In this post, I aim to delve into the methodology I employ to determine the ideal purchase price for a BRRR property. I believe it is beneficial to illustrate this process using a practical example involving the acquisition of a three-story terrace property commonly found throughout the United Kingdom.
The strategy entails acquiring the property at an appropriate price, renovating it to create three one-bedroom apartments, and subdividing the ownership of each unit. By evaluating the individual worth of each apartment, you can ascertain the Gross Development Value (GDV) of the project and comprehend the potential income it may generate.
To provide some context, I will utilise property prices reflective of our targeted investments in the north-west region of England. Assuming the property is listed at £156,000 and necessitates significant refurbishment.
Valuing A BRRR
When evaluating a BRRR project, begin by determining the end value first, known as the GDV (Gross Development Value). This represents the property's worth upon completion of the work. To assess this, we analyse local comparables. For instance, since our aim is to transform a terrace house into three apartments with separate titles, it's advisable to use 1-bedroom apartments as benchmarks. It's crucial to ensure that the comparables closely align with our project goals.
After pinpointing several comparables, we can gauge the potential return from a 1-bedroom apartment in your vicinity. For instance, if you're considering an investment in northern England, and our comparable apartments are valued at approximately £90,000 each, simple calculations indicate that the GDV could be around £270,000.
Valuing Property Refurbishment
Once we've received valuations from comparable properties, we can move on to assessing the necessary improvements to align the properties with your desired specifications. We won't delve too deeply here as there are numerous factors to consider when renovating a property, such as installing a new roof, windows, heating systems, rewiring, and more.
Let's assume our estimate is around £100,000. We anticipate that each apartment will cost approximately £30,000, with an additional £10,000 allocated for contingencies.
Additional Expenses
Considering the financing strategy chosen for the property, it is crucial to factor in the associated costs. For instance, opting for a bridging loan entails facility fees and interest rates.
In this scenario, let us assume we are using our own funds to purchase the property and carry out the renovations, eliminating the need to account for finance-related charges.
Furthermore, it is essential to account for solicitor fees and survey expenditures. Assuming solicitor fees amount to £1,500 and the survey costs £800, the total additional costs sum up to £1,300.
By aggregating all these expenses, we arrive at the total cost of the refurbishment, which stands at £101,300 in this illustration.
Framing your Offer
When formulating the offer, we must factor in the Gross Development Value (GDV) and achievable finance. In this scenario, the total value of the three flats is £270,000. Given that these flats are residential, a 75% mortgage could be obtained. Consequently, upon refinancing the property, an estimated £202,500 could be withdrawn. This figure serves as the basis for framing our offer.
To extract our entire investment from this deal, we would need to subtract the costs of £101,300 from the £202,500, resulting in an offer price of £101,200. Various factors could influence this outcome, such as escalating development expenses. It's uncommon to withdraw the entire investment from deals, so determining how much you are willing to reinvest in a property is crucial.
Ultimately, your strategy guides this decision. For instance, if you were comfortable leaving £30,000 in the property, it would provide more flexibility in the offer. Considering the initial asking price was £156,000 and the property is newly listed, an offer of £101,300 would likely be insufficient. However, if the property has lingered on the market and the seller is motivated, the situation may shift.
Assuming the property is newly listed, adding the extra £30,000 to the offer brings it to £131,200, edging closer to the vendor's asking price. Should the vendor accept your offer, you will have £30,000 invested in the property.
Therefore, it's vital to assess the exit strategy for this deal promptly. The property's net income plays a crucial role in this assessment.
For instance, if the apartments can generate £750 monthly each, the total monthly income would be £2,250 or £27,000 annually. Accounting for a 5% mortgage rate on £202,500, equating to £10,125 yearly, a net income of £16,875 remains after subtracting the mortgage cost. This implies that within two years, all invested funds can be recouped from the deal.
Consistency in adhering to your strategy is key. If an offer is rejected, consider moving the property to your pipeline and revisiting it in the future. A property that remains unsold may prompt the vendor to be more receptive to your offer over time.
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