3 Components of Choosing an Exit Strategy for Your Real Estate Investment
You have found the perfect home for your next real estate investment. The pieces are falling into place: the motivated seller, a quality property, and numbers that look promising to make a profit. Now it’s time to consider what your exit strategy for your real estate investment will be.
But, what will you do with your investment after you buy it? That is where the money is made! I use three components, or what I call the decision triangle, to determine an exit strategy for my investments.
Decision Triangle: How to Choose Your Exit Strategy
Your Personal Finances
The first aspect of the decision triangle is to consider your own personal finances. Do you need to cash out of your real estate investment deal quickly, or can you wait for a larger profit in the future?
If you need cash right away, the best is probably to sell outright. Selling right away means you will get cash quickly. However, I only suggest selling outright if profit is over 10% of the home value. Also, selling outright has costs like commissions and closing costs.
Selling on terms, like subject-to the existing loan taught in the free Unlimited Funding course, means selling will cost less. You will have the chance for more profit in the future than selling outright.
The Market Conditions
The market conditions also play a part in deciding an exit strategy for a real estate investment.
For instance, if the market is going down quickly, it might make sense to sell outright. If the market crashes, the potential for profit in the future dwindles.
However, if the market is neutral or appreciating and you don’t need cash immediately, selling on terms, like a wrap or subject to the existing loan, gives the potential for more profit in the long run.
The Deal Structure
How you purchase the investment property is probably the most important part of the decision triangle. It has three considerations:
The discount you negotiate when purchasing from a motivated seller can determine what exit strategy to use.
If you want to sell outright as an exit strategy, the purchase price should be at 75% or less of the Fair Market Value (FMV). The FMV is what the home is worth in the current market conditions and based on comparable sold homes.
Selling on terms you can still make a large profit with a smaller negotiated discount. For this type of exit strategy, I suggest a FMV or 80% or less. Although, a bigger discount means a happier bank account!
Type of Financing and Interest Rate on Existing Loan
When selling outright the type of financing and interest rate on the seller’s loan doesn’t matter. You will sell so quickly, their financing won’t affect your deal.
If you sell on terms where you will keep the current loan in place, this information is very important. The best-case scenario is to find a motivated seller with an existing mortgage with an interest rate of 7% or less. You should also avoid adjustable rate and balloon mortgages.
Source of Funds Used for Purchase
Like with the financing and interest rates, if your exit strategy is to sell the investment property outright, the source of funds isn’t important because you won’t own the home for long.
There is a right way and a wrong way to buy real estate. The most beneficial way to purchase an investment property on terms with zero money down. However, if you need cash try to source long-term, low-cost money from a private investor. I always teach that it is best not to use your own money, unless absolutely necessary.
Using these components can help you determine a profitable exit strategy for your next real estate investment, but there is so much more to learn! I invite you to join me at my next in-person event or to check out my free Unlimited Funding program to learn how you can gain financial freedom as a real estate investor without using your own cash or credit.