Week 35: BRRR
Morning All! It's Bank Holiday today and you guessed it; i’m still working, writing my blog (I have a sad life) but hopefully not for long. When these projects start to bring in some regular cash-flow it'll all be worth it. Hope you all had a great weekend, I dropped my cat over to her friend Millie’s yesterday who by the way is another cat, in order to squeeze in a sneaky night out (really should be working though). I hate leaving my cat alone; though this ensures a guilt free night. Just in case you were wondering what the title of the blog BRRR (all consonants, no vowels) stands for ‘Buy, Refurbish, Rent, Refinance. Some people write it the other way round i.e buy/refurb/refinance and then rent at the end. But, I have been told you get a higher value for the house if it has sitting tenants in there and then you approach the banks. They will then see this as an established business. A lot of people fall into this strategy by accident without even knowing they are actually doing a BRRR. One of the oldest and popular methods chosen by many investors today. Some move into larger developments yet still find that they can't resist a ‘good ol’ brrr.
The object here is to purchase (Buy) a very run-down house or building and add value to it in order to secure a higher worth once the job is complete. You could choose to keep the house as a long term rental or sell it on to release quick funds. The discounted house will give you some scope to add your own margins. You can then either carry out the refurbishment yourself if you're a bit of a handy man or woman or you can out-source this to a subcontractor. I will go for the latter as I have no building skills whatsoever. The trick here is to renovate the property to the best of its ability by spending the least amount possible to create a great product. Not only does this product have to satisfy all building regulations and look aesthetically pleasing, it also has to deliver to its end-users or customers, which in our case are the tenants. Things to bear in mind:
Good communal space, perhaps with TV areas?
Enough worktops in the kitchen during peak times?
Is it light, airy, spacious, warm?
Is it comfortable, affordable, incredible?
Yes, incredible! Why not? a lot of competition out there. These are just some of the things one should consider when designing these products.
The 3rd ‘R’ in the mix i.e rent could also be outsourced to a lettings agent who can find, vet and qualify tenants before they accept them on your behalf. Obviously, there is a small charge to this but they will make sure all legalities are met and any handling of payments are done so in an orderly manner. Like everything else in life there is a choice, you could on the other hand do it yourself and advertise on platforms such as ‘Open Rent’ to meet your tenants directly if this is something you want to do. A lot of self-managing landlords do this.
The last ‘R’ of the mix Refinance; this is a biggie and can make or break a deal. The aim is to get the highest valuation possible. But like many things in life not everything is in our control and in this case sadly we are in the mercy of the valuer. What he/she decides could predetermine the future, don't you just hate that? Our future in the hands of someone else. For this reason it’s no rocket science to say keep all your receipts safe for all the works carried out in your property. All the suppliers, traders even the miniscule of upgrades, please don't practice nobleness, you have to be somewhat in their face. The valuer will check to see:
what you purchased the house for
what work you carried out and;
sold houses of similar nature
If you have done your research correctly then hopefully you shouldn't have any nasty surprises and the odds should be in your favour. You then take the final amount which is the refinance price and start deducting all your expenses. Just to keep things simple let's say you are a cash buyer, you will pay yourself back for the original price of the house followed by any renovation costs and leave in a percentage as deposit/equity. Then whatever is left is basically your take-home pay or profit earned. Most investors will agree if this is less than £10k then is it really worth it? But, as a newbie I will defo advise not to be scared of accepting a lower amount in order to learn the ropes.