This week in Tucson - Vol. 1 - EXIT STRATEGIES
Whenever we undergo a project, we always want multiple exit strategies. In real estate, that could be a variety of things. For example, if we’re looking at a potential property, we’ll run our numbers from the perspective of a flip. Then, we’ll run it as a rental. If both make sense, then we’ll pull the trigger. If we take on a flip project and can’t end up selling it at the price point that makes sense for our margins, then we’ll fall back on using it as a rental.
Here’s an example of a project that we’ll be starting in a few weeks:
The property is currently an uninhabitable 2 bd/1 bth, 800 sq ft house a few blocks away from the University of Arizona. It was purchased for 70k we are going to be adding just over 1,000 sq ft. In the end, it’ll be a 5 bd/ 3bth, over 1,800 sq ft. Now, what do the numbers look like from a flip and rental perspective?
Plan A - FLIP
Purchase: 70k
+Renovation: 150k
All-In Budget: 220k
Re-Sell Value: 320k
-Closing Costs: 20k
-All-In Budget: 220k
Profit: 80k
Plan B - RENTAL
All-In Budget: 220k
Market Rent: $2500
% Towards Expenses: 30%
Cap Rate/Return: 9.5%
After looking at these numbers, both scenarios make sense as a real estate investor. Obviously, each is entirely different but it’s a way to turn to Plan B. With real estate, Plan A doesn’t always work out so it’s vital to protect yourself. I see time and time again that a flipper only goes in with the expectation to sell it at a certain price point and then they end up losing money after not reading the market correctly. Then, they’re just sitting there with a property that isn’t producing results. You never know when the next crash is going to happen so having that added protection of renting is extremely beneficial.
In essence, protect your assets… if you’re going to take on a flip, always consider worst-case scenarios. If you have multiple exit strategies, then you’re reducing risk. In real estate, you want to be risk-averse. If you can minimize risk, then you’ll be setting yourself up for success.