Many people are ready to jump into the real estate investment game by acquiring new properties, but what happens when you’ve reached your goals and you need an exit strategy for your investment?
There are a lot of reasons why people need a real estate exit strategy. Maybe you're ready to retire, moving on to a new investment, flipping a property, getting rid of an investment that isn’t producing enough cash flow, or leaving an investment that was inherited and isn't something you want to continue maintaining.
If you’ve met your real estate investment goals, or you’re just ready to move on to a different venture, here are some real estate exit strategies to help you make the transition.
Step # 1: Understand Why a Real Estate Exit Strategy Is Important
An exit strategy for real estate is important because it gives you a compass or a direction for your investment. You need to know what your end goal is so that each step in your investment lines up with that goal. In other words, your exit strategy begins long before you try selling your property.
Make Sure Your Choice Matches Your End Goals
If you purchased a property primarily for cash flow, refinancing wouldn’t be your best option because you would be increasing your debt payment. That would, in turn, cut into your cash flow. You also want to avoid spending a lot of money on upgrades like wood floors or granite countertops. Those upgrades would be dipping too deeply into your cash flow to make it worth the cost.
An Accidental Investor
Imagine a person who has become an accidental investor. Let’s say they inherit or obtain property. They may not be able to produce a big picture for that property because it wasn’t their original vision. They may not have basis for decision-making, which may make it difficult for them to create a day-to-day plan for their property. As a result, they might sink a lot of money into repairs that are not necessary. The accidental investor should either decide on a tangible goal for their property or find a way out that is financially beneficial.
Avoid Band-Aid Fixes
Another real-life example of misguided goals is a landlord who keeps getting an AC unit repaired on his property every 60 days. His tenant is unhappy because the AC is never in good repair, and he is spending a lot of money on repairs.
If his reason for owning his properties is to use them as an investment, he has to look at his long-term goals. Temporarily fixing the AC will cost him more money in the long run, and he also risks losing a paying tenant. A better solution would be to pay for the cost of a new AC unit up front. By doing so, he’s fixing the problem and keeping his tenant happy.
You should always keep your end goal in mind when you make decisions about your investment property. Everything you do either contributes to the end goal or takes away from it.
Step # 2: Determine What Your Investment Goals Are
Not everyone who purchases property has the same goal. To determine what kind of exit strategy works for you, you’ll first need to determine what your goals are.
Many people invest in properties primarily for cash purposes. Some people simply want to add to their income, but others have specific goals in mind. For example, some people may use their investment property to pay for their kids’ college. Others may want to pass their properties on to their children as a legacy.
Other people may purchase properties with the intention of fixing them up and reselling them for a profit.
Determining your goal will help you make daily decisions about your property and determine when you’re ready to exit the investment.
Step # 3: Pick the Real Estate Exit Strategy That Fits Your Goals
Once you’ve achieved your goals and you’re ready to part with your investment, there are a number of ways to move on. Many of these strategies will be guided by the ultimate goal of your investment.
Pass Your Investment On to Your Children
For those who want to pass their property on to their children, this can be an excellent exit strategy. Once your children become old enough to inherit property -- or when you no longer want to manage properties -- giving it to your children is the perfect way to pass on your legacy.
Sell to a Tenant or Another Investor
Another common way of exiting an investment is to find another person to purchase your property. This may be someone who is interested in a cash flow property or looking for a home of their own.
If your property is tenant-occupied, you will need to be sensitive to their needs. Another possibility is to do a rent-to-own or let your tenant get a loan and purchase the property from you.
Fix It and Flip It
Some investors look for properties they can quickly fix up and sell for a profit. This type of investment strategy works with a quick exit strategy. A quicker sell means less time on the market and more money in the pocket of the investor. Each decision an investor makes as a house flipper should be to maximize profit and reduce cost.
Pick a Real Estate Exit Strategy That Gives You the Maximum Benefits
With any investment, you should ask yourself what your final goal is. Are you looking for cash flow, retirement income, or something to leave to your children?
Whatever your final goal is, make sure your decisions as a property owner align with your end game.
If you need help determining what your investment goals are, or if you’re looking to sell your investment to move on to a more lucrative property, LEAP Property Management can help.