As cognizance of real estate investing as a wealth building tool continues to proliferate, the awareness of the BRRRR strategy has grown significantly. Look no further than to the popularity of the book “Buy, Rehab, Rent Refinance, Repeat” written by the very owner of this blog, David Greene, as a gauge.
In this article, we will discuss the BRRRR method. We will also introduce another powerful investment strategy, the “CLEER Method”, which has similar benefits.
The Power Of BRRRR
The BRRRR method, when executed correctly, allows investors to build a portfolio of homes by recycling a single chunk of capital; either their own or, another investors. The key, as is the case with most real estate strategies, is to find the right kind of deal.
1. Buy
Buy a property that is distressed, needs significant work and that a traditional retail buyer would not touch. These types of properties will command a price that is favorable for an investor. As an example, a distressed property in a neighborhood of other $200,000 homes may only command a price of $120,000. In this example, let’s assume the $120,000 home needs $25,000 of work to get it up to par and rent ready.
2. Rehab
Rehab the property with the $25,000. Let’s assume you have $5,000 of holding (insurance, utilities, taxes, etc.) and other costs (transaction) while the property is being rehabbed and seasoned. You are all in for: $120,000 + $25,000 + $5,000 = $150,000.
3. Rent
Rent the property out at market rental rates and start taking advantage of the powerful benefits of holding real estate.
4. Refinance
Here is the beauty of the model. A bank will allow you to do a 75% loan to value (LTV) cash out refinance on a single family investment home (70% on 2-4 unit buildings, unless you live in 1 unit). You acquired an asset for $150,000 that is now performing and because of the neighborhood it is in, the rehab you financed and the lease, it is now worth $200,000. The cash out refinance allows you to get your $150,000 back. You are left with a cash flowing rental property and the same $150,000 you started with. How cool is that!
5. Repeat
You take your $150,000 and execute the process again. Do it again and again to build a multitude of rental properties and in the process, build wealth.
What Is The CLEER Method?
My wife and I are currently in the process of executing the CLEER method:
1. Construct
2. Lease
3. Extract Equity
4. Repeat
In our article “The Build To Rent Trend – Is There Opportunity For You And I?” we discussed the movement towards newly and purpose built rental properties. The CLEER Method leverages the build to rent model.
1. Construct
Step one, constructing a rental property, is accomplished by either acquiring newly built properties or working with a builder to finance the construction. In my example, we contracted with a builder in Tennessee to acquire two 4-unit townhome buildings for $375,000 each that the builder already had plans to build. We financed these using “HELOC Money” from other properties that we own. More on that in #3 below.
2. Lease
Find tenants for the property and start collecting rent. In our example, our property manager was able to lock in 8 leases for our 8 units within 60 days of closing on the properties.
3. Extract Equity
Here’s where the beauty shows up again. Similar to the BRRRR method, when you have a tenanted property (a newly built one at that) you are in a favorable position to work with a bank to get cash out of the home. See “How Houses Can Buy You Houses – The Power Of Equity and HELOC’s” for 3 different ways to extract the equity.
It took approximately 10 months from the time we entered into the contract (June of 2019) until the 4plexes were ready to close (March 31,2020). In this timeframe real estate prices had risen. In fact, the appraisals we had done as part of getting HELOC’s on the 2 fourplexes show the value of each building is now $470,000. Because we bought pre-construction units in a market with high demand, we ended up paying less for the buildings than they were worth when we actually acquired them. How cool is that!
4. Repeat
Take the tax free cash gained in step 3 and run the process again. We are currently in contract on two more 4 unit townhomes which we will acquire predominantly using the HELOC funds from the 1st 2 fourplexes. Assuming market conditions remain favorable, the plan is to repeat steps 1-3 either in the same market or a new one.
Comparing BRRRR and CLEER
Both the BRRRR method and the CLEER method allow investors to use a single chunk of capital to acquire multiple properties overtime and to snowball wealth. When executed as a pure BRRRR, an investor is able to extract ALL of the original capital invested. It may be a bit more challenging to extract ALL of the original capital in the CLEER method as there is no self managed value add component (no rehab).
That being said, there are clear advantages to CLEER. When you enter into a contract for a new construction property, you know exactly what your costs will be (predictability). With BRRRR, there is the risk of underestimating rehab costs. There are also decisions to be made on exactly what should be rehabbed or what can be temporarily deferred. With new construction, there is no stress in deciding what should be rehabbed and there theoretically should be no significant maintenance issues for many years after acquisition.
With BRRRR there is also risk in misestimating the ARV (after repair value). A poor estimate will lead to less than optimal cash out when the property is refinanced. Unless housing values goes down during the time your CLEER property is being constructed, there is very little risk that you will not be able to extract your anticipated amount in using the CLEER method. Knowing the minimum you will get back allows you to aggressively and confidently seek out the next deal.
Summary
Savvy wealth builders understand the velocity of money and are always working to find ways to snowball their net worth through intelligent asset acquisitions. More and more folks are using the BRRR method. The lesser talked about CLEER method, when executed correctly, is another fantastic way to leverage the advantages of real estate investing as a means to enhance economic prosperity.
