Having an exit strategy for your real estate investment is a crucial element in the success of a project. An exit strategy is exactly what it sounds like. It is a plan as to how an investor will remove themselves, or exit, from the real estate investment project. Determining an exit strategy can also influence the investment strategy and indicate the particular terms needed for financing. This is all done in an effort to maximize returns and minimize pitfalls.
Not only are well thought out exit strategies a way to maximize success and minimize risk, they are sometimes required in the qualification process when obtaining a loan. Most lenders want to see that the investor has evaluated the potential risks and returns expected from the property to ensure they are funding a project that won’t fail.
There are several different types of exit strategies to consider. An investor may also want to examine factors such as supply and demand, market conditions, location, and financing options in the process of determining the most appropriate exit strategy.
Different Types of Exit Strategies
Fix and Flip - this is a great option for an investor looking to make a profit in a short amount of time. This strategy involves locating a property that is run down and in need of rehabilitation, purchasing the property at a low cost, then improving the home and adding value so that it can be sold at a much higher cost than what it was originally purchased for. Location and supply and demand are two major factors to consider before committing to this type of exit strategy.
Buy and Hold - If an investor is less interested in a quick profit and wants to take advantage of home appreciation while making passive income then buying and holding onto a property as a rental would be a great option. Typically, investors choosing this method as an exit strategy will plan to hold onto the property for 5 years or more.
Wholesaling - This method can be very accessible, however it does require some patience and effort from the initial investor. With wholesaling, an investor would contract a property and almost immediately sell it to another investor who will then search for buyers before the contract with the original investor closes in order to make a profit.
Rent-to-own - This strategy is sometimes referred to as a lease option. In this type of exit strategy an investor purchases a property and then rents it out to an individual for an agreed upon amount of time. After that time has passed the renter can choose to continue making payments towards the eventual purchase of the property.
Regardless of the exit strategy you choose, it is important to understand that there are certain circumstances that could require you to adjust your plans. Consider the factors that may influence your particular project and determine what makes sense financially before committing to your exit strategy.
If you’re looking to connect with other industry experts or are in need of financing for your next investment project, allow CALCAP Lending to be your resource.