3 Exit Strategies You Need to Have When Investing in Real Estate

by | BiggerPockets.com

Today, we’re talking about the top three exit strategies that you need to have when investing in real estate. Before we get started, I want to reiterate something I’ve said before: You make money when you buy, not when you sell. Never forget that. To rephrase that a little bit: You need to have an exit strategy in mind before you actually buy the property. And if you do not have multiple exit strategies in mind before you purchase the property, you can get yourself into a bit of a pickle.

Time is money, and if you are holding onto an asset, you are cash-strapped because all of your capital is in that asset. You might not hypothetically be losing money right then and there, but you are losing opportunity cost. You don’t want to be sitting on the sidelines doing nothing.

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3 Exit Strategies You Need to Have When Investing in Real Estate

1. Selling Your Property to a Homeowner

The first consideration you need to have as far as exit strategy is to ensure the property that you are buying has to fit a homeowner criteria. So make sure that you conduct due diligence on that particular area. Make sure that there is high homeowner activity in that area. Make sure that properties are selling at a quick pace. Make sure that you renovate this particular property to the same standard as the comparable sales, and price it a little below to get that quick sale. Use this when you’re doing your first deal, your 10th deal, or your 100th deal. I still to this day have the same exit strategies in mind, and I’ve done over 450 deals.

2. Selling Your Property to an Investor

The second exit strategy that you need to have in mind is selling it to an investor. You’re probably thinking to yourself, how can I find an area where I can sell it to a homeowner and sell it an investor at the same time? There are areas that are 50 percent investor-owned, 50 percent owner-occupied. There are areas that support an investor demand and a homeowner demand. They are everywhere. Here in Ohio, I feel like a kid in a candy store. There are so many areas out there where you can buy a property and sell it to a homeowner or sell it to an investor.

Related: 5 Alternative Exit Strategies to Liquidate Properties Fast

Now, when you are selling a property to an investor, the numbers need to make sense. Investors base their decision on the numbers in the deal, not emotions like a homeowner does. So make sure you are delivering that property at a good cap rate. It should most likely be tenanted, and it has to have good property management in place. If I’m an investor and I’m buying your product, I would need to know what it takes to manage this investment property. So when you’re selling or you’re looking at exit strategy, have reputable, legitimate property management lined up. Then you can possibly sell that property to an investor if the homeowner aspect of it does not work out.

3. Refinancing

Let’s say you can’t sell to a homeowner, and you can’t sell to an investor. You should ask yourself what you’re doing wrong, then you should refinance. Is your financing in check, can you get a loan, and can you refinance out of that property? I’m not too worried about that; there is a lot of money out there. But when you refinance, you need to make sure that your monthly rent is covering all of your expenses. Underestimate your income and overestimate your expenses when you’re doing deal projections. If those make sense, then you should be able to refinance that particular purchase. But you have to make sure that you have all of these things in order before you actually go into a deal.

And if you can’t sell to a homeowner, can’t sell to an investor, and can’t refinance? Then why are you even buying properties? Get your stuff together before you buy your first deal.

What’s your favorite exit strategy?

Let me know with a comment!

About Author

Engelo Rumora

Engelo Rumora, the Real Estate Dingo and your favorite Australian, quit school at the age of 14 and played professional soccer at the age of 18. From there, he began to invest in real estate. He now owns real estate all over the world and has bought, renovated, and sold over 500 properties. He is currently in the process of launching an ICO that will “Decentralize The Real Estate Industry.” He’s also known for giving houses away to people in need and his crazy videos on YouTube. His life’s mission is to be remembered as someone who gave it his all and gave it all away.

2 Comments

  1. Rob Cook

    Good stuff Engelo. I just read a post downplaying the “make your money when you buy” approach, or at least encouraging deemphasizing that mindset.

    Being a cautious, not-deep-pockets investor, I always had to make sure I did not strike out, or get caught and lose my capital. So I always try to have my prospective purchases meet all THREE of my version of possible exit plans. Since circumstances can change for any of us, I always want to have the option to: 1) Be able to sell it fast, at a discounted price and get out financially (if not emotionally), intact after all transaction costs. 2) Be able to Rent it out quickly and with a positive Cash Flow and 3) Be able to hold it long term free of foreseeable economic risk of getting whacked, such as a severe downturn in the neighborhood or market area.

    I would only buy the deal if ALL three of those worked out. Back when I was new to investing, I would even add another condition – Would I be able to live in the house if the other three exit plans failed! Got to live somewhere and pay for that, so that option is another way to avoid catastrophe, via allocating my own personal housing budget to the deal to avoid a big loss. Of course, once I got my financial feet beneath me, with lots of reserves, I no longer buy only what I would personally be willing to live in, but for a beginner, that is a HUGE safety net (I guess, kind of an unintended house hacking imposition).

  2. Alik Levin

    Either grossly wrong title or grossly wrong advise. Don’t follow neither of the three as an exit strategy unless the intention to lose ton of money. Refinancing can’t even be considered as an exit strategy as it only entrenches you in real estate more by doing so. Good exit strategy helps offloading the properties *and* helps to keep most if not all of the equity accumulated in it. None of the above does it.

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