What’s Your Real Estate Investment Exit Strategy?

Real Estate

Before you invest a penny in a new real estate transaction, you should know what your exit strategy is, or at least you should be fully informed about your options and have a plan. This idea may sound a little odd, especially to people who are new to investing, but you can’t make a smart investment decision if you don’t understand how the investment needs to perform to earn you a decent return. “But I plan to hold on to my properties, possibly for many years,” some investors will say. “Why should I think about my exit strategy now?”

There are a few reasons. The first is that circumstances may require you to modify your plans. For example, significant market changes might make it necessary to sell a property sooner than you had expected. Or, a life change like an unanticipated relocation could require you to move too far away to effectively manage a rental property. Your exit strategy could also help determine your investment strategy. If you plan to hold the property for a long period of time, you might want to borrow more for the acquisition than if you plan to “flip” the home in the next few months.

How you intend to divest yourself of a property can also affect how you deal with it while it is in your portfolio. For instance, if you intend to hold a property for a period of years, your approach might involve making improvements gradually, whereas if you are looking to resell a property quickly, you might make all your updates within weeks of acquiring it.

Common Real Estate Exit Strategies

There are many exit strategies (or you might call them operational strategies) you can use with your real estate investments. Five of the most common are:

1. Flipping: This strategy involves buying a property under the right conditions, making some immediate improvements to enhance resale value and then selling it for a profit. Those conditions include finding a property that is priced below market value in an area where there is more demand than supply and where there is a reasonable expectation that the market will stay strong for the duration of your renovations. A quick, all-cash, no-contingency offer can often help you get a better deal, but could also tie up the capital you need for repairs.

2. Buy/hold/rent: This is a more long-term strategy in which you buy a property, make some minimal initial improvements that allow you to rent it at a rate that is at or above your mortgage payment and then benefit from the positive cash flow and the leveraged growing equity leverage. You might put 20% down but receive 100% of the appreciation.

3. Wholesaling: In wholesaling, you essentially serve as a middleman, purchasing a property and immediately selling it to someone else at a higher price. This can occur as two sales or you can do what is called “assigning” your purchase contract to the person you are selling to.

4. Prehabbing: This strategy occupies the middle ground between flipping and wholesaling. You purchase a property and then make just enough updates that it’s appealing to someone who wants to buy it and take the renovation process further. For example, you might close on a property and within a week’s time have the carpets replaced and the interior and exterior painted. The home needs additional work, but a buyer can now more easily see its potential.

5. Rent-to-own: Also called a lease option, a rent-to-own scenario involves purchasing a property and then renting it to someone for an agreed-upon time period, after which they have the option to continue making payments that will now go toward the purchase of the property.

Which of these or other exit strategies is right for you? There are multiple factors to consider as you come to your decision. What are your short- and long-term goals? What is the condition of the property? What is the purchase price in relation to the property’s assessed value? What are the current market conditions and how are they trending? Do you have experience in renovating properties or managing renovations? Are you trying to grow your real estate portfolio or just add a small number of properties to your asset mix?

Considering these kinds of questions can help steer you toward an exit strategy that gives you confidence as you move ahead with your purchase.

Maximizing Profit Or Minimizing A Loss

Understanding what your real estate investment exit strategy options are and being prepared to execute the one that makes sense for your current goals — or a different one if conditions change — is essential to successful investing. Ideally, “success” means getting a good return on your investment. However, all investing involves risk and, in some cases, the best you may be able to hope for from an exit strategy is that it helps minimize your loss. But that certainly beats the alternative, and it helps you hang on to more of your capital so you are better positioned to get back into the market when conditions improve.

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