The Buy-Rehab-Rent-Refinance (BRRR) strategy is in no way a new form of real estate investing. This has been practiced by people all over the world, and I believe to a certain extent in Singapore. I believe that some savvy investors have already been practicing the BRRR strategy, but have not placed a name to it yet!
Taking a look at a larger scale, this is simply what most Real Estate Developers are doing and therefore able to bring out a profit, through the concept of forced appreciation.
As an individual investor, it is very difficult to conduct this on a similar scale. Let us discuss more in detail the similarities between what Real Estate Developers are doing and what you can do as a Real Estate Investor to utilise this strategy.
This article does not aim to overload you with lots of statistical figures, but more as in to provide you with a framework in which you can work with for real estate investing, to draw sustainable profits through capital appreciation, rentals, and refinancing, as the name of the strategy implies. This will lead in a snowball accumulation of equities which can help you achieve financial freedom.
The Buy Stage
Developers purchase a residential, commercial, or industrial block through the practice of a collective sale. Most of them will most likely not have enough cash in the first place to make such a hefty purchase. Think nine-digit purchases at the minimum. It is also not such a good practice to place in too much cash investments initially as this will result in a poorer return of investment.
For new launches, most of the funds needed to conduct the actual purchase of the land and construction are released in phases and this is in regard to the number of units sold by the developer. Banks will release these funds gradually in phases to the developers.
For homeowners, we suggest looking into purchasing properties that are undervalued. These properties are usually available through mortgagee sales or through properties that are sold by owners under distress as this will usually be cheaper. However, do take note that these properties usually have an “underlying” consequence as to why they are being sold more affordably, so be sure to do some research before purchasing. The main reason why we suggest purchasing an undervalued property is that this will be a lower “basepoint” in which you are forking out. This will result in a bigger net gain once you are involved in the next few stages of the BRRR strategy.
The Rehab Stage
After purchasing the real estate through a collective sale, the developer will have to raise the value of a said real estate to generate a profit. Real Estate in its basic terminology means the property, land, buildings, air rights above the land and underground rights below the land. All immovable property/works which are conducted on the land will result in it contributing to its overall value.
What people in the past used, and still do, is to conduct a form of business on said land to raise its value, this can be in the form of agriculture. However, in Singapore for most of us, this is not possible due to land scarcity? The next best solution is to target in particular the reason why Real Estate is so crucial to the Singapore economy and why people are able to profit from it. To “raise” the value of land, you will have to improve upon its current condition to generate value from it.
Developers will tear down the said building on the land, and rebuild a “better” version of it so it is viewed as more valuable than before. This is part of the contributing factor to why real estate prices will continuously increase.
As a homeowner, source a renovation contractor to improve upon the current condition of your property. This can be as simple as repainting the whole of your unit or installing new carpentry to the existing damaged ones. But before the commencement of your renovation project, calculate how much you are willing to spend so as to not make a net loss after refinancing. We suggest not spending more than 10% of your existing property value on renovation works. During this stage, also consider what will make your property highly differentiating from other units. Will your home be revolving around a particular interior design styling?
The “Rent” Stage
Most developers are not included in the rent stage, as they have most likely cashed out on their investment by selling the development, which at this stage will also include their profit after land, development and agent costs. Still, there are some alternative forms in how the developers will execute the “rent” stage, for example renting out a commercial unit instead of selling it immediately for a capital profit.
After the “rehab” stage, your property should be much more attractive to potential tenants. Having the property to be more attractive as compared to your competitors, will ensure that you are able to demand a higher rental. A higher rental will ensure that you will have a good margin after your mortgage, agent fees, and other costs.
For the homeowner, rental is very important in terms of real estate investing as it helps to offset the existing mortgage payments which you are fulfilling.
Do discuss with:
1) A trusted banker on the best repayment schedule and loan sum in order to generate positive cash flow.
2) A trusted real estate agent which understands how to make the repayment schedule work for you by setting a realistic rental amount to charge to obtain positive cash flow.
The Refinancing Stage
For this stage, most developers will not be involved in this as the property will have been already sold. For most homeowners, however, the discussed rates for your mortgage at the point of sale can be often renegotiated, you can consider other options through refinancing.
After the renovation project on the property is done, consult your bank valuer to do a second appraisal before conducting the refinancing.
For valuation, there are two forms that you will need to take note of. One is indicative valuations and the other is actual valuation.
Indicative valuation is a simpler approach, where the value is obtained through the average price of properties transacted around the immediate vicinity. This form of valuation can be quickly done through the use of free online tools or based on past transactional data.
The form of valuation that you should consider is actual valuation done by qualified surveyors and valuers, who do not value the property on face value as there are other factors that they will base their assessment on.
Some additional factors will be for example,
· built-up area
· number of rooms
· vehicle accessibility/parking
· age and condition of the property
These factors are modifiable from the point of an investor and you should take the time to consider how you can improve upon a property even before purchasing it as an investment.
Refinancing is important as firstly, upon improving the current condition of your property, it will be deemed more valuable as compared to your immediate neighbors. Secondly, refinancing offers you the option to have a better interest rate as compared to what you are paying for at the moment.
In addition, refinancing or repricing should be done even if you are not intending to sell away the property as bank interest rates will usually increase after the 3rd year, and its best for you to relook into it.
With every form of real estate investing, there will be bound to be some challenges. One such issue with the BRRR strategy is that it heavily relies on what makes a property unique. To further elaborate on this point, we will have to work on the fact that market transactions cannot be too efficient in this aspect. For certain residential properties like public housing in Singapore, HDBs are far too homogenous and therefore there is little room for profiting in regards to this strategy.
This goes back to the point of indicative valuation, which is the most accessible style of valuation for homeowners. If there are potentially 20 transactions/month of 4-room HDBs occurring within the immediate vicinity, most buyers will most likely view the unit from a cost standpoint and not appreciate your property for its unique qualities. However, this strategy can still work for them, should the property be able to present itself with a highly differentiating quality like marble tiling for flooring or branded quartz tabletop for kitchen carpentry. Just make sure that your property agent is able to emphasize strongly on that point when they are marketing that unit!
You should have a well-thought-out plan before conducting this investment strategy as BRRR investing requires a sound knowledge of the real estate and renovation industry. You will need to ensure that you are not overspending on any particular area and all your investments should work out for you.
This strategy requires a mindset that is heavily focused on long term investing. If you are a real estate investor who is keen on immediately flipping a property after the 3rd year, the end of seller stamp duties, it will be very challenging to work this strategy out. The BRRR strategy heavily relies on the fluctuation between bank rates for refinancing and also your holding power of the properties.
Thank you for taking the time to read this article, I believe the BRRR strategy is a fantastic way to gain capital appreciation/rental in the long run, as this method consistently provides profit from both ends. Every stage is important and provides a sound foundation for further real estate investment.
If you are interested in getting my opinion on your current properties, or any other future property investments, do give me a call at +6596329840.
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