Property Strategies (Part 2)
Last week we took a look at basic buy to let investing and this week we’re going to look at more sophisticated ways of doing this strategy. First of all, though, let’s just recap.
At the most basic level of investing, we could buy a property, put a tenant in and just collect the rent. Not all investors want to own a portfolio of 50 to 100 properties; some may just want a few properties to supplement their income or pension and therefore this would probably be “good enough” for them.
But, there is much more you can do with buy to let. For example, using my favourite technique within the strategy, BRR – or Buy, Refurbish, Refinance.
This is not actually a specific buy to let strategy, but a technique. You buy properties, refurbish them and refinance them, and then recycle your money back out. This technique can be used within many of the property strategies not just buy to let. For example, with HMOs, commercial property, etc.
The essence of BRR investing is to find a property where by you can add value. When combined with buy to let, it works really well and enables you to build a very large portfolio. What’s more, it doesn’t need to be complicated – adding value can be done by undertaking just a minor refurb. For example, putting in a new kitchen, bathroom, carpets or windows, or even by just giving the property a lick of paint.
By adding value, you can then refinance the property and hopefully recycle most or even all of your money back out.
To make the margin even greater and to make it even more likely that you’ll get all or most of your money back out, you can buy the property slightly cheaper. For example, a property might be on the market for £80,000 but because the condition might not be fantastic, the price might be discounted to reflect the work required. If it was in good condition, it might have been on the market for up to £100,000.
If you can buy that property for say, £65,000 and spend (as an example) £7,500 on the refurb, you can then end up with a property that is worth in the region of £100,000. If you then get a 75% or 80% LTV mortgage, you will be able to get most (if not all) of your money back out again. This is how BRR works.
Now, adding value doesn’t just have to be through a refurbishment. There are other ways and other things you can do if BRR is going to be tough in your area. As a general rule, BRR is difficult in areas where properties are of greater value – the upper end of the range (at the time of writing) is probably around £150,000. The reason for this is because banks have introduced what they call “Stress Testing”.
To give a brief explanation of what this is, stress testing is a calculation that lenders use to determine how much they will lend to a borrower. In simple terms, the bank comes up with a notional interest rate and then multiplies this by 125%, 130% or 145% over and above that figure. The rent has to then be greater than that notional interest rate.
Stress testing limits the top value of a property that you can actually buy. This is about £150,000 so you need to be looking for properties in the region of £100,000 or less.
Incidentally, with BRR you don’t necessarily have to go down the refurb route – there are other things you can do if you’re buying in an area where property values are higher or where you’re going to struggle to do BRR.
Another option you could consider is title splitting. This is where you buy a house and turn it into two flats. Or, where you buy a house and turn it into four flats, for example. Of course, you need to do the figures to make sure it all stacks up, but this might be another strategy that might work in your investment area.
If the figures don’t stack up, you may have to buy in a cheaper area where the figures do work, or if you’re not going to do a refurb, you might consider some kind of development. For example, some investors in big cities such as London, remove the kitchen and make an open plan kitchen/living room and convert the room that housed the kitchen into an additional bedroom.
This won’t make the floor area of the property change, but because in the UK we tend to calculate value based on the number of bedrooms, by doing this you would increase the value of the property.
In essence, there are various tweaks that we can make to a property which can make the BRR technique effective depending on where you are. What’s more, with a basic level of minor refurbishment and then refinancing, you can buy the property using a buy to let mortgage on the proviso that the lender deems the property to be habitable.
By the way, habitable doesn’t have to mean pristine, and whilst each bank IS different with its criteria, this usually means that the property has to have a working bathroom and kitchen. If the kitchen and the bathroom are not up to scratch, some banks will accept it and some valuers will be okay with it. However, others may not. It’s somewhat of a lottery.
If it does turn out to be a stumbling block, a way of getting around this is to buy the property using 100% cash.
If you borrow 100% of the funds, do the refurb and then refinance, then the banks are likely to be happy with this.
In my opinion, overall the BRR model is fantastic – and, once you get your head around it and understand how it works, you’ll certainly see that it can be a very powerful technique indeed.
Here’s to successful property investing.
Peter Jones B.Sc FRICS
Chartered Surveyor, author and property investor
By the way, I’ve rewritten and updated my best-selling e-book, The Successful Property Investor’s Strategy Workshop, which is an account of how I put together my multi-property portfolio, starting from scratch and with no money of my own, and how you can do the same. For more details please go to: