Retire Early with the Buy Refurbish Refinance Property Investment Strategy
Leverage is the cornerstone of this strategy, which can allow you to fast-track your property results (and more importantly the money in your bank and the size of your property portfolio) quickly and give you the means to retire early, with both cash flow to live on and equity to retire with.
So grab a coffee, pull up a seat and discover how to fast track your property business like the pros.
The principle here is that you re-cycle your initial deposit so you can buy multiple properties, by using leverage to its full capacity.
You can even use this alongside other property strategies and you would purchase the property in much the same way as a traditional purchase, and the same as the vanilla buy to let strategy
The difference here though is that this strategy relies on you forcing the appreciation of the property through a refurbishment to add value. With this added value, you would then look to re-mortgage
Your re-mortgage would then be based on the ‘new value’ and you will be able to pull out your original deposit and refurbishment costs.
You would then simply move on to the next property, rolling and recycling your initial deposit pot.
The key to this strategy is being able to prove to the mortgage company and the surveyor that you have genuinely added value to the property.
Data is very accessible now, so they will know you purchased it in, say, January for £80k and now you want to remortgage it in August for £125k...
So there needs to be a very good reason as to why the property is now worth this new figure.
This strategy, therefore, relies on you adding significant value with an extensive refurbishment, showing a surveyor before and after pictures, a schedule of works and before and after comparisons.
This will help show your surveyor and lender that the property has in fact had value added, is now worth the new valuation, and should allow you to re-finance to its new value, so you can take out your initial investment and repeat the cycle on your next deal.
Where the Money Is
As with standard buy to lets you would still make money on rental income and equity, but the idea here is that you can increase your Return On Investment to an almost infinite return.
As your using just one investment pot to buy the first property, add value, re-mortgage, pull out your initial funds and re-use it to buy your next property.
But be aware that your risk-reward is therefore amplified as you have more properties.
The greater reward comes from more properties bringing in more rental income and the potential to increase in value with capital growth.
Cash Rich and Time Poor
This strategy requires a similar deposit investment as the vanilla buy to let strategy, but you also need additional funds to cover refurbishment costs, and I would also advise it’s wise to have a contingency budget in case you don’t get the re-valuation on a deal and you end up with some money left in.
Assets that Will Help
- A Good credit history is vital
- A Stable income from a source other than property so you can get regular mortgages.
- Money to invest in the original deposit, refurbishment and further funds if needed
- 9-12 months
The initial timeframe is the same as buying a standard buy to let.
The difference here though lies in having the time to then add value and refurbish the property, and then go through the process of the re-mortgage.
The timeframe above is conservative, it can be done quicker, but I want to be realistic with you. Sometimes these projects overrun, so it’s best to consider this early on.
One additional point to note, is that over time mortgages change, as do their rules and requirements.
It is now a standard requirement with most mortgage lenders that the owner of the property must own it for more than 6 months before they can apply for a re-mortgage.
This is one of the reasons for the longer time frame mentioned above.
So you can source the property, buy, refurb and allow this 6 month requirement to pass before you get a re-mortgage.
Tip: As mortgage products change all the time, make sure you speak to your mortgage broker to get the full picture of what mortgages are available ‘today’. There may be products available that allow you to speed up this process and complete the cycle in a much shorter period of time if there is no requirement for this 6 month rule with a particular lender.
Note: The purchase costs in this example include sourcing fees to find the property as well as the traditional purchase costs, like legal fees and surveys
Negotiated Purchase Price: £80,000
Mortgage @ 75% LTV: £60,000
Deposit Required @ 25%: £20,000
Purchase costs: £5,000
Cost of Refurb: £5,000
Total Invested (Deposit, Refurb and Purchase Costs): £30,000
New Market Value: £125,000
Re-Mortgage @ 75% LTV: £93,750
Locked in Equity (New Market Value - Remortgage Amount): £31,250
Money Taken Out (Re-mortgage amount - Paying Initial Mortgage): £33,750
Once you have paid off your original mortgage of £60,000 you would be left with £33,750.
You have then taken out your initial investment and some. You have effectively bought a property, refurbished it, and re-mortgaged it, all with one deposit pot of £30k whilst still having your original investment back in your pocket to re-invest into your next property.
You also still have equity in the property that you have left in, but because you have pulled out your original investment in full.... this is an infinite return on your investment (ROI) for this property.
As well as the equity in each property you will still get your net yearly rental income as well, and you have your initial deposit to move on to the next property.
How NOT to do It
This was the strategy that I set out to use on all of my properties when I left my estate agents J.O.B. in 2007.
The plan was to purchase, do a small refurbishment – as I wasn’t experienced in large-scale refurbs at the time, and then refinance.
The downside to this plan is it relies on you being able to refinance. This is fine when property prices are static or going up, but is not so great when house prices are falling or mortgage finance is restricted.
In 2008 I purchased a property that was in need of a refurbishment. My sole plan for buying this property was to run this strategy above, so I picked a property where I could show definite added value.
The refurbishment that I had planned consisted of a new bathroom, kitchen, heating system, new carpets, general decoration and landscaping the garden front and back, as well as improving some of the double glazing (patio doors, windows and front door).
After we started the works a couple of unknowns cropped up (as they do when you buy properties needing work).
Unfortunately, as it was one of my first refurbishments I hadn’t planned a proper contingency.
The original budget was planned at £8k. The works eventually cost £15k.
At the same time, the property market had started to fall but wasn’t showing signs of stopping.
By the time we had come to re-mortgage the property, the market had dipped too much and the new value we had planned on, was no longer achievable and the cost of refinancing wasn’t cost effective.
I was therefore left with a property with all of my refurbishment costs tied up and I couldn’t refinance.
This put a serious hole in my cash flow and restricted me being able to re-cycle my funds as planned.
The property was still a good deal, it was in great condition and would rent well, and I had locked in equity by doing the refurbishment, but the change in the market meant I couldn’t remortgage and my money was tied up.
The Top 3 Things I Would do Differently
- Have a plan B – if you can’t remortgage and pull out your investment is it the end of the world? Or do you have another option
- Plan for contingences – Sod’s law in property refurbishments, what can go wrong will. Make sure you have a contingency budget to cover some unknowns.
- Know your market – If property prices are falling (or expected) that’s fine, you just need to buy at a bigger discount, to account for the expected dip
When it Goes Right
Buying a property to live in (as you may know) is completely different to buying to rent.
You have different reasons for buying and you’re looking for a home, not necessarily just an investment.
The first property I purchased where I did a Buy-Refurbish-Refinance strategy was more out of luck than planned judgement.
It was a property I purchased to live in 2007.
I hadn’t planned to do any major refurbishments, but over the first year of living there, I had gradually done a few bits and pieces. But being my home I had gone a bit overboard on the fixtures and fittings. Nicer looking tiles in the bathroom, designer taps in the sinks and a new garden overhaul with decking and plants (that to this day I still don’t know the names of :)).
It certainly wasn’t a ‘buy to let refurbishment’, it was my home so I didn’t mind.
But my situation changed.
The lady that came to do my garden design ended up being my wife 🙂 and after only a year of being at the property, I moved so we could live together and start a new home.
House prices had just started to change, but as the change in the property had been significant since I had moved in, I was able to apply for a re-mortgage.
I was able to re-finance out my initial deposit and most of my refurbishment and re-cycle this into other properties.
What had started off as a straightforward property, turned into the Refurbish & Re-cycle your deposit strategy.
I was left with a ready to let property, none of my own money left in, and my initial funds back out to use on other properties.