The Game Plan: 5 Exit Strategies Essential To Profitable Real Estate Investing
Many individuals get into real estate investing for the financial rewards it provides – it’s no secret that the main point of buying investment properties is to make money in the future through appreciation or rent. Before purchasing a real estate investment property, no successful real estate investor establishes an efficient business model (plan), thus having an exit strategy or exit strategies.
What Do Exit Strategies Mean in Real Estate?
Real estate exit strategy is a method for a real estate investor to exit a real estate investment venture. A real estate investor’s exit plan is essentially a contemplation of what the investor will do with the investment property.
Real estate investors consider some exit plans as part of their initial investment choice (business model/strategy). On the other hand, once they have a clearer perspective of the investment and things unravel, some property investors begin to seek an exit strategy. The best advice for real estate investors, on the other hand, is to plan before buying any investment properties.
Many property investors underestimate the need of developing this when it comes to real estate investing. So, why is it so crucial to have them in place?
Is It Important to Have a Real Estate Exit Strategy?
Several factors drive real estate investors to implement exit strategies:
- Real estate investors will benefit from determining an effective game strategy because it will give them a plan of action and reduce future risks. Property investors who research prospective exit options before purchasing investment properties are aware of the hazards involved and how to prevent them.
- It is critical to have a clear exit strategy for success, as the suitable method will maximize profits. It’s never a good idea to get into a real estate investing agreement without knowing how you’ll benefit from the property when you’re done. As a result, having a financial goal and perfect plan in your real estate investing career can save you thousands, if not millions, of dollars.
What if you bought an investment property and discovered that real estate investing isn’t for you after a while? Or what if you can’t keep up with the real estate investing market’s demands? Or if you’ve lost your love for real estate and your home has become a burden or is not worth your time and effort? These are some reasons why having an exit strategy in place before investing in real estate is so important.
- Anyone, including real estate investors, might be affected by unforeseen events. An investor may find themselves amid a disaster and in severe need of funds. In this case, a real estate exit strategy will aid in the faster sale of the property and cash out.
- Property owners who want to increase their real estate investment portfolio and make more significant investments can benefit from real estate exit options. It is undoubtedly one of the most common reasons to execute an exit plan. It will teach property investors how to manage their various investment properties and what to do if one isn’t generating a profit in the form of rental income or appreciation.
In essence, failure to develop a this strategy can result in lower potential rewards while also increasing dangers. Exit plans should be understood before purchasing investment properties to ensure that property owners do not regret their decision to enter the real estate investing industry. What remains to be answered is the most prevalent exit methods used by real estate investors.
Exit Strategies for Real Estate
Understanding and selecting the appropriate exit strategy will directly impact your real estate investing performance.
Strategy 1 Fix-and-Flip
Because it allows the real estate investor to sell the property at full market value, this real estate exit strategy frequently offers the highest profit margins. It comprises purchasing investment properties in need of repair (at a discount), renovating them, and then reselling them at a return greater than the initial investment (purchase price plus repair costs).
Real estate investors who want to use this exit strategy should be aware of market trends and capable of boosting the value of their rental properties.
Strategy 2 Buy-and Hold
Buy and hold exit strategy is conventional for real estate investors looking to build equity in a property. It’s similar to fix-and-flip, however the real estate investor decides to maintain the restored property and rent it out for a period instead of selling it to earn monthly cash flow (rental income). When appreciation and equity accumulate, these investment properties can be sold for a profit.
Strategy 3 Wholesaling
Wholesale trade occurs when a real estate investor (wholesaler) acts as a go-between between a property seller and a buyer. A real estate wholesaler, in essence, locates and promptly sells a low-cost real estate property for a profit. The investment property is placed under a purchase contract by real estate wholesalers, who subsequently sell (or “assign”) the contract to the buyer for a modest profit.
Property investors use this exit plan to close a real estate investment agreement since it saves them time.
Strategy 4 Seller Financing
In this situation, the seller finances and acts as a bank for the real estate investment agreement. A promissory note is exchanged between the seller and the buyer, including an interest rate and a payback timeline. Sellers gain from this exit plan since they receive monthly payments to service the mortgage loan, and their return on investment rises due to interest income. It is a great way to get out of a real estate investment property while still making money.
Strategy 5 Rent to Own
This form of exit strategy allows a real estate property owner to rent their investment property to a renter while also having the opportunity to buy it once a certain amount of time has passed. In some situations, a part of the monthly payments may be used to the home’s purchase price.
How to Select the Most Appropriate Exit Strategy
Choosing which of the above-mentioned real estate investing exit methods to employ is not as straightforward as it may sound. No rule distinguishes them. Furthermore, there are various elements to consider while devising an exit strategy, the most important of which is the real estate investor’s expertise 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
- Factors that may jeopardize an exit plan
Real estate investors should be aware of certain factors, such as:
- Tenant problems resulting in rent arrears
- Maintenance charges that aren’t budgeted for can wipe out profits.
- Poor property management depreciates the value of the property and lowers the prospective cash flow
- The investment property may be unable to be flipped due to a lack of demand, a failed escrow, or a lender backing out.
On the other hand, successful real estate investors can overcome these possible roadblocks by having a variety of exit alternatives. Because things might change at any time, it’s a good idea to have a backup plan.
Before entering into a real estate investing agreement and purchasing investment properties, real estate investors should understand how to exit the investment property and when to sell it for a profit – after all, that is the whole objective of real estate investing.
There’s no doubt that the more experience you have, the more deciding on a real estate exit strategy will come naturally to you, even if it may appear daunting at first.