Understanding the BRRRR Investment Strategy

Property people who don’t want to catch a cold with unpredictable interest rates or tightening legislation are investing in BRRRR - but does the system work?

BRRRR stands for Buy a below-market-value (BMV) property, Refurbish to add value, Rent, Refinance and Repeat.

BRRRR is about buying and flipping a property for a profit with someone else’s money.

The formula is nothing new. Property investors have long used other people’s money to expand their portfolios, but what are the risks?

Comparing BRRRR with most other property investment strategies reveals the main difference is the source of investment cash.

Expensive borrowing

Property investors buy a home at auction and fund the refurbishment and other costs from their pockets or loans secured against their homes or other properties. BRRRR investors do not flip but keep properties to rent out.

The rent must cover running costs and loan interest payments and provide scope for a profit.

Borrowing is expensive, with interest rates between six and nine per cent. Typical loans are between £100,000 and £250,000, with a guaranteed return over terms from three months to two years.

The credit is working capital that covers the purchase price, building materials, interest on the loan and other costs.

Once the refurbishment is finished, tenants are moved in to generate an income, while a standard buy-to-let loan is arranged to refinance the angel’s credit and give cash for the next deal.

BRRRR stress points

BRRRR has several stress points.

• The property purchase price must be low enough to cover settling up with the investor and turning a profit.
• The property value and rent at the end of refurbishment must cover repaying the angel.
• Don’t forget stamp duty and tax. Flippers pay income tax on property business profits, while landlords should consider the impact of capital gains tax.
• The angel will take a first charge against the property to cover the credit line. If the deal goes wrong, the angel can take ownership of the property, and the would-be landlord will end up with nothing. Some angels will sign an investor agreement that shares the risk.
• If you can’t find an angel, consider a bridging loan - effectively, a more formal angel investment that is often expensive.

Professional property investment networks are good places to start the hunt for BRRRR angels. Many prefer to be called high-net-worth investors looking for a better return on their money than traditional savings or investments can provide in the short term.

Who controls a BRRRR deal?

The main problem with BRRRR is getting the first deal off the ground as an unproven property investor.

An issue with the current market is that BRRRR projects have no guarantee that property values will rise over time to allow a refinance to close off the deal and give enough cash to move on to the next one.

The most significant risk is who controls the BRRRR deal - the property investor or the money man?

If a conflict arises, the person with the power in the relationship holds the purse strings.