Rental property and real estate investments should not be a decision made lightly without the proper preparation. As with any investment, it’s crucial to consider all the moving parts before diving into a decision. Especially with the ever-fluctuating state of real estate, it’s easy to get caught off guard with just the slightest change in the market. This is why an imperative part of any real estate investment is to also consider how to exit a deal if the situation requires it. Investors removing themselves can occur for a plethora of reasons: market fluctuations, financial changes, or general life and goal adjustments that are natural to occur over time. Successful investors know the importance of developing a solid exit strategy before an investment is ever finalized. They understand that property and real estate management often can go down unexpected routes, so before making an offer they will create an exit strategy based on their current property’s future needs. In this article, we’ll explore the importance of understanding exit strategies, as well as cover some of the most popular real estate strategies for investors to consider.
What is an Exit Strategy in Real Estate?
To understand what a real estate exit strategy is, let’s think of this first and foremost as a business investment. Most successful entrepreneurs will proactively consider when they’d likely sell or transfer ownership of a business to maximize capital and overall profits. A real estate exit strategy is very similar. It’s a way for investors to anticipate and plan for a way out of their current investment to maximize profit or minimize losses by removing themselves from a current real estate deal. When running any successful business, exit strategies should be considered before making any large-scale investment.
Why do Investors Need Exit Strategies in Real Estate?
Investors need exit strategies for a variety of reasons. Not only does having a strong exit strategy save the investors money and maximize profits, but the intended exit strategy can often dictate many of the real estate decisions made down the line. There are numerous risks involved in not having an exit strategy because realistically there will be a time in which it’s best to move on from a current real estate deal. Without properly anticipating when and how the investor would like this to occur, they can end up tanking their profits or staying within a stagnant market for too long. By creating an effective real estate exit strategy they can run a more effective business, become a more well-rounded entrepreneur, and set themselves up for future profitable investments.
Real Estate and Rental Property Exit Strategies
At the end of the day, there is no end-all-be-all real estate exit strategy. Each real estate investment is unique, and the most effective real estate strategy will depend on many different factors. Some of these include the current market, property conditions, supply and demand, location, potential profitability, general goals, and more. Let’s explore some of the most popular rental property and real estate exit strategies to help investors properly create a prosperous future within the market.
Exit Strategy #1: Sell
The most traditional, almost go-to real estate exit strategy is to sell. For rental property owners especially, it’s very common for them to consider only the short-term. This monthly cash flow is a lovely benefit of investing, but failing to see the long-term big picture can result in endless time analyzing monthly profits and returns on their investment. This is all to avoid the inevitable conclusion that it’s unrealistic to expect that they will hold onto a rental property forever unless they’ve found the unicorn of rental properties. Rental property owners need to consider the changing market and potential profits gained from selling their property by considering when they would likely anticipate this sale. Many will hold off on selling to ensure that they take advantage of a hot location and consistent monthly returns. But with time these property owners will need to ask the question of if they’ll sell and when. Timing is crucial for this real estate exit strategy. The owner needs to consider recuperating their initial investment, what price they’d be willing to close immediately on, as well as what level of net profit they’re looking to gain. These are all important factors to consider at the beginning of the process, as any current work and updates made will impact the future value of the property. Knowing when and why you should sell is one of the largest indicators of success for property ownership.
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Exit Strategy #2: Own Outright
Rental property and real estate investors often are drawn to owning their property outright to net all the rent received in the future. While this can certainly lead to lucrative results, for this plan to be truly prosperous investors must know they want this before ever finalizing the deal. Owning outright will take many years to occur unless the investor intends to put down a large initial deposit. The first payment will dictate how long it will take to pay down or pay off a loan balance. For those looking to own in as little time as possible, their repayment plan needs to be reflective of these wishes. The amount of money put toward a monthly principle ultimately dictates the speed of paying down the balance. More monthly payments equal shorter repayment periods, regardless if an investor is working with a 15 or 30-year loan. This is a great option for investors willing to marinate on their potential profits of eventually not having to repay a loan. The real estate property can serve as a form of retirement earnings or even primary income, with only the property taxes and insurance still being a factor once the property is fully owned. While this is a very common goal, it should be one considered upon making the initial payment.
Exit Strategy #3: Refinance
For real estate and rental property investors, it’s very common to be overwhelmed by the number of options available, which can sadly lead to opportunities being missed that they would benefit from. From rental property loan programs to changing guidelines, it’s important to have a firm grasp of all available avenues. The experts at CT Homes have a firm grasp of all these options, but when first starting in real estate the options can be boggling. For those with the right credit score and equity, there are more options than they might realize. A very popular real estate exit strategy is to opt for a cash-out refinance. These are loans that are typically capped at 75-80% loan to value, depending on the rental property’s number of units. This results in a new loan that can be up to 75% of the appraised value. The investor can pay off their existing first lien and keep residual cash to invest any way they desire. If used efficiently, the cash-out refinance can be used to help an investment business flourish or be used as a down payment for other projects.
Exit Strategy #4: HELOC
Another popular real estate exit strategy to consider for those that wish to keep their property long-term is to add a home equity line of credit (HELOC). To put it simply, a HELOC is a new second mortgage behind an existing first lien. Everything established under the first loan is still in place, but there is now a new loan behind it. HELOCs are a unique option as their repayment terms, rates, and anticipated fees are a bit different from that of the first mortgage. These disparities can and should be capitalized upon by investors. For example, there are interest-only options for the first ten years followed by principal payments for the following ten years which effectively allows the investor to keep their payments as low as possible. Unlike traditional loans, HELOCs also have unique closing costs and prepaid costs, with many lenders out there being able to offer a line of credit for a few hundred dollars or even less.
Exit Strategy #5: Stay the Course
Sometimes when calculating the best possible exit strategy, investors will find that doing nothing is the best thing they can do. While seeming contradictory, there are ways to still maximize profits and minimize risk by not rushing into an exit strategy too early or not considering a new one if things change. This doesn’t mean that investors should just sit back and relax. Just because the correct exit strategy hasn’t been pinpointed yet doesn’t mean that the owner shouldn’t consider when they should act. If an investor is choosing to stay the course, they need to give themselves a predetermined period to analyze and evaluate profits and return on investments. This will change based on property type but can be done annually, every five years, or at the end of the ten-year mark if needed. The main thing for investors to avoid is simply paying a monthly mortgage without a vision of the future or long-term goals in mind. By occasionally taking a step back, investors can more accurately evaluate what they should do with the property, and choose an appropriate real estate exit strategy if necessary.
Real Estate Exit Strategies to Avoid
Now that we’ve explored a few valuable and effective real estate exit strategies, it’s time to consider the most common mistakes investors make when developing these strategies. Besides, what better way to prepare successfully for a future than by simply avoiding errors that have been made historically? Some of the most common things to avoid when developing a real estate exit strategy include:
- Not addressing or acting upon property devaluation
- Not putting a strong enough emphasis on property management
- Lack of response to tenants not paying their rent
- Lack of initial inspection, resulting in unexpected maintenance and repair fees
- Not recognizing increased or diminishing demand
CT Homes Helps Investors Navigate Rental Property Exit Strategies
Without considering a proper exit strategy, it’s easy for investors to make decisions that lack thought and foresight. As Benjamin Franklin once so aptly put it, “By failing to prepare, you’re preparing to fail.” Bracing for the unexpected factors within the housing market is an effective way to stay ahead of anything that comes in an investor’s way. Considering these factors before even making an initial deal ensures that all opportunities are properly taken to an investor’s advantage, whether that’s selling, foreclosing, or simply staying the course. At CT Homes, we’re passionate about helping investors make educated decisions regarding real estate. From real estate exit strategies to helping beautify neighborhoods, CT Homes has the resources investors and sellers need to maximize their profits and minimize the many risks within the housing market. Learn more about how CT Homes can help investors navigate the current market and develop fruitful real estate exit strategies today!