Exit Strategy vs Buy and Hold?

Question

My goal is to grow my rental property portfolio for long term  passive income, and I am considering adding MFH to the mix as I see that there are benefits to MFH vs single properties with the economies fo scale that come with MFH.

With this in mind it seems like a lot of the videos I have watched speak of making sure you have your exit strategy planned however does this pertain to buy and hold also?  Maybe this is meant only for investors who use short term financing while improving the property?   If my intention is to hold for an undetrmined period for passive income is an exit strategy even relevent?  I would want to use long term commercial financing or bring other investors into the deal who would want to hold for long term also.

Any insight/opinions appreciated.

Scott Skinger · Answer

Exit Strategy is always relevant because you just don't know when you might need to exit. Life circumstances change, markets change and balloon payments come due.

Here are SOME of the examples that you need to consider:

-You mentioned other investors. Even if you're providing good returns, it is very common that investors want their money back after a certain amount of time (5-10 years is common). I certainly would want the option. I don't want to feel like you have access to my $ indefinitely. I might want to invest it in the stock market, another REI or pay for my daughter's wedding.

-A lot of commercial loans have a 5 year balloon payment, you need to sell or refi. What if the market has soured a bit and interest rates have gone up? Your appraisal may not hit the mark and the new loan might mean negative cash flow? You need to underwrite and plan for this.

-Even if (as you describe) you get investors with a long term mindset and you get long term (10 year) agency debt, it would be very prudent to underwrite an exit at 10 years and make sure that you have options. 10 years is a long time and things change. It is always nice to have options and you want to feel like you can sell your building in a position of strength if you need to.

Good Luck!

Kurt Jones · Answer

As with any business plan, an exit strategy is always needed. Even the best businesses look to evolve in the future or they stagnate and become irrelevant. Real estate is no different. Granted, your exit strategy might be to sell at five years, refinance and get cash out for the next chess piece in your empire, or just to let it ride for ten years and pay it off. But I never enter into any investment without a good plan for how to monetize an illiquid investment.

Dave Foster · Answer

@John Merritt There's exits on the interstate for rest stops, to take you to different directions and the final one at your destination.  Same with life and investing.

Real estate isn't...well... just real estate.  It's sub types and locations and all ebbing and flowing with the dynamics of a free market.  Buy and hold is an awesome strategy.  But when to sell and wait to buy is a form of exit.  How to sell to buy more is an exit.  Selling to go into a different type, location, financing is an exit.  Dying and the outcome of your estate is the ultimate exit of course.  And in each of these on and off ramps lie opportunities to take advantage of market inefficiencies, your situation, and tax law as it stands.  Being a buy and hold investor doesn't mean you're static.  Far from it.

So as you look forward don't think about buy and hold as a destination but rather a journey with stops along the way.  The 1031 exchange is one tool that will become a favorite in your buy and hold arsenal as it allows you to sell buy change locations change types accent your personal portfolio and cash flow and ultimately pass along tax free wealth to your heirs.

John M. · Answer

@Kurt Jones @Scott Skinger @Dave Foster  Thanks for all your replies.

I think I need to just adjust my thinking since 5+ MFH there's a few more moving parts I wasn't taking into account.  With 1-4 it's not too complicated, I buy it myself, finance it for 30 years if I want, and I don't have to think much beyond collecting the rents.  If I want to keep it I keep it, if I want to sell it I sell it.   Even if I bring on just one partner that's another person I have to consider.  That does make an exit plan a bit more important, since one of us may want to cash out and move on to other investments.

5+ seems like a natural progression from 1-4 but need to get through the learning curve that is commercial....

Exit Strategy vs Buy and Hold?

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