How to Choose Real Estate Exit Strategies for Retirement?
“You’ve got to think about big things while you’re doing small things, so that all the small things go in the right direction.” ~ Alvin Toffler
Real estate is exciting, and if it has worked out so far for you, what’s thereto stop you from acquiring more properties. A lot of real estate investors start with that mindset, and there’s nothing wrong with it. After all, you are creating multiple sources of income including rental income, property appreciation, mortgage down payment, and tax benefits. However, almost every other investor fails to create an exit strategy.
While creating an exit strategy may not appear to be your primary concern until and unless you are about to retire but it’s smart to have a plan to encash your real estate portfolio. There are several reasons out of which one may want to exit physical real estate:
- Starting into a new business/investment opportunity
- Nearing retirement and planning to fund a fulfilling retirement with existing portfolio value/equity
- Tired of managing property issues
- Achieved financial goal of wealth creation and ready to receive the big check
3 Potential Exit Strategies for Real Estate Investors
Sell Every Single Property
While selling every single property down the line may sound lucrative to the novice investors, it may not be the best exit strategy. Further, it may work out for someone with 20 or even 30 units in his/her portfolio, but the case gets worse with increasing units. Imagine having 500 units in your portfolio, built over 30 years.
In addition to the realtor fees (up to 8%) and taxes, you are quite likely to send the local market down by disposing even 10% of the properties at a time. The only way it can work out is to spread the sale over multiple years, and you might even delay your retirement in the process. In short, it is not the best strategy to exit real estate.
Bundle Your Properties for Sale or Create an REIT
Another option is to bundle your properties together and sell the entire portfolio. In the case of a big portfolio, individual investors could pool together to purchase it or you can approach a local bank with an offer. If you intend to sell the portfolio to a big bank or firm, your portfolio should value close to $10 million or higher to attract high-end buyers. The downside is that big players would look for a bargain and you may not get the best price for your portfolio.
You can create a Real Estate Investment Trust out of your portfolio although it requires a sophisticated organizational structure and several regulatory steps. If you own a large portfolio with a group of investors, it might be the perfect way to get along. However, it will increase the paperwork and you will deal with a whole new level of legal/financial professionals on a regular basis.
Convert Your Real Estate into Paper Assets
While each of the above options appears to be more work than one may want to handle in retirement, paper assets stand out in terms of their management and responsibilities. You can maintain a small team or even outsource the management of these assets while receiving a solid cash flow from your properties.
Paper assets or real estate notes are easier to manage, and you get a strong cash flow minus all the hassles of managing the properties.
Bonus Option: Buy Real Estate with a Roth Solo 401k Plan
If you qualify for a Solo 401k retirement plan, investing in real estate with the plan could be your best bet. Roth Solo 401k plan comprises of after-tax contributions and after fulfilling the necessary requirements, you can walk away with the capital gains and rental income tax-free.
When operated over several decades, a Roth Solo 401k could offer huge tax benefits, especially for appreciating real estate. The only downside to this option is that you can withdraw only after 59 ½ years of age although pre-retirement withdrawal for Roth Solo 401k may not attract any penalties from the IRS.
Real estate is fulfilling and one of the best ways to generate wealth over a long period. You can enrich the experience with multiple exit strategies. Start with simpler ones and move towards the sophisticated options with every passing deal.
“To rely on rustics and not prepare is the greatest of crimes; to be prepared beforehand for any contingency is the greatest of virtues.” ~ Sun Tzu