Exit Strategies: How Does it All End?

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Earlier this week, I was reading a blog post by fellow BiggerPockets contributor Ankit Duggal.  His argument for a real estate investing road map is spot on.  However, I was surprised he didn’t discuss the most important part of planning a route: the destination.

Let’s rectify that situation and examine four potential real estate exit strategies (destinations) and compare the relative pros and cons.

I can’t speak to Ankit’s background, by most of my experience is “buy and hold” investing for high passive cash flow.  This article is focused on that approach.

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Continue Growing

Just keeping swimming, just keep swimming…I mean…buying.

Just Keep Buying

Pros

  • Ever Increasing Cash Flow.  Assuming you’re not taking too much advice from a guru of course.

Cons

  • No Retirement.   No rest for the weary.  Even if you hire employees, you’ll need to watch them and make sure things keep rocking.
  • Difficult to tap appreciation.  Let’s say you own 400 homes worth $50,000 apiece and they get 5% annual appreciation.  That’s $1,000,000 in equity a year you’ll want to use to buy more properties.  Your only options to access this appreciation is by selling the properties (see below for pros and cons on this) or refinancing them.  The downsides of the latter are loan fees, appraisals, and general hassle.

For me, continual growth isn’t an exit strategy.   When I leave real estate it will be because I want to pursue other interests.  Like bingo.

Sell Every Property

Tired of real estate?  Big investment didn’t pan out?  Want to say sod it and walk away?  Why not sell everything?

Pros

  • Retirement.  If you’re able to move every single property, you should get a nice pay day and can live out your days in style…playing bingo.

Cons

  • Fees, Fees, and More Fees.  When you sell a home using a Realtor, figure on at least 8% in closing costs (agency fees, title insurance, appraisals, etc).  Your retirement fund just shrank.
  • Time.  You have 400 properties?  Go ahead, try listing them all at once.  Now watch local home prices plummet.  Want to avoid destroying the market?  Spread out the property sales.

The “just keep buying” strategy isn’t for me.  When I want out, I won’t want to hang an albatross around my neck for a few years.  They look vicious.

Albatross around your neck

Sell the Portfolio

If you don’t want to spend eons selling properties piecemeal, you could try finding an investment firm to buy the entire portfolio.  This strategy relies on having good connections, a large enough portfolio, and strong returns.  How many hedge fund managers do you know?

Pros

  • Retirement.  Yay bingo!
  • Quick Transaction.  Compared with selling every property, the sale is lickity split.
  • Fees.  Economies of scale kicks in and closing costs should be under 8%.

Cons

  •  Lower Price.  The investment firm will want a bargain  The price they’ll agree to will lower than selling each property.

Consider this strategy if you have a medium size portfolio that hasn’t reach the next tier.

Go Public

High level steps to going public:

  1. Control at least $100 million invested in real estate.
  2. Grow to at least 100 investors and then change your corporate structure to a Real Estate Investment Trust (REIT)
  3. Exectue an Initial Public Offering (IPO) wherein you list shares of your company on an exchange.

Pros

  • Great Price.  Assume you’re getting 10% cash flow a year (doable in our area).  A random sampling of public REIT’s shows the annual dividend yield is between 2.5% and 5%: DCT is 4.04%, BXP is 2.54%, CBL is 4.38%, AKR is 3.54%, NNN is 4.85%, and ACC is 3.77%.  If your offering gets priced similarly, that could double your valuation!  $100,000,000 invested with a 10% dividend a year is worth $200,000,000 invested with a 5% dividend a year.  Please note, I’m whitewashing over heaps of detail.
  • Retirement.  Once your company is public, you can cash out and retire, if you so choose.

Cons

  • Fees.  Dozens of people are involved in an IPO: accountants, lawyers, investment bankers, exchange employees, etc.  None of them are going to help you out of the kindness of their hearts.  How much you pay depends your negotiation skill, but it’ll be well into 7 figures.
  • Hassle.  A public company is a whole new level of complication.  SEC filings, Sarbanes-Oxley requirements, shareholder meetings, creating a board of directors, etc, etc.

At our company, we think going public is the best exit strategy for us.  How we accomplish this is a topic for another conversation.  Or the topic for a gazillion other conversations.

Wrap It Up: The Ideal Exit Strategies

We started with a question: how does it all end?  When it comes to exit strategies, size matters.  With a small number of properties selling them outright is possible.  With a medium number, consider finding a big real estate investor to buy them.  With a large number, explore going public.

How big is small, medium, and large?  That’s an exercise for the reader.

Heed Ankit’s advice and create a road map.  Just don’t forget to set a destination.

Photos: David Douša, Callocephalon Photography, orangeacid

About Author

Kenneth Estes

During Kenny's decade in finance he bought many single family rentals in rural areas, as a hobby. Along the way, he talked some brave souls into joining him as investors and recently retired from finance to take his hobby to the next level. Find more by and about Kenny on his personal blog and his recently created twitter account!

19 Comments

  1. Don’t forget taxes if you sell your rentals. How much is the IRS going to want after all that depreciation an investor has taken.

    I think a good property manager can make owning a lot if rentals a hands off experience. If you do sell all of your properties you still have to manage your money, unless it sits in a checking account making .02 percent.

    If my retirement consists of me occasionally watching over a property manager, I’m fine with that.

    • Kenneth Estes

      Good point Mark. One more reason that selling individual properties isn’t the ideal way to go. If you keep a property for over a year the IRS is going to take 15% of your after depreciation/loss basis.

      That said, you’re correct, if you can find good staff to mange your empire it certainly frees up your time. I’ve found it’s time consuming to find and/or replace good help, especially in the rural areas we invest in.

      Cheers,

      Kenny

  2. It is hard to do now, buying at the price, and appreciation etc. My take as an individual is to diversify, like single tanant net lease STNL, arental home, and small 4- or8 plex.
    Own till the end (die) , enjoy coming cash flows, and let kid inherit, zero taxes to pay, they start from value when they get it. Hopefully you have enough depreciation from all above investments, so no taxes to pay either for me. Thanks

  3. Kenneth Estes

    Hey Kris,

    I’ve a story about that exit strategy. A lady in the area bought about 10 rental properties in her life. She managed them herself and her plan was to “let the next generation sort it out.” The problem was when she passed away, her three children didn’t want anything to do with them. They wouldn’t even risk increasing rent because they didn’t want to have to find new tenants. By the time we entered the picture their tenants had not had rent increases in over 15 years!

    Eventually they decided to sell. They originally wanted $200,000 for the 3 houses (5 units) that we eventually bought.

    Unfortunately, 2007 happened and they didn’t adjust their expectations. The stress it caused blew up. The siblings stopped talking to each other and two moved out of town saddling the third with “handling” the properties. By the time we came along, he had stopped maintaining them and they accepted our offer just to be done with it. We paid $37,000 for all 3 houses (5 units).

    I’m not saying this couldn’t have been avoided or that your situation is similar, but food for thought.

    • The big picture is the original owner got what they wanted from the rentals.
      The second generation were fools, turning lemonade into lemons.
      In the end it was all free money.

      Quick story, I bought a estate house that was handled by the second generation in the same manner. In my case there were 5 heirs, who had stolen all the cash of the estate, thinking their Father had money hidden in the walls, they had ripped holes in any suspicious location, one dug a hole next to the heater because the concrete looked disturbed.

      In the end the place looked like it belonged in Detroit. The township this house was located required a CO inspection which this place failed, the buyer (me) would need to escrow money to get the place fixed to a minimum standard, as the heirs had blown through Dad’s estate money.

      My offer the only one they had was quite low, low enough where one heir said “I don’t give an F@#^, all I want to know is how many cases of beer I’m going to get out of this?”

  4. It’s refreshing to hear the 4 exit strategies. Sometimes there is so much hard work I forget that there is a end-game. In my career, I have had the privilege to evaluate 3 of the 4 exits.

    Cheers

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