinitely to acquire an endless number of properties – with time perhaps your biggest challenge.

It is a truly awesome strategy with the potential to acquire limitless property wealth without huge injection of external capital.

However it is a complex strategy with many moving parts and as with all strategies where rewards are high, risks are also high. 

It is not an ideal strategy for a property newbie, but it is by no means beyond someone prepared to learn its niceties, seek advice from property professionals or partner up with someone who has successfully implemented the strategy and knows the ins and outs.

Prior to getting stuck into BRR, you will benefit from having a good grasp of the key features of  buy to let

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1. Buying at the right price

To be successful with BRR you need to buy the right property at the right price.

You need a property which will appreciate in value after works but if you pay too much for it, the value you add will not be enough to allow you to take all of your money out following refurbishment.

If you can only take out some of your money, you are going to need capital from elsewhere to go again.

That may not be a difficulty for you once or twice, but if it becomes commonplace the pace at which you acquire new properties will slow if not come to a halt.

To be able to buy at the right price you will need to:

  • Know the right price to pay, and
  • Have the negotiating skills to agree the right price, or
  • Engage an agent or property sourcer who can agree or secure the right price for you.

To know the right price to pay you will, in your first project at least, need to link up with people such as builders, property coaches or joint venture partners who can assist you in coming up with accurate costings and timing for building works and the precise value uplift such works are likely to add. 

Clearly you can self-educate yourself to deal with these matters on a trial and error basis.

However, that would not be the low risk professional approach and is not an approach you should take if you want to give yourself the best chance of achieving maximum success in the shortest possible time.

2. Buying the property   

When buying the property you can do so for cash or with the aid of a mortgage depending on your circumstances. If you are carrying out a “heavy refurbishment” you may even consider buying with the aid of a bridging loan.

You will be operating with less risk and benefiting most from leverage if you purchase with the aid of a mortgage.

Remember however that a buy-to-let mortgage is not appropriate for BRR and you should consult with a mortgage broker to find mortgage products suitable for BRR – both to buy the property and later to refinance or remortgage it.

With the ideal in BRR being the ability to remove all your investment following refinancing, here (for illustration purposes only) is how a successful project could look in terms of the numbers:

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In real life these figures would require adjustment for full accuracy. For instance, you would need to take account of the valuation, mortgage, broker and legal costs of arranging the remortgage.

Further there could be letting agents’ charges in renting out the property and there could be a void period before a tenant is found – with all such matters reducing the £33,750 (£93,750 – £60,000) available for the next BRR. 

However the general picture is clear. If a BRR goes according to plan you will be able to take out your investment and repeat the trick again and again!

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3. Carrying out the refurbishment 

Getting the refurbishment stage wrong is probably the most likely reason a BRR will not go to plan.

You need to be realistic, not over-optimistic with the cost of works and the time it will take.

If you seek appropriate advice or assistance, engage top grade workmen and make realistic allowance for each head of expenditure (including a sufficient amount for things not going to plan), the refurbishment stage should not derail your project.

If you are an experienced builder and will carry out the works yourself, you will lower the level of risk in that regard and for that reason BRR is a strategy particularly suitable for builders or people with some of the skills required during the refurbishment. 


MUST KNOW PROPERTY STRATEGIES
Buy to let (buy and hold a property for income and/or capital growth)
Rent to buy (property is rented before it is bought)
Delayed completion (completion is delayed to make a profit)


4. Refinancing

Things can go wrong at the refinancing stage if you are unable to remortgage for the amount you calculated, leaving you short of funds to go again.

That is less likely to happen if you have carried out your calculations meticulously.

One possible problem is the so called “six month rule” – which refers to the fact that many lenders will not enter into a remortgage until six months after the purchase of the property.

If the works are completed before six months, you may need to wait before you can refinance. If you purchased the property with a bridging loan, the delay in being able to remortgage could cost you in terms of extra interest, fees and charges.

However, not all lenders insist on a 6 month period before refinancing and it would make sense to identify and use such lenders if your refurbishment is likely to take less than 6 months.

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5. Have a Plan B

As with any property strategy, when carrying out a BRR you should always have a Plan B.

Some of the things that can go wrong include:

  • Works running over
  • Cost of works under-estimated
  • Value added less than anticipated
  • House prices fall during the period of works
  • The remortgage is for less than anticipated
  • A remortgage is not possible at all.

You should have contingency plans for these and other things which may go wrong.

Perhaps the greatest danger is if you cannot secure a remortgage. That could happen if there is steep and sudden fall in property prices – such as happened in the 2007-8 credit crisis.

In such a case, you could simply rent out the property after refurbishment, without refinancing, until house prices recover – assuming your lender is agreeable.

If you purchase with a bridging loan or short term mortgage, be sure you have at least two strategies to pay off your lenders in the event of them not being prepared to extend the length of your borrowing.    

Have you ever had a go at BRR? How did it go? Did you learn any lessons which you would like to share?   Please leave your comments below.

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Dalton Barrett
Rebel Property Coach

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