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Buy Refurbish Remortgage Strategy - Insufficient Cash?


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Hey all,

I'm in the process of planning a new venture in property development. Over the past few months I've visited properties, built myself a comprehensive budgeting spreadsheet (that factors in all purchase, finance, holding and remortgaging costs), and gathered enough data to be able to run a simulation of my intended BRR strategy. The result has been discouraging! It would appear that given my starting capital of £100k, I'll run out of funds by my third purchase. Would an experienced developer sanity-check my simulation and confirm this?

If this is indeed true, what would you suggest as a more realistic strategy to build a portfolio? A mix of BRR and flips? 

The BRR Simulation
(this is based on figures from an actual property visited, costed, estate agents approached and comparables found) 

  • I have starting capital of £100k
  • I buy Property A (a two bed terrace) for £120k. I use a 70% mortgage of £84K, and I put in £36k
  • Purchase, renovation and holding costs for 6 months are a further £36K
  • Hence, my total investment is £72k
  • I have £28k left in the bank
  • The house is remortaged after 6 months redevelopment for £190k
  • The 70% mortgage releases £133k
  • ·After paying back the first mortgage there is £49k equity released
  • I own one property and have £77k capital left in the bank

 

  • I use the money to complete  Property B, which is identical, buying for £120k, again investing £72k
  • I have £5k left in the bank
  • The house is remortaged after 6 months redevelopment for £190k
  • The 70% mortgage releases £133k
  • After paying back the first mortgage there is £49k released
  • I now have two properties, but only £54k capital remaining in the bank, which is insufficient to buy Property C

BTS
Conversely, if I were to use a Buy to Sell strategy, this 'model' property would make £23k after sales costs and corporation tax on my business, so things are viable. However, my goal was to build a portfolio as quickly as possible, not to flip, as this is intended to be my pension. What would you advise in terms of strategy? Flip for a while to build more capital, then revert to BRR, or to alternate between the two?

Many thanks!

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Couple of things in your calculations - you can't use a mortgage for the initial purchase and then remortgage after 6 months. You may get away with it a couple of times, but would be blacklisted. If you haven't got the cash, you'd need to use bridging, so need to build that into the costs.

When you come to remortgage, you could also up it to 75% which would free up a bit more money. You've also not taken into account the net rent, which would help fill up the coffers. Ultimately, you'll always run out of money regardless of how much you start with, unless you can draw it all back out, which is unlikley with current lending rules and growth rates, so the decision is whether you need to bring in JV finance alongside the mortgages to get to your goal. 

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Thanks Dino, useful info
I was aware I'd need bridging finance initially (I labeled it incorrectly) and built the costs in, but yes I'd forgotten the net rent!
Having scribbled on the back of a napkin for an evening, I'm coming to the conclusion that a mix of flips and BRR would likely keep me solvent, although building a portfolio at a slower rate. Off to do the sums properly now.

I have a gut reluctant to bring in JV finance, but perhaps I need to take a more objective viewpoint...
 

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You need to be clear what your goals are - do you want cash flow soon, if so how much and by when or are you looking for property worth X now that will grow by Y over the next Z years.

If you want £10k a month in a year, you're either going to have to be a brilliant and lucky builder or find a JV partner and come up with some good strategies. If you want a few grand a month in 5 years, it's probably doable on your own. 

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Your main, and I really mean your main, problem will be to convince a valuer that a property (2, indeed) that you purchased for 120k is now, suddenly worth 190k.

You will need to demonstrate in great detail how exactly that added value is justified.

It's not what the estate agent thinks that is important, the valuer is your foe!

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I agree with Dennis. In today's market it will be very hard to convince a surveyor that you have increased the value of the house by 70K in 6 months. The surveyors will not simply look at comparables in such a short timescale, they will take how much you've spent and add on how much you spent in refurb, which will be 25K to 30K in your example. So you will more likely get a valuation of circa 150K.

I'm surprised you are able to find a house with such a large margin of 70K (market value when refurbed minus purchase price). I'm struggling to find  35 to 45K margins where I am. 

The BRR strategy is tough to do at the moment and I would suggest you look at houses that need less if a refurb such as 15K rather than 30K. Also be prepared to hold and rent for 2 yrs before remortgaging as after 2 yrs the surveyor will use comparables to determine market value. 

If you purchase a house worth 100K and do a refurb of 15K let's say. You can get regular Buy to let mortgages and hold for 2 years. You can probably do 2 at a time for your 100K pot and remortgage after 2 years. That way you can pull out the max possible, at 75%LTV and have had 2 years worth of rent income to build your pot further. Its not as quick as we all would like but it's how the market is working nowadays.

Best of luck

Ahmed

 

 

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  • 8 months later...
On 7/24/2019 at 5:03 PM, ahmed i said:

I agree with Dennis. In today's market it will be very hard to convince a surveyor that you have increased the value of the house by 70K in 6 months. The surveyors will not simply look at comparables in such a short timescale, they will take how much you've spent and add on how much you spent in refurb, which will be 25K to 30K in your example. So you will more likely get a valuation of circa 150K.

I'm surprised you are able to find a house with such a large margin of 70K (market value when refurbed minus purchase price). I'm struggling to find  35 to 45K margins where I am. 

The BRR strategy is tough to do at the moment and I would suggest you look at houses that need less if a refurb such as 15K rather than 30K. Also be prepared to hold and rent for 2 yrs before remortgaging as after 2 yrs the surveyor will use comparables to determine market value. 

If you purchase a house worth 100K and do a refurb of 15K let's say. You can get regular Buy to let mortgages and hold for 2 years. You can probably do 2 at a time for your 100K pot and remortgage after 2 years. That way you can pull out the max possible, at 75%LTV and have had 2 years worth of rent income to build your pot further. Its not as quick as we all would like but it's how the market is working nowadays.

Best of luck

Ahmed

 

 

Hi Ahmed,

You mentioned that as well as looking at comparables, surveyors will also take into account how much someone has spent on a refurb - could you clarify a but further how the amount spent on the refurb affects their valuation?

Also, do they take into account any other factors besides comparables and the refurb costs, such as the quality of the fittings (like the kitchen, bathroom, appliances) or do they generally go of the structural integrity of the property?

I know when people refurb to flip properties to sell for a profit they often 'stage' the property to make it more appealing to buyers and potentially increase it's value - is this irrelevant when a surveyor is just valuing a property for the purpose of remortgaging instead of selling?

Any advice would be really appreciated! 

Sam

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  • 8 months later...

Hi @Tasshope you're good?

I found your post from a Google search as we're going through the same planning process but about 10 months behind you!

Out of sheer curiosity I was wondering how you're getting on and if you  could share any learnings!

Many thanks 😊

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