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BRR is this how it works against a deal?


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Hi,

 

Just looking for some guidance/re-assurance around the BRR (buy, refurb, re-finance) strategy with a specific deal I'm looking at, also keen to understand if this would be deemed a good deal or not.

 

Purchase price = £115k

Bridging loan = £80k (75% ltv)

Finance fees = £6.5k

Legals & SDLT = £4.5k

Refurb cost = £10k (costs plus 20% contingency)

 

Re-finance after 4 months @ £150k

Pull out £32.5k with new mortgage 75% ltv

Leaves £37.5k equity after paying back bridge loan

 

So I've invested £56k of my own cash

Total equity and cash out would be £70k

I've generated £14k plus a house that would generate around £300 per month rental

 

Interested to understand if my calculations are in line with what I should be looking at or have I missed anything glaringly obvsious?

 

I can see how this strategy would have been great in past years minus the SDLT and obviously the bridge is expensive so eats into profit, however for me the figures still seem to look OK as it generates £14k for 4 months work that I'll be mainly project managing (maybe some ripping out) and then results in £300 a month with an asset that I'd hope would increase in value over the coming years based on it's fundamentals, plus I'll have £37.5k to start my next project..........

 

Keen to understand peoples thoughts. 

 

Thanks,

Royce 

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Hi Royce

 

I do love a good BRR project myself too!

 

However, based on the info you have shared, I sense that perhaps you have not experienced one before, or if so, it went swimmingly well? They don't always go as well in practice as on paper unfortunately.

 

I say this as I see the following potential omissions or risks in what you shared:

  • You seem to miss out a number of costs, such as fees for the refinancing and holding costs (e.g. council tax, insurance, utilities, bridger legal fees, remortgage fees, etc.), so make sure you have captured everything in your numbers
  • £10k in works to generate an increase in value of £35k might be a little optimistic these day...remember, that you will have to get the buy-in of both the valuer and the lender for this to stick and a simple makeover often does not usually do that, but stranger things have happened!
  • 4 months from completion to refinance is also optimistic and is also only possible when using a commercial / non-CML lender any way due to 'the 6-month rule'...I usually budget on 6 months myself.

Still, even if some or all of these things go against you, the idea of a 'free hose' or 50% to 100% cash recycling is very compelling isn't it?

 

Best

Richard

 

PS - so true on the pre-3% SDLT premium days...this has made flips and BRR more challenging for sure!

Richard W J Brown a.k.a. The Property Voice

Property Investment Strategist

10%+ ROI property deals every week: check out PROPERTY DEAL TIPS
Amazon best-selling author Property Investor Toolkit & #PropTech, YPN Magazine columnist & PODCAST host

Web & Blog: The Property Voice | Curated property news & insights feed

Facebook Page | TwitterLinked In

Let's connect...mention The Property Hub :)

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Hi Richard,

 

Thanks for the reply, feedback and advice really appreciated.

 

You're correct I have not done a BRR deal before like this anyway, I have done a BRR but over a two year period using standard mortgages etc.  I'm interested on adding the value and getting some cash out asap rather than waiting the two years for the mortgage, hence why I assume the best route is bridging or JV through someone with the cash.  

 

Thanks for pointing out the areas I have not considered I had included the bridging costs of £6.5k but I hadn't included the re-mortgage legals and fees which will probably come to another £2k plus and I need to consider council tax, running costs etc as I had not put these into the calc's. 

 

I think as well I have underestimated the refurb cost so I'll tweak those figures, but the end value I'm confident on the property is listed for £125k so I'm obviously banking on a deal there's some comparables in the area in a slightly better state but still need work doing at around £140. 

 

Now I have a question on the 6 month rule as I don't fully understand this one, as I'm doing bridging I'm not having a conventional mortgage so I thought this might not apply as I'm essentially buying in cash (with the bridger having a charge I assume), my understanding was this rule applied to standard mortgage products and lenders so I thought as I'm bridging I could re-mortgage whenever the refurb is finished with a standard mortgage provider but may have misunderstood? 

 

Thanks again,

Royce 

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Hi Royce

 

Yes, CML suggest that their members must have a reasonable period between ownership and refinancing and the de facto gap happens to be 6 months for most of the members (it's actually a guideline rather than an absolute rule). However, the non-CML members, such as commercial lenders and challenger banks can refinance in a matter of a few months, so that's the way to go if you want to refinance quickly, although sometimes their rates can be a little higher.

 

R

Richard W J Brown a.k.a. The Property Voice

Property Investment Strategist

10%+ ROI property deals every week: check out PROPERTY DEAL TIPS
Amazon best-selling author Property Investor Toolkit & #PropTech, YPN Magazine columnist & PODCAST host

Web & Blog: The Property Voice | Curated property news & insights feed

Facebook Page | TwitterLinked In

Let's connect...mention The Property Hub :)

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  • 3 weeks later...

Hi Royce,

 

You can get a bridge to mortgage product which will work around the 6 month rule, but there would need to be serious evidence of similar properties selling that that higher price, and even then that is not guaranteed.

 

Pulling all of your money out after costs is very difficult, especially if you are using bridging or private financing, as normally the cost of lending severely eats into profit margins.  I have just completed a BRR project where the numbers stack up for it extracting every penny with a few ££ left over as a bonus (Project BRR), but as Richard has said this is simply on paper at the moment. If a valuer came out and was having a crappy day then it could be a different story.  I still have a few months to go before I can start re-financing, and I may just leave the property as unencumbered at the minute as I do not need the cash.  In my mind the longer that I leave it, then better the end valuation is likely to be.

 

What would your exit position be if the refurb ended up being higher or the valuation ended up being far lower than you anticipate?  What is your worst case scenario exit strategy?

 

Darren

 

www.fmp-investments.com

www.f-m-p.uk

property@f-m-p.uk

I am looking for private financing

with a 10% ROI - get in touch

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