The majority of new real estate investors were initially drawn to the industry for the potential financial gain. There’s really no hiding the fact that the main intent of acquiring real estate is to eventually earn a significant return on investment via appreciation or rental income somewhere down the line. Achieving and maintaining success in the real estate investment market requires a solid and scalable business approach—a key component of which is having a predetermined, specifically-tailored exit strategy in mind for each and every investment project.
As the name implies, a real estate exit strategy is a pre-planned framework that enables investors to extricate themselves from a given real estate investment property—which can be one of the most complex and most challenging to navigate stages of the entire investment process. Investors approach the exit strategy development process differently based on personal preference as well as the unique circumstances of the associated property. Some choose to plan their exit strategy as a component of their original investment move; whereas others being to formulate their exit approach after they have a better understanding of the project’s trajectory. While both of these strategies can be successfully leveraged, the ideal method is to have a replicable exit strategy in place before acquiring any investment properties.
There are several factors that make exit strategies a vital aspect of successful long-term real estate investing, including:
- Formulating a viable real estate exit strategy provides real estate investors with an executable game plan that identifies and subsequently mitigates the inherent risks all investors assume when purchasing properties.
- Implementing a customized exit strategy tends to enhance the profit margin of real estate investors by clearly establishing financial targets and expense plans earlier rather than later to keep investors on-track over the investment project timeline.
- Some aspiring investors acquire an investment project and then come to realize that they do not have the requisite resources or skills to make it in the real estate industry. Others may not be able to stay well-informed of the constantly evolving real estate marketplace. Still, others lose their passion and consider their acquired assets a financial burden or non-productive waste of time and effort. There is a plethora of reasons why investors may need a reliable exit strategy—and having one on hand at all times is the most efficient way to save time, money and stress.
- The real estate investment industry is notorious for last-minute, unexpected emergencies that can impact virtually anyone—regardless of experience or skillset. If and when these unfortunate events occur, the extra effort devoted to coming up with an exit strategy in advance will pay dividends when the time comes.
- Exit strategies are also an advantageous tool for real estate investors who are contemplating expanding their property portfolio and own more assets. The more diversified the portfolio, the more important it is to understand how to concurrently manage them and what steps to take in the event that one or more of them becomes a liability.
Common Exit Strategies
Put simply, not establishing a real estate exit strategy can result in lost profits and an increased level of risk—not an ideal combination for any investor. That being said, the question still remains: What are the most effective exit strategies?
- Fix-and-Flip: The Fix-and-Flip approach generally yields the greatest profit margins, as it enables investors to resell the completed project at or above full market value. It necessitates acquiring properties that require serious rehab at below market value, making extensive renovations to them, and then re-selling them at a price that will still turn a profit after accounting for the initial purchase price plus rehab expenses.
- Buy-and-Hold: This plan is a common choice for investors seeking to accrue equity in a given real estate asset. It is comparable in many ways to the fix-and-flip method; however, as opposed to immediately reselling the rehabbed property, the real estate investor opts to retain it and then rent it out. As both appreciation and equity increase, these projects can then be put on the market for a substantial profit.
- Wholesale: These deals involve investors essentially functioning as a middleman between a property seller and buyer. The investor locates and then quickly sells below market properties for a profit margin by placing the asset under a purchase agreement and then assigning the contract to the buying party for a fee.
- Seller Financing: This is an ideal approach for getting out of an investment project while maintaining profitability. This involves the seller financing the deal and acting as a bank. The selling and buying parties exchange a promissory note that includes an interest rate and repayment plan. This type of exit strategy is beneficial to sellers, who receive monthly installments to pay the mortgage loan and their ROI scales up via interest income.
- Rent-to-Own: This approach enables the owner of a real estate property to rent the investment property but gives tenants the right to buy it outright after a pre-established length of tenancy.
Factors to Consider When Choosing Exit Strategies
Choosing one of the aforementioned exit strategies is far from a simple process and investors should subsequently consider all of the following applicable factors when doing so:
- Short and long-term financial targets
- Level of industry experience and skillset
- Closing timelines
- Initial market purchase price
- Property valuation
- Initial condition of the property
- Market stability and history
- Market supply and demand by property size/type
- Available funding sources
- Potential profit margin
- Future depreciation
- Problematic tenants
- Maintenance and repair expenses
Before pulling the trigger on acquiring a real estate investment project, real estate investors should already have a plan in place regarding their eventual disassociation with the property and how to maximize profits when doing so.
A Good Exit Strategy Equals a Good Bottom Line | Gauntlet Funding – Melville, NY