What do exit strategies have to do with your real estate offers?
Everything! You always need to begin with the end in mind.
It’s a well-known fact that you make your money on a property the day you buy it. If you pay too much initially, there is a very good chance you will lose money in the end. So it’s vital that you know your exit strategy right from the beginning.
Your exit strategy will have an effect on a lot of things. It will determine the amount of money you will need, and most likely the type of financing you get. Your particular exit strategy will play a part in the finishes you put in the house; in most cases you will use different materials for a rental then you would for a home that has been beautifully renovated for a retail buyer.
3 Popular Exit Strategies for Real Estate Investors
- Buy, rehab and sell (short term)
- Hold the property as a rental (long term)
- Wholesale the property to another investor (short term)
Should You Have A Plan B?
Most experienced rehabbers in my area are now buying property with two exit strategies in mind. If you ask them, they will tell you that they always have a “plan B” or a “back up plan” in today’s market. Let’s face it, things don’t always work out the way we plan them.
What I mean by that is that they might buy the property with “plan A” being to rehab it and sell it to a retail buyer. But if the house doesn’t sell in a reasonable amount of time, they will rent it until the market improves. Experienced investors want options. For instance they will want to know right from the beginning that this property will cash flow if it ends up being rental. Deals that might be good for an investor to rehab and sell to a retail buyer might be too expensive to cash flow as a rental. I have had investors pass on what was a great rehab opportunity for that very reason in the past year or so.
What About Financing?
The type of financing will be different for different exit strategies. If the intent is for the property to be a rental right from the beginning, the investor would secure long term financing. If the investor is a rehabber and is using a short term or construction type of loan, this could pose a problem if he is has to hold the property long term. He would be forced to refinance the property.
The days of buying a property, rehabbing it and being absolutely certain you can sell it quickly have been over for a while now. But with a little planning, and a solid “plan B” you can still take full advantage of this terrific real estate market.
Photo: Peggy Reimchen