A lot of beginning real estate investors have a hard time grasping the concept that you need to know the day you buy a property what you plan to do with it; or your exit strategy as it is commonly called. Experienced real estate investors also typically have a backup exit strategy or a “Plan B”. Having more than one exit strategy gives you options if things don’t work out as planned. As the saying goes, “You make your money the day you buy the property”. In most cases it will be very difficult for any investor to make money on any property if he pays too much for it initially. So knowing what you plan to do with the property right from the beginning is extremely important.
What do I mean by having a backup strategy?
Let’s face it. Things don’t always work out as planned. For instance, if you purchase a property with the intention of rehabbing it and then selling it to a retail buyer, what happens if you can’t find a buyer? You may have to rent the house until the market improves, so it’s important to know whether or not this property would cash flow if you find yourself in that situation. Another thing to consider is the effect it will have on your
financing if you have to hold the property long term. If you have used some type of short term construction financing for the purchase and rehab of the property, will you be able to refinance later if you can’t find a buyer?
Over the past couple of years this has become a big part of the “buying criteria” for rehabbers in my area. They have passed on some properties that would have been good deals to flip. But if they weren’t able to find a buyer, they were going to be too expensive to cash flow as rentals. Taking the exit strategy one step further; it makes a difference in your renovation whether you plan to sell the house to a landlord or to a retail buyer (a home owner). Typically a real estate investor wouldn’t put in granite counter tops and expensive upgraded cabinets in a rental home. In a bad market you may make different choices than you would in a good market. But if you buy the house at the right price, you will always have options available should one exit strategy not work out the way you planned.
Does my exit strategy have an effect on how much money I will need?
Yes! The amount of money you will need will depend on your exit strategy. Some are short term strategies, and others are long term strategies.
3 Exit Strategies for Real Estate Investors
- Buy, renovate and sell (short term).
- Keep the property for a rental (long term).
- Flip or wholesale the property to another investor (short term).
Whatever exit strategy you ultimately choose isn’t nearly as important as knowing what that strategy is the day you make your offer on the property.