If you’re putting money into an investment, surely you want to get it back at some point. But how do you decide when is the right time to retrieve your invested capital? When it comes to investing in real estate, you should always have an exit strategy in mind before signing a deal. These exit strategies are what drive your profits home. It’s where you turn your equity into cash.
What are the different types of real estate exit strategies?
You can use many different types of exit strategies for real estate properties. Some of these will likely look familiar to you. You’ll notice that it really comes down to how you structure the investment in the first place. Each option is unique in terms of the length of investment, the volume of cash flow generated, the degree of required management and several other factors. Consider all of the options below to find one that works for you.
Buy and hold (long-term): This involves buying a property and staying invested indefinitely. In the meantime, you will generate cash flow through rental income.
Buy and hold (short-term): Here you also buy a property and rent it out. However, the renting only lasts a short while before you go ahead and sell the investment property.
Rehabbing: This is also known as a fix and flip. This is generally short-term in nature since you buy the property, fix it up and then list it for resale when ready.
Wholesaling: This is the exit strategy with the quickest turnaround time of 90 days at the most. Essentially you buy a property and sell it immediately without doing any work to it. Sometimes, you don’t even have to close on the property yourself if you find a buyer soon enough.
Seller finance: Here the seller issues a mortgage so the buyer can purchase the property. In this case, the seller holds onto the full amount of the mortgage to cover the selling price. However, the buyer continues making the monthly mortgage payments to the seller which they in turn use to pay down the mortgage.
Lease option: This can be similar to the short-term buy and hold strategy if the property is sold to a previous tenant. These deals are known as rent-to-own agreements.
Real estate auction: This is not a conventional exit strategy but it can never hurt to know your way around a real estate auction. It’s better to be prepared than be caught off guard.
Which exit strategy is right for you?
We recommended to look at all of the possible exit strategies and pick the right one for you. But how do you know which one is right for you? Take a moment to consider some of the conditions below to help you figure it out.
What are your goals? You should consider your personal and financial goals as an investor. How much profit are you seeking to make? How much time can you commit to it?
Your experience as a real estate investor. Some types of exit strategies are more easily maneuvered than others. If you’re new to real estate investing, then you may want to stick to some of the simpler strategies.
What financing is available to you? The amount and type of financing you have at your disposal can affect the particular exit strategy you decide to pursue. Of course, some strategies require more capital than others.
The price to value ratio of a property. The price to value ratio of a particular property can determine what the most profitable exit strategy would be for the situation. Not all deals are good ones, so you’ll want to pick the most suitable strategy.
Market conditions. Of course, you must consider the state of the real estate market. Is there a balance between supply and demand, or is one lopsided? Some markets make it easy to turn a profit no matter which option you choose, while down turning markets can make other strategies risky.
These are just a few factors to consider in picking the right strategy. Ultimately, there is no right strategy for every single investor. It really depends on your personal situation.
What can cause an exit strategy to go wrong?
If all investments went smoothly, it’d be a perfect world. However, this is not the case as there is always room for error. Be prepared for some of the following obstacles that can put a halt to your exit strategy.
Tenant issues. Issues with your tenants is never a good sign, especially when you lose out on rental income. Essentially, bringing in less cash than expected will hurt your profitability and can affect the timing of your exit strategy.
Financing issues. Depending on your strategy of choice, a funding cut can hinder any progress on your investment. Take a fix and flip, for example. If funding is unavailable, then no more renovations can be made. This leads to the full value of the investment not being realized at the time of sale.
Low market demand. If you are unable to find sellers at the desired price level, this can affect your exit strategy. You may be forced to hold out longer or worse, lower your asking price.
Unexpected costs. These unexpected costs are never good signs as they eat away at your profits.
Poor property management. If you don’t take care of the property it can negatively impact your property value.
Transactional problems. Problems arising in the process of reselling a property can affect the timing of your exit strategy. Additional costs may also be incurred by having to find a new buyer.
Remember, you always want to go into a deal with an exit strategy in mind. It doesn’t make sense to only think about where to invest your money and not think about capitalizing on it, right?
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