Every Great Success Starts with a Great Exit
Exit Strategies: Planning your “Out” Before Getting “In”
In the process of learning how to invest in real estate you will learn that before you purchase real estate you need to know which exit strategy or strategies you might implement. How are you going to dispose of the property when you are ready to remove it from your portfolio and still make a profit in the process?
As per Wikipedia, an exit strategy is “…a means of leaving one’s current situation, either after a predetermined objective has been achieved, or as a strategy to mitigate failure.”
As you increase you learning of how to invest in real estate you’ll realize that it’s wise to have multiple exit strategies. A good investor should always think of the end before beginning an acquisition. In real estate, a plan is everything!
Although this is not an exhaustive list, here are five common strategies that are implemented, each with their own advantages and disadvantages. The state of the market will certainly be a pivotal factor that will affect which exit strategy you choose.
- Flips– This is where you fix and resell a property, usually geared towards single family homes.
- PRO: They can be great short term projects that allow you to liquidate quickly and work towards the next deal.
- CON: You want to ensure that there is a strong enough market that will allow you to sell it quickly and for the right price. You don’t want to be caught with any additional carrying costs which will eat into your profit. As you increase your learning of how to invest in real estate you’ll also realize that this is not the greatest strategy for tax purposes. Although if done ahead of time there are things that can be done to eliminate the taxes that would normally have to be paid.
- Buy and Hold– Buying and keeping a property for the cash flow over a long period of time.
- PRO: Passive Income. As your cash flow increases over the years the value of your property goes up as well. The best pro of all the BEST tax benefits of any investment, as well as equity build up.
- CONS: Potentially rising interest rates and the repairs/maintenance costs you will incur while you own the property will affects profits, not to mention the headaches of management if you’re doing that yourself.
- Refinance– How to invest in real estate by employing a refinance strategy. Typically this is done by buying distressed properties, forcing the appreciation on them by renovating, and bringing new life to non-performing properties. The hope is that in short order you can refinance and get your capital back by getting a new institutional first mortgage at a higher dollar amount that will replace the funds that come from your own pocket.
- PRO: A reasonably quick turnaround can be achieved if you’re able to get the renovations done to have the property appreciate to the level you need.
- Institutional money is typically at a lower interest rate than private money, which means lower monthly payments, and maybe even some additional cash back to bolster your investment bankroll.
- CON: On the flip side, re-financing does have associated costs so make sure you perform your due diligence. Lenders also have different guidelines for what they consider a stable property will could affect your time frames.
- Reposition– Repositioning a property is essentially “bringing it up a notch”. It’s re-branding it via exterior and interior improvements to increase the class level of the property to attract higher quality tenants, and as a result, higher rents. I.e. change the property from a “C” class to a “B” class.
- PRO: it can be a lucrative pay off when it’s done properly.
- PRO: added rent increases mean immediate increase in value of the asset in question.
- CON: It can be both labor and time intensive and you need to do your research with respect to your competitors and market.
- Stratify– This strategy involves changing the use of existing real estate. One good example is converting an apartment complex into condominiums. Common uses of this strategy involve taking a lot and rezoning it to increase the property value.
- PRO: Very lucrative venture if done properly in the right market.
- PRO: In some markets this might be just a paperwork exercise and requires no physical changes to the structure.
- CON: Make sure to research the local jurisdiction regulations and account for the changes in property taxes in your financial plan. Stratifying a property can result in higher property taxes. You also need to look at market conditions.
Whichever exit strategy you use, the key when learning how to invest in real estate is to choose them before you acquire the property. If you want to minimize risks and maximize your returns, planning ahead will make for a smooth exit when you are ready to cash out.
If you are interested in finding out more about the great world of multi-family real estate, drop us a line! There’s no better time than now to start building wealth.
Remember, real estate doesn’t have to be complicated. With Simple Acquisitions it’s smart and simple!