CPC Finance frequently helps investors expand their portfolios using the buy, refurb, rent, refinance strategy. Recently, CPC Finance director Karl Griggs spoke to Property Investor News about how this works in practice.
The Buy, Refurb, Rent, Refinance Strategy – An interview with Karl Griggs of CPC Finance
Property investors should generally always be looking towards strategies that maximise their returns. One way to do this is to combine a number of strategies that produce an outcome that is, hopefully, greater than the sum of the parts. The buy, refurb, rent, refinance strategy is an example of one such strategy. In this report we will look specifically at the finance aspect of this type of project.
First, for those who are not familiar with buy, refurb, rent and refinance (or B.R.R.R. as it is often known) a quick heads-up. B.R.R.R. generally offers potential to offer enhanced returns compared to say a standalone refurbishment or buy to let project. There is potential to generate a short term capital gain as well as a long term one. There is potential to enhance yields and income. B.R.R.R. can also offer potential to leverage a relatively small capital investment to grow a portfolio quickly.
Looking more closely at each of the individual elements of B.R.R.R. now. When buying, although this strategy could potentially work with any kind of property, there are advantages to buying some kind of problematic or distressed property where value can be added. With refurbish there are often two aspects to the refurbish element: Refurbishment is used to not only make the property more lettable but also so that it can be financed using more cost effective finance. With a B.R.R.R. project the rental could be to a standard let but rental via a HMO is frequently considered as a way of maximising returns. With finance the overall objective is generally to finance on short term and relatively expensive bridging before refinancing to cheaper long term finance.
By definition, therefore, a successful B.R.R.R. investor needs to be multi-talented and multi-skilled. As well as a degree of market knowledge, property knowledge and project management skills a degree of financial acumen is needed both when initially purchasing the property and subsequently financing and refinancing it.
CPC Finance is a finance broker and packager which specialises in sourcing and packaging a range of property funding. This includes buy to let and commercial properties, auction investments, property developments and secured loans. In this report we look more closely at the financial aspect of B.R.R.R. and take in some thoughts on the subject from Karl Griggs of CPC Finance.
Firstly, Karl outlines why he believes B.R.R.R. is growing in popularity with property investors at the moment. He explains: “The numbers of investors promoting courses on the subject alongside TV programmes showcasing these projects has undoubtedly brought B.R.R.R. into the public eye as an attractive development opportunity recently.
“However, the main reasons I see for growth of B.R.R.R. are the growing number of properties coming onto the market which are suitable for commercial to residential conversion or residential to HMO conversions. Small and new property investors are seeing these kinds of properties being offered in online auctions and, encouraged by the fact they no longer need to visit the auction room to bid, are deciding to investigate further.
“The fact that B.R.R.R. can be used to increase returns and yields on a project shouldn’t be forgotten either of course.”
He offers some advice to new developers looking to start in BRRR: “First and foremost I would advise developers who are new to B.R.R.R. to start small. Start with just one property rather than, say, an entire block of flats. And look for something that just needs a light refurbishment and with minimal planning hurdles to overcome rather than a major renovation.
“There are two main reasons for starting small. Firstly, the simpler the project the less time it will take and this will help keep the costs of bridging finance under control. Secondly, lenders will take into account your lack of experience in this type of project alongside how realistic your project is. They are much more likely to lend to new B.R.R.R. applicants if your plans are modest and achievable.
“Once you have successfully completed a number of small projects by all means look to take on more ambitious heavy refurbishments. Lenders will be more willing to consider them as they have a proven track record.”
He suggests what some of the pitfalls of B.R.R.R. might be, which investors should look out for: “The main risk to be aware of with these types of projects is that something goes wrong which delays them. For example, some kind of structural problem is found or there are difficulties or delays in securing planning or a HMO licence in the case of a HMO.
“You should also be sure that you have a ready exit route to let out on a buy to let mortgage or sell.
“Anything that causes a delay with a B.R.R.R. process is potentially a problem since it can push up the costs of the project and eat into your profits. When used as short term finance bridging can be very cost effective, but over an extended period it is less so.”
Karl outlines how a typical B.R.R.R. project might work: “To give a simple example, let’s assume you were looking at a small project with a purchase price of £100,000, refurbishment costs of £10-15,000 giving a gross development value (GDV) of £150,000. Bridging finance could provide up to 85% of the purchase price. On completion you would switch to a term facility at 75% of the GDV i.e £112,500 loan advance so withdrawing almost all of your original outlay and works funds, to move on to a new project
“Even with this kind of small project the aim should be to get in, do the work and then exit to a longer term facility as soon as possible. It’s best to think of bridging finance as a tool of the trade that enables you to achieve your goals with your project
“The first step is to find a property that is suitable for refurbishment, whether it be a commercial to residential conversion or a residential to HMO. The next step is to put a finance proposal together. This would need a schedule of works with costings and timescale, credit reports, a survey and due diligence. The lender would also look for a valuer opinion and take a view on whether the end GDV is achievable.”
When sourcing finance Karl outlines what some of the advantages of using a broker such as CPC Finance are. He explains: “Here at CPC Finance we are aware of the different products that are available from lenders and the different lenders’ requirements and so we are able to place the applicants with the lenders that best suits your needs immediately to save you the time etc of shopping around
“We handle all the financial work, prepare the application, do all the chasing including the valuers and solicitors where it is needed to ensure completion of your applicants as soon as possible .
“Very importantly we are able to advise on what type of B.R.R.R. projects are likely to work and so what can and cannot be financed even before you start to put a project together.”