{"id":8731,"date":"2020-05-06T07:00:04","date_gmt":"2020-05-06T07:00:04","guid":{"rendered":"https:\/\/www.canadianrealestatemagazine.ca\/getting-the-most-from-brrr\/"},"modified":"2023-11-08T01:11:57","modified_gmt":"2023-11-08T01:11:57","slug":"getting-the-most-from-brrr","status":"publish","type":"post","link":"https:\/\/www.canadianrealestatemagazine.ca\/expert-advice\/getting-the-most-from-brrr\/","title":{"rendered":"Getting the Most from BRRR"},"content":{"rendered":"

As property values have increased in most major markets in Canada, investors continue to look for ways to enhance their ROI. One of the ways to do so is to increase the rent-to-price ratio (RPP) through increasing the rental income a property generates.  <\/p>\n

While there are various ways to do this, the buy\/renovate\/refinance\/rent (BRRR) strategy has gained particular popularity in recent years as it enables investors to achieve exactly that.  <\/p>\n

While many investors understand the benefits of BRRR and know how to deploy it as a strategy, there is often a lack of understanding of what is involved from a financing standpoint to both enter and exit a deal. <\/p>\n

Let\u2019s identify some of the common financing traps associated with BRRRs and figure out how to avoid them.  <\/p>\n

TRAP 1: Taking a fixed rate <\/strong>
\nMany investors are opting for fixed rate mortgages, which are very attractive right now relative to variable rates. The problem when you take a fixed rate on a BRRR is that you are assuming you will be able to go back to that same lender and top up your loan or add a secured line of credit once the reno work is done.    <\/p>\n

Depending on how you (and the property) qualify and the guidelines of the lender you have locked in with, you may or may not be able to go back and refinance so soon after you are done the work. For example, some lenders require at least six months to elapse from the date you purchased the asset before they consider a refinance at the newly increased value. Some want to wait a year.  <\/p>\n

In some cases, your finances or the lender\u2019s guidelines may change by the time you are done the renovation. If you have taken a fixed rate, you will either have to pay an often large penalty to move your file to another lender that can get it done or wait \u2013 and that comes with an opportunity cost or other holding costs that you did not plan for.  <\/p>\n

We always recommend taking either a variable or an open rate going into a BRRR. <\/p>\n

TRAP 2: Making false assumptions around rate and down payments <\/strong>
\nTwo misconceptions regularly doom BRRR deals: that all investors will qualify for financing with 20 percent down and that your rate going into the deal will be two-point-something. <\/p>\n

With a BRRR in particular, the condition of the property plays a huge role in determining the type of financing you can obtain at acquisition. As an investor, you may have been pre-approved for a certain loan amount and terms, but until the lender sees the asset they will secure their money against, you can\u2019t seal the approval terms. <\/p>\n

It is one thing to buy a property that is dated but livable and requires some updating, perhaps even a secondary suite. But it is a completely different story to buy a property that requires gutting or has issues such as water damage, knob and tube wiring or foundational issues. <\/p>\n

You may need 25 percent or more in down payment funds, and you may end up going to an alternative or even private lender (at higher costs of capital) versus working with a bank.  <\/p>\n

Always consult with your mortgage broker regarding the condition of the property before going firm on a deal. Ideally, allow for a visit from the appraiser to avoid any surprises. Until the lender sees the property and reads the appraisal report, you can\u2019t seal the financing terms. Unless you are prepared for a private mortgage, do not go firm. <\/p>\n

TRAP 3: Expecting max equity too soon  <\/strong>
\nThe power of a BRRR done right is the forced appreciation a property often experiences upon the completion of the work.  <\/p>\n

As mentioned in Trap 1, even when the value has appreciated and you qualify, some lenders will not allow you to extract equity so soon. Therefore, it is important to do your homework upfront and have your broker validate your exit strategy financing assumptions by confirming a couple of things for you upfront, including:  <\/p>\n