Many people enter the real estate investing business for the financial benefits this market offers – it’s no secret that the whole point of purchasing investment properties is to make money through appreciation or rent in the years to come. No successful real estate investor enters the market without establishing an efficient business model (plan) – hence, having an exit strategy before even purchasing a real estate investment property.
What Is a Real Estate Exit Strategy?
As the name suggests, a real estate exit strategy is a plan in which the real estate investor intends to remove him/herself from a real estate investing deal. Essentially, an exit strategy is a consideration as what the real estate investor will do with the investment property.
Some exit strategies are planned by real estate investors as part of the original investment decision (business model/plan). On the other hand, some property investors start considering an exit strategy once they have a clearer picture of the investment and things begin to unravel. However, the best advice for real estate investors is to plan an exit strategy before even purchasing investment properties.
Oftentimes, property investors fail to realize the importance of establishing an exit strategy when making a real estate investing deal. So, what makes exit strategies so important?
The Importance of a Real Estate Exit Strategy
There are a number of causes that push real estate investors into implementing exit strategy plans:
- Determining an appropriate real estate exit strategy not only will provide real estate investors with a plan of action, but will also minimize forthcoming risks. When property investors evaluate potential exit strategies before purchasing investment properties, they realize the risks associated with the investment and know how to avoid them.
- Having a specific exit strategy is crucial to success, as the correct approach will result in maximized profits. It’s never wise to enter a real estate investing deal without having a clear understanding of how you will profit from the real estate property when exiting from the investing deal. Therefore, having a financial goal and an exit strategy can save you thousands – if not millions – of dollars throughout your real estate investing career.
- What if you purchased an investment property and a while later you realized that real estate investing isn’t really your thing? Or if you’re not able to keep up with the demands of the real estate investing market? Or if you’ve lost your passion and now your real estate property is becoming a burden or is just not worth your efforts? These are reasons why having an exit strategy before purchasing investment properties is crucial.
- Unexpected emergencies can affect anyone, including real estate investors. An investor might find him/herself stuck by a tragedy and in desperate need of cash. In this situation, a real estate exit strategy will help sell the property faster and cash out.
- Real estate exit strategies are also beneficial for property investors who are considering to expand their real estate investment portfolio and have bigger investments. This is probably one of the most common reasons to implement an exit strategy as it’ll give property investors an understanding of how to manage these different investment properties and how to act if one of them is not giving return in terms of rental income or appreciation.
Essentially, failing to establish a real estate exit strategy can lead to reducing potential profits and increasing risks at the same time. Understanding exit strategies before purchasing investment properties will ensure property investors that they won’t regret entering the real estate investing market. The question that is left to answer is: What are the most common exit strategies that real estate investors follow?
Top Real Estate Exit Strategies
Understanding and choosing the right exit strategy will ultimately affect how successful you will be in your real estate investing career.
Exit Strategy #1: Fix-and-Flip
This real estate exit strategy typically results in the highest profit margins, as it allows the real estate investor to sell the real estate property at full market value. It involves purchasing investment properties that need repair (below market value), renovating them, and then selling them for more than the original investment costs (purchase price plus repair costs).
Keep in mind that real estate investors who seek to execute this exit strategy should be aware of market trends, and capable of quickly adding value to real estate investment properties.
Exit Strategy #2: Buy-and-Hold
This exit strategy is popular for real estate investors looking to build up equity in a real estate property. It’s similar to that of fix-and-flip; however, instead of selling the renovated property, the real estate investor chooses to hold it for a period of time and rent it out to receive monthly cash flow (rental income). As appreciation and equity build up, these investment properties can be sold for a profit.
Exit Strategy #3: Wholesaling
To put it simply, wholesale real estate is when a real estate investor (wholesaler) acts as the middleman between a property seller and a property buyer. Basically, a real estate wholesaler finds and quickly sells a cheap real estate property for a profit margin. Real estate wholesalers place the investment property under a purchase contract and then sell this contract (or “assign” it) to the buyer for a small profit.
This exit strategy is highly sought after by property investors when they need to end a real estate investing deal because it saves investors’ time.
Exit Strategy #4: Seller Financing
This is an excellent strategy for exiting a real estate property while continuing to produce a profit. In this case, the seller finances the real estate investing deal and acts as a bank. The seller and the buyer exchange a promissory note including an interest rate and a repayment schedule. This exit strategy benefits sellers as they are awarded monthly payments to cover the mortgage loan and their return on investment increases through interest income.
Exit Strategy #5: Rent to Own (Lease Option)
This type of exit strategies allows the real estate property owner to rent the investment property to a tenant, but with the option to purchase it after a set period of time. In some cases, a portion of the monthly payments is put towards the purchase price of the home.
How to Choose the Best Exit Strategy
The decision of which one of the above mentioned real estate investing exit strategies to use is not as simple as it may appear. There is no rule to differentiate between them. In addition, there are several factors to take into consideration when planning an exit strategy, mainly the real estate investors’ familiarity with their:
- Short and long-term goals
- Experience level
- Time to close
- Purchase price
- Property value
- Condition of the property
- Market conditions
- Supply and demand
- Financing options
- Profit potential
Understanding these factors will allow a real estate investor to determine which of the real estate exit strategies he/she should follow.
Factors That Could Ruin an Exit Strategy
It is important for real estate investors to understand that certain factors may ruin a planned real estate exit strategy, such as:
- Tenant issues resulting in lost rent
- Unexpected maintenance costs can cancel out profits
- Poor property management that reduces the value and potential cash flow
- A distinct lack of demand, or failed escrow, or the backing out of a lender may that prevents the investment property from being flipped
Nevertheless, successful real estate investors can counteract these potential obstacles by having multiple exit strategies. Things can change at any given moment; thus, having a backup plan is a good idea.
Before making a real estate investing deal and purchasing investment properties, real estate investors should understand how to get out of the investment property and when to sell it to make a profit – as this is the whole point of real estate investing. An exit strategy is a mechanism to allow the real estate investor to cash out of the investment property with minimum difficulty.
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