Investing in Real Estate? Be Sure to Plan Your Exit Strategy!

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In his landmark book, The 7 Habits of Highly Effective People, Stephen R. Covey calls the second habit: Begin With The End In Mind. Nowhere is that more true than in today’s real estate market. When investing in real estate, the End in Mind is your exit strategy. Unless you just like to wander aimlessly down a highway, you know where your exit is before you get on the interstate. When entering into a real estate investment you also need to know how you plan to exit.

Novice and veteran investors alike tend to get caught up in the excitement of finding a great deal. However a veteran will be more likely to think a deal through. Finding a property with a ton of equity is only good if you have a way to realize that gain.

Possible Exits

There are a number of different ways to dispose of a real estate investment in order to collect your profits.  These may include:

  • Wholesale
  • Sell/Flip
  • Long Term Rental
  • Lease Option
  • Seller Finance

These are the most common ways of exiting an investment.  Each one has its own advantages and disadvantages. The current market conditions will play a large part in determining which method is best.

 If it was a great deal and you are just looking to make a quick profit, then wholesaling the deal may be your best bet.  If you aren’t in as much of a hurry you may want to rehab and flip the property.  If your goals are to build a large rental income, then you may wish to add the property to your rental portfolio.  If the market is not favoring the seller you might use a creative technique such as lease option or seller financing.  A strategy that works well in one set of market conditions may not be good for another.  You need to know this going in.

Analyzing A Deal

Investors have a myriad of different ways to analyze a deal before making a decision to purchase.  They may look at the cash flow and built in equity as well as any repairs that may be required.  However, one of the most important things to determine is when and how they are going to dispose of the property.  If it is going to be a long-term rental they need to be sure that the income will be sufficient to cover the cost associated with holding the property.  As long as you are making money every month you can sell the property when the market conditions favor the seller.

Looking to flip or wholesale a property requires that you look at the deal differently.  How long does it take to sell a property in the area?  Can you price it low enough to assure a fairly quick sale?  Recent comps may indicate that the property you are evaluating has a lot of equity, but does that mean anything if you can’t find a buyer? 

 Eat Dessert First

You may make the bulk of your profits by buying a property at a great price, but you realize those gains when you sell.  While planning your exit strategy before you buy may seem like starting a meal with dessert, it can prevent you from getting into a bad deal.   

I buy when other people are selling.
J. Paul Getty

 

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9 Comments

  1. Good article. The rehab and sell market is also facing the problem of everyone that is looking is looking for a discount property. You know, a perfect property but at a discount price. Also, the picture of the banana split makes me seriously want to get one!

  2. Awesome post! Very true, having an exit strategy before hand is definitely key to making the most profit possible in the end. It is definitely like starting your meal with dessert, but hey, you can complain about that :).

  3. Fantastic advice. You make a great point about different market yielding different results for different strategies. I think it is important to have several exit strategies like the previous poster mentioned. If the market tanks and you can’t sell it, you need to be able to and willing to rent it.

  4. Well I will have to agree with the rest – considering your exit plan is numero uno in my books. While others get caught up in renovations and profits the smarter investor sees profits but exits as well, especially when you are living in a city with a very unsteady market!

  5. Great article Richard! The part of the deal where you actually make the $$$ is the most important part, the whole point of the process. Without a plan there may be no $$$.

  6. Great article!! I think one of the key points here is that the best approach varies by market. Right now, flipping is not as easy as it once was so we are seeing a big shift towards strategies such as Lease Options and Seller Financing. Where I’ve seen people get hurt the most was when they only had one strategy plan (Flipping) and when the market shifted they were not in position to consider a long term hold.

  7. All seasoned investors and wealthy people that I have been around always have a game plan and an important part of that plan is having an exit strategy.

    This is a smart way to not get trapped and lose money, customers, family etc.

    Excellent Post!

  8. When considerging a flip its important to thoroughly analyze the town and area you are purchasing as well. The place may seem like a good deal, but you definitely need to assess how it will look over time if you hold the property and/or the present conditions. I love seeing the before and afters and have written several articles. Of course, the market has changed alot and we’re not seeing so many flips these days.

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