Buy Refurbish Rent Refinance or Flip?
Updated: Jun 16, 2021
A lot of people have heard about house flipping, but only a select few have heard about the BRRR strategy. This post will briefly explain how they work and go over the advantages and disadvantages of each strategy so you can find out which one would work best for you. I’ll also briefly go over the three ways value can be added to a property.
Before we dive any deeper into the differences between the two strategies, I’d like to point out one main similarity; both strategies work by adding value to a property. See below the three ways I believe value can be added:
The first way is all about negotiations and finding the right seller. For example, if you purchase a property for £77,000 but it’s actual worth is £85,000 you’ve immediately gained £8,000 from that property. Look for and negotiate Below Market Value (BMV) deals. Remember, you make money when you buy.
The second way only applies if an investor will be buying the property from you and usually works best with commercial or larger residential properties such as HMOs or blocks of flats. All you have to do is find tenants. Think about it for a second, if you were an investor wanting to buy an investment property, would you rather buy the exact same property which is empty or the one next door which already has tenants paying you the income you are looking for? Most investors would choose the latter and pay extra money for the convenance. Also, take into consideration that if an investor buys an empty property, they will have to pay the property managers a tenant finder’s fee as well as run the risk of having an extended void period.
The third and final way is adding value through renovation works. You would be surprised at what new carpets and a lick of paint can do to a property’s value. For this method to work it’s important to have the right building contractors in place, a team who can do a great job of the works at an efficient price. It’s also important to do some research and find out what similar properties, in better condition, sold for. So you get an idea of what value you could potentially add.
House flipping is basically buying a house where value can be added and selling it, making a profit off of the value added. As easy as that sounds there are a few things to consider when doing this. Here are the advantages and disadvantages of flipping houses:
· The first advantage that comes to my mind is that money is made a lot faster if done correctly.
o But you got to be quick to re-invest your money into the next flip project after the first has completed.
· You don’t have to worry about bank loans and interest rate charges if you have the cash.
o Getting mortgages approved is a time consuming and stressful process. Maybe due to your circumstances you can’t get mortgages or can only get them at exceptionally high interest rates.
· Make no errors!
o There is not a lot of room for error in this game. One wrong move and you could be stuck with a house that isn’t selling or forced to sell the property at a loss.
· Holding costs
o The idea of a flip is to be as quick as possible and assume every day you own the property is costing you money. If the build takes longer than expected or you can’t sell the property you still have to pay empty property rates/ council tax every month.
· Selling costs
o Don’t forget to factor these into your calculations. Properties cost money to buy and sell as a lot of parties are involved in the transaction. You have to pay the estate agent who helps you sell the property and you have to pay your solicitor who conveys the property.
o Capital gains tax also needs to be considered and if you are going to get into this game, I’d strongly recommend you speak to an accountant who can advise you how to go about this business as tax efficiently as possible.
BRRR (Buy, Refurbish, Rent, Refinance)
A very popular strategy amongst investors today!
The idea of this strategy is to add as much value as possible through buying, refurbishing and renting a property. The biggest difference is, instead of selling the property on, you keep it for yourself and get a mortgage from a bank who will lend you up to 75% of what the property is worth. Meaning that if you’ve added 25% or more value to the property you can pull out all of your initial investment and even more to invest into the next deal.
· Recycle your money!
o Imagine pulling all of your original investment out of a cash flowing property and re-investing it into another one. If you do this correctly you are guaranteed snowball your wealth.
· Having a property portfolio
o If you keep the properties instead of selling them on and structure your business in such a way that you don’t manage the properties yourself, you can build up passive income from the rent which would be perfect for early retirement or living a financially stress-free life.
o A portfolio of properties is bound to increase in value overtime. You can re-mortgage the properties or sell them on to get some more money to use or re-invest.
· More room for error
o If some things go wrong, it doesn’t matter so much as you were planning to rent the property out anyway.
o There’s always a plan B which is sell!
· Easier said than done
o Adding 25% or more value to a property is a huge task and requires a lot of knowledge and dedication, especially in the heat of the current market. A lot of investors nowadays are settling for a 10% increase in value and even as low as 5%. This meaning a fair amount of money is still left in the deal.
· Extra steps
o There are extra steps involved and depending on how big the project is, it can take up to 9 months to see the reward (mortgage finance).
o Rent has to be sufficient to pay off the mortgage as well as all the other costs and still make you a profit every month. If you don’t check this you could be stuck with a liability.
o Every step of the BRRR process is important so don’t forget this last one (I know I did with my first property). It’s vital to speak to a mortgage broker first to get an idea of what amount and rate a lender would be willing to lend you.
o My first property went really smoothly and I was expecting a return of 33%, all until it came to the last step, refinancing the property. As I was working overseas at the time, I was seen as a risky person to lend to. I ended up paying 10K in fees, on top of that they only gave me a 55% loan to value at an interest rate of 7%. That bought my 33% down to a 9% return. If I had known better, I would have done it differently. However, I have learnt my lesson and I am a whole lot wiser from it now.
Thanks for reading my blog. I hope some of the information was useful. If you’re currently looking for a flip or BRRR project why not register for our property deals or sign up to our bespoke sourcing contract? Furthermore, if you have any property related questions visit our website and get in touch, either myself or one of the team would be more than happy to assist you.