Exit Strategies: How Does it All End?
Earlier this week, I was reading a blog post by fellow BiggerPockets contributor Ankit Duggal. His argument for a real estate investing road map is spot on. However, I was surprised he didn’t discuss the most important part of planning a route: the destination.
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Let’s rectify that situation and examine four potential real estate exit strategies (destinations) and compare the relative pros and cons.
I can’t speak to Ankit’s background, by most of my experience is “buy and hold” investing for high passive cash flow. This article is focused on that approach.
Just keeping swimming, just keep swimming…I mean…buying.
- Ever Increasing Cash Flow. Assuming you’re not taking too much advice from a guru of course.
- No Retirement. No rest for the weary. Even if you hire employees, you’ll need to watch them and make sure things keep rocking.
- Difficult to tap appreciation. Let's say you own 400 homes worth $50,000 apiece and they get 5% annual appreciation. That's $1,000,000 in equity a year you'll want to use to buy more properties. Your only options to access this appreciation is by selling the properties (see below for pros and cons on this) or refinancing them. The downsides of the latter are loan fees, appraisals, and general hassle.
For me, continual growth isn’t an exit strategy. When I leave real estate it will be because I want to pursue other interests. Like bingo.
Sell Every Property
Tired of real estate? Big investment didn’t pan out? Want to say sod it and walk away? Why not sell everything?
- Retirement. If you’re able to move every single property, you should get a nice pay day and can live out your days in style…playing bingo.
- Fees, Fees, and More Fees. When you sell a home using a Realtor, figure on at least 8% in closing costs (agency fees, title insurance, appraisals, etc). Your retirement fund just shrank.
- Time. You have 400 properties? Go ahead, try listing them all at once. Now watch local home prices plummet. Want to avoid destroying the market? Spread out the property sales.
The “just keep buying” strategy isn’t for me. When I want out, I won’t want to hang an albatross around my neck for a few years. They look vicious.
Sell the Portfolio
If you don’t want to spend eons selling properties piecemeal, you could try finding an investment firm to buy the entire portfolio. This strategy relies on having good connections, a large enough portfolio, and strong returns. How many hedge fund managers do you know?
- Retirement. Yay bingo!
- Quick Transaction. Compared with selling every property, the sale is lickity split.
- Fees. Economies of scale kicks in and closing costs should be under 8%.
- Lower Price. The investment firm will want a bargain The price they’ll agree to will lower than selling each property.
Consider this strategy if you have a medium size portfolio that hasn’t reach the next tier.
High level steps to going public:
- Control at least $100 million invested in real estate.
- Grow to at least 100 investors and then change your corporate structure to a Real Estate Investment Trust (REIT)
- Exectue an Initial Public Offering (IPO) wherein you list shares of your company on an exchange.
- Great Price. Assume you’re getting 10% cash flow a year (doable in our area). A random sampling of public REIT’s shows the annual dividend yield is between 2.5% and 5%: DCT is 4.04%, BXP is 2.54%, CBL is 4.38%, AKR is 3.54%, NNN is 4.85%, and ACC is 3.77%. If your offering gets priced similarly, that could double your valuation! $100,000,000 invested with a 10% dividend a year is worth $200,000,000 invested with a 5% dividend a year. Please note, I’m whitewashing over heaps of detail.
- Retirement. Once your company is public, you can cash out and retire, if you so choose.
- Fees. Dozens of people are involved in an IPO: accountants, lawyers, investment bankers, exchange employees, etc. None of them are going to help you out of the kindness of their hearts. How much you pay depends your negotiation skill, but it’ll be well into 7 figures.
- Hassle. A public company is a whole new level of complication. SEC filings, Sarbanes-Oxley requirements, shareholder meetings, creating a board of directors, etc, etc.
At our company, we think going public is the best exit strategy for us. How we accomplish this is a topic for another conversation. Or the topic for a gazillion other conversations.
Wrap It Up: The Ideal Exit Strategies
We started with a question: how does it all end? When it comes to exit strategies, size matters. With a small number of properties selling them outright is possible. With a medium number, consider finding a big real estate investor to buy them. With a large number, explore going public.
How big is small, medium, and large? That’s an exercise for the reader.
Heed Ankit’s advice and create a road map. Just don’t forget to set a destination.