Whenever you invest, you need to be thinking of your way out. An exit strategy is any method in which an investor or business owner gets their cash and time back—with an attractive return at one time or over a period of time. And yes, real estate investors, you need to have an exit strategy for each and every property. Even when I’m just browsing properties, especially commercial, I repeatedly ask myself, “What’s the exit?”
One of my early mentors taught me an invaluable lesson about having an exit strategy. It was in the early 1980’s and he took me in his brand new Mercedes 380 to one of his doughnut shops. As we pulled into the parking lot, he asked what I saw.
“Well, I see your doughnut shop,” I said.
“Yes, but what does it look like?”
After studying it for a while, I said, “It looks just like a 7-11 store.”
“Exactly,” he said.
Then he took me inside for a closer look. We investigated the inside of the store, noting dimensions. Then we went outside and he stepped off the length and width of the building. He explained that all of the walls, inside and out, were the exact dimensions of those found in a 7-11.
So then we wandered over to the parking lot and counted parking spaces. And sure enough, there was the same amount found in the average 7-11. He had had built this building built from scratch to his specifications.
I furrowed my eyebrows in curiosity and asked him, “Why?”
“In case one of my doughnut shops fails, I plan to sell it to 7-11 for a good price,” he said. “Not only is the store and the parking lot the same as a 7-11, the traffic count of the intersections of all my shops are equal to or greater than what 7-11 requires at all of their store locations.”
This mentor had done his homework. He understood that he was in the real estate investing business as well as the doughnut business. He had created a profitable exit strategy for himself.
There are several exit strategies that can be utilized in real estate investing, just like this example. Real estate–or any investment for that matter–should have at least two exit strategies. It’s particularly easy in real estate to use several. Here are three great exit strategies in real estate investing:
- Buy and Hold: This strategy uses rents (primarily monthly) as its immediate exit. It offers a longer exit of selling it after five+ years by using a 1031 exchange to avoid paying capital gains taxes.
- Fix and Flip: This exit strategy involves purchasing properties that are distressed in some way. Look for situation of the seller and condition of the property. But the best fix and flips have both of these disorders. Think of a foreclosure (situation of the seller) that needs repairs (condition of the property). Repair the property quickly and list it for sell in less than a month from the closing. That’s a quick exit.
- Lease Option: A lease option is similar to the buy and hold tactic with a couple of differences:
- Typically you can charge a $100-$200 or more premium for rents.
- Tenant is responsible for all repairs and upkeep.
- You can get usually triple the amount of a deposit as option money upfront.
Preparing yourself to buy a property by using any of these three exit strategies is a great way to protect yourself and your investment.
Have you ever utilized an exit strategy? Share in the comments so we can all learn!
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