27 Apr Why Every Investor Needs an Exit Strategy
If you are a real estate investor – or any kind of investor – you must plan your exit strategy while you’re planning your business. Many people wait to come up with their exit strategy until they are ready to move on to a new business or retire, but this can become problematic. Read on to discover why every investor needs an exit strategy, as well as some examples of good exit strategies.
Google offers a simple definition of an exit strategy: “a preplanned means of extricating oneself from a situation that is likely to become difficult or unpleasant.”
I like to define it as “any method in which an investor or business owner will get their cash and time back, with an attractive return, either at one time or over a period of time.”
One of my early mentors taught me an invaluable lesson regarding exit strategies. It was in the early 1980’s and we drove up to one of his donut shops. He asked what I saw. I said, “I see your place of business.”
He quickly corrected me. ”No, what does my place of business look like?”
I studied the donut shop for a few minutes and said, “It looks just like a 7-11 convenience store.”
“Exactly,” he replied.
Then, he took me inside the donut shop for a closer look. We thoroughly investigated the layout of the store. Next, we went outside and he stepped off the length and the width of the store. He proceeded to explain that all of the inside and outside walls were the exact dimensions of those founded in a 7-11 store. Finally, we walked to the parking lot and counted the parking spaces. He told me that there were the same number of parking spaces found outside the average 7-11 store.
With a puzzled look on my face, I asked him why? (He had had built this particular building from scratch to his specifications.) Without hesitation he responded, “Just in case one of my donut shops doesn’t make it, I plan to sell the building to 7-11 for a good price. The store and parking lot are the same as a 7-11, and the traffic count of the intersections of all my shops are equal to or greater than what 7-11 requires for all of their new store locations.”
This mentor had done his homework. He understood that he was in the real estate investing business as well as the donut business.
This story demonstrates perfectly the need for an exit strategy. So, do you have a strategy in place?
There are several types of exit strategies that can be employed. Real estate – or any investment for that matter – should have at least two exit strategies.
3 Common Exit Strategies for Investors
1. Buy & Hold
This exit strategy engages rents – usually monthly – as its immediate exit strategy with a longer exit of selling the property after 5 years. Then, the investor could use a 1031 exchange to avoid having to pay capital gains taxes.
2. Fix & Flip
This involves purchasing properties that are distressed in some way. Think of a foreclosure (situation of the seller) that needs repairs (condition of the property). Both the situation of the seller and the condition of the property allow you to buy the property at a great price. The exit strategy is to repair the property quickly and place it on the market shortly after purchasing.
3. Lease Option
This exit strategy is similar to buy and hold with a couple of differences.
First, you can typically charge $100-$200 more for your rental rate. Second, the tenant is responsible for all repairs and up-keep. Finally, you can usually triple the amount of the deposit as money upfront.
There are, of course, many more exit strategies. However, especially for real estate investors, these three are great options. Just like the story I shared about my mentor in the 1980’s, it is essential to have a plan before you need one.
My mentor didn’t wait until his donut business started going downhill to do something about it. Instead, he researched exit strategies AND implemented them before he needed to exit.
So, share with me: What are some other exit strategies? Do you have an exit strategy in place for your business?