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