The Buy, Refurbish, Refinance, and Rent (BRRR) strategy has become increasingly popular among UK property investors. This approach allows investors to build a property portfolio with minimal capital tied up in each deal, generating ongoing rental income while also leveraging the property’s increased value post-refurbishment. Here’s a detailed look at what the BRRR strategy involves, key considerations for executing it, and a numerical example breakdown.
What is the BRRR Strategy?
The BRRR strategy is a method used by property investors to maximize their returns by following these four key steps:
Buy: Purchase a property, typically one that requires refurbishment, at a below-market price.
Refurbish: Carry out renovations or refurbishments to increase the property's value.
Refinance: Once the refurbishment is complete, refinance the property to pull out the equity generated by the increased value.
Rent: Rent out the property to generate ongoing rental income.
By refinancing after the refurbishment, the investor can often pull out most, if not all, of the original investment, allowing them to reinvest in additional properties and repeat the process.
Key Considerations When Executing the BRRR Strategy
Property Selection:
Location: Choose a property in an area with strong rental demand and potential for capital growth.
Condition: The property should require enough work to add value but not so much that it becomes a money pit. Structural issues or extensive repairs can erode profits.
Price: Aim to buy below market value. This could be a property in need of refurbishment or one sold under distress.
Refurbishment:
Budgeting: Set a realistic budget for the refurbishment and add a contingency for unexpected costs (a proper schedule of works put together by a reputable builder is recommended here)
Scope of Work: Focus on improvements that will maximise the property’s value and rental appeal. Common refurbishments include kitchen and bathroom upgrades, new flooring, and cosmetic repairs.
Project Management: Efficient project management is crucial to keep costs down and ensure the work is completed on time.
Refinancing:
Valuation: After refurbishment, a lender will value the property to determine how much you can borrow against it. The higher the valuation, the more equity you can release.
Loan-to-Value (LTV) Ratio: Most lenders will offer a mortgage at around 75% LTV, meaning you can borrow up to 75% of the property’s new value.
Interest Rates: Shop around for competitive interest rates to ensure your mortgage payments are manageable within your rental income.
Renting:
Rental Yield: Calculate the rental yield to ensure the property will generate sufficient income to cover mortgage payments and other expenses.
Tenant Management: Consider whether you’ll manage the property yourself or use a letting agent. Good tenant management is key to ensuring consistent rental income.
Compliance: Ensure the property meets all legal requirements for renting, including safety regulations, energy performance certificates (EPC), and necessary licenses.
Return on Capital Employed (ROCE):
Definition: ROCE measures the efficiency and profitability of your investment, calculated as the profit generated relative to the capital initially invested.
Importance: A higher ROCE indicates a more efficient use of your capital, allowing you to assess whether the BRRR strategy is yielding the expected returns.
Calculation: To calculate ROCE, divide the annual net profit (after costs) by the total capital employed (initial outlay minus any equity released through refinancing). This metric helps you compare different property investments and make informed decisions on future projects.
Numerical Example Breakdown with Return on Capital Employed (ROCE)
Let's look at an example and include a detailed calculation of the Return on Capital Employed (ROCE).
Investment Opportunity Breakdown
This section details an investment opportunity utilising the BRRR (Buy, Refurbish, Refinance, Rent) strategy with the following assumptions:
Property Purchase
Purchase Price: £100,000
Purchase Costs
Deposit (25%): £25,000
Stamp Duty: £3,000
Survey: £500
Legal Fees: £1,500
Loan Set-up Fees: £1,313
Refurbishment Costs
Refurb Cost: £20,000
Interest During Refurbishment: £4,500
Council Tax During Refurbishment: £835
Electric/Gas During Refurbishment: £360
Water During Refurbishment: £180
Insurance During Refurbishment: £240
Total Refurbishment Costs: £26,115
Total Purchase & Refurbishment Costs
Total Cost: £57,428
Refinance Details
Estimated Market Value (Post-Refurbishment): £165,000
Locked-In Equity: £41,250
Money Left In: £8,678
Explanation: The "Locked-In Equity" represents the amount of value added to the property post-refurbishment that remains tied up in the property. The "Money Left In" figure represents the remaining capital in the property after refinancing.
Total Annual Expenses
Mortgage @ 4% (Interest-Only): £4,950
Repairs/Maintenance: £1,080
Insurance & Agent Fees: £1,560
Total Annual Expenses: £7,590
Profit and Return Metrics
Monthly Profit: £268
Annual Profit: £3,210
Return on Investment (ROCE): 37.0%
ROCE Explanation: The ROCE is calculated as the annual profit (£3,210) divided by the total capital left in the deal (£8,678), providing a return of 37% on the remaining capital invested.
Anything above 25% ROCE is generally considered to be a great deal
Comentarios