10 Minute Read👋 Intro to BRRR Property Flipping
Did you know that properties typically double in value every 10 years? There are two types of property investors…
🙅♂️ Those who try and time the market
- 🏆 Those who spend time in the market.
- The old saying goes that it’s better to spend time in the market, rather than trying to time it and I agree.
- If you procrastinate and spend too much time chasing the perfect deal, you’ll end up wasting valuable time you could have spend benefiting from capital appreciation and I’m totally guilty of this myself.
- I’m not a massively experienced investor – I’m just getting started and documenting what I learn along the way.
- In this blog I’ll cover the buy to let basics of how to cost up and work out a buy, refurbish, refinance deal, otherwise known as BRRR when getting yourself an investment property.
Buy
Refurbish
Refinance
Rent
👍 Benefits of Property Flipping BRRR
Why is buy to let property investing financially better than the stock market? (In my personal opinion. I think there are 3 reasons why property investing is one of the best asset classes to get involved with.
Leveraging Finance
You can leverage money that isn’t your own to buy investments which you’d never be able to do for the stock market. But the joy of property investing is that it’s asset based lending, or known as secured lending which is lower risk for banks and investors.
This means that the banks are prepared to lend you up, usually, 75% of the cost of the property meaning you only need to front 25%. So if you wanted to buy a £100k house, it’ll actually only cost you £25k. And if you had £100k to spend…. you could buy 4 x houses priced at £100k each with 4 x £25k deposits.
The reason is that because the lending is secured… the bank know that they’d be able to get their money back by selling the property if you stopped paying the mortgage or if they wanted the money back… which is a lot harder to do when you spend money like a loan on a holiday which you should never do.
UK Supply VS Demand
But… should you wait until you find the perfect deal, or just find something that’s reasonably suitable, run the numbers and get stuck in?
My personal opinion is just getting stuck in… it’s 10x better to spend time in the market than it is timing the market.
Now I have another video about the 18 year property cycle which you can check out in the corner here after this video as property crashes do happen. But for the majority of time… if you’re in it for the long game.
You really can’t lose… even if you bought at the peak of a crash.
Property prices have pretty much doubled every 10 years so far, as far back as we’ve been monitoring property prices, back in the 1950s you could buy a house in London for £2500 and now you can’t pick anything up for less than £400k. And that’s the joy of compounding growth and inflation playing out there.
Cashflow & Capital Appreciation
The amazing part of property is that if you run your numbers right, you’ll benefit from monthly cashflow which I’ll take you through in the second part of this video every month from rental income, while also then benefiting from capital growth of the house which at the moment during strong market can be upwards of 5% a year…..
But also remember that’s not 5% on the deposit you put in…. that’s 5% on the entire cost of the property meaning that 75% I mentioned that the bank will give you for a mortgage, you get the 5% increase on that as well and it’s yours to keep.
To give you a super quick example… if you bought a property for £100k and gained £300 a month net rental income after costs, in a year you’d have 300*12 which is £3600 net rental income and then say property prices in the area went up 5%, that would be an extra £5k.
So after your first year of owning an investment property you’d have an extra £8600 through a mixture of cash and capital growth. Which isn’t bad when you put £25k to £30k in to begin with.
🏆 How To Successfully Manage a BRRR Project The Right Way
Alright… so – that’s why I think property is great. Now lets look at the key things I would be looking for when considering a buy to let property.
Below Market Value & Adding Value
Now, you might see the term below market value or BMV being thrown around by a lot of property hype gurus selling courses. But there is some substance behind this…. finding a property below market value isn’t as easy as just walking into an estate agent and asking for a discounted property as they’ll probably laugh you at the door as quickly as you walked in.
BUT you should be looking for a few scenarios that will help with negotiations when offering on a property and getting an offer accepted.
The main way to do this is finding an unloved property that needs a bit of work doing to it, this is where the property done up might be worth say £120k, but because of it’s outdated interior, estate agents list the property a bit cheaper giving you manoeuvrability to use that price reduction to improve the property and bring it up to standard.
The pro level to this is finding a property and managing a refurb that after the costs… the new price of the done up property, known as the gross development value is greater than what you’ve put in so that you actually make a profit on the refurb for all your hard time, effort and risk.
This I think depends on the strength of a market… at the moment the market is super hot still with stamp duty tax breaks so they’re harder to find and you have slimmer picking of on-market deals.
🏡 BRRR Method Example
Lorem ipsum dolor sit amet, consectetur adipiscing elit. Ut elit tellus, luctus nec ullamcorper mattis, pulvinar dapibus leo.If you bought a properties market value was £100k in it’s condition but the estate agent lists it for £90k, then you’ve found a property below market value.
Lets say it takes £10k to fit a new bathroom and kitchen but otherwise the rest of the property is ok… the new value might then end up being £130k if others on the street sell for that price when fully done up.
That way you’ve spent £100k on the property + the refurb, add about £5k for purchase costs so that’s £105k money in. And you’ve now got a property worth £130k… that means you’ve got an extra £25k equity in that property.
But the best bit is that you can now refinance the property on a 75% LTV mortgage meaning the bank will give you £90k back to pay for the new house value and you need to put £30k for your 25%.
Well if you put £22.5k for the original deposit to buy the house in the first place at the old £90k value and you’ve just gained £25k equity.
If you take away the £10k refurb cost that you spent and £5k on purchase fees. You’ve got £10k net profit sat in the property.
Now I’ve tried to use a realistic on market deal example here of properties I’ve recently seen, rather than making up some fancy unobtainable money in money out deal that isn’t actually possible to get for the average person who has limited time. It would mean that you have to tie up that £8k profit in the property and you get £2k back in the bank.
Now I know what you’re thinking… Matt I’ve been taught that I should be looking for money in money out or pulling all of my money out to recycle my cash. Yep that’s true and that’s what you should aim for… but for the average person starting out on a standard terraced or semi detatched house with on-market deals isn’t going to stumble across these types of deals every day.
⏰ Why Time Matters for BRRR
Lets say you rent this house out for £700 a month or £8400 GROSS a year
take
10% for maintenance £840
10% for management £840
5% mortgage stress test so that’s (£90k * 5%) or £4500 a year for mortgage costs
That would comfortably leave you with £2220 a year net profit. That’s not too bad, but then factor in capital growth.
12 months £120k could turn into £126k so thats £6000 capital growth + £2220 rental profit
2 years it could be £132k – so that’s £12k capital growth and £4440 rental profit
3 years it could be worth £138k and £6660 rental profit.
So after 3 years, even though you tied a lot of money up, you’d be sitting on £18k of more equity due to capital growth plus £6660 rental income profit after all costs so that’s £24 to £25k extra in only 3 years from one property.
Now…. if you sold the property – you’d have the £30k you left in originally, plus the £2k you pulled out, plus £26k equity so you’ve now got £58k after 3 years. You could buy two more houses with that and do it all over again.
Or if you refinanced the property again the bank would give you £104k towards the property to pay off your original £90k mortgage so you’d end up pulling out £14k plus you’d have £6660 rental profit before taxes which is £20k back in your bank to buy another property and keep the first.
That doesn’t include any saving that you’d do normally through those 3 years to keep your cash pile growing. So lets say you saved up another £10 – £20k over the 3 years from your job, you’d have £40k after saving + refinance AND still have the house that’s paying rental income and growing 5% a year in capital growth.
⚖️ Conclusion
Hopefully this has inspired you to think about property and show you how you don’t need crazy no money down or to be able to pull every penny out after a refurb – and that just by spending a bit of time in the market for 3 years, you can generate really strong profits to then snowball that investing journey.
Free Goal Setting Guide
Are you struggling to find focus in your property business? Do you have a clear, tangible and measurable plan of action? Download this free handy goal setting guide that explores wherey you are today, your financial literal and north star lateral goals – and what you need to do to bridge that gap to meet your goals.
