As part of our real estate investing tips, in this article we’ll dive deeper and discuss the 4 types of exit strategies for real estate investors.
We all know that moment in classic cartoons, where the main character is cornered and seems to be doomed, but all of a sudden, they pull out a big red button and as soon as they push it, BOOM! They’ve made it out safe.
It would be great if investors thought the same. It’s always a great idea to have an escape plan, so you can also get away safely if you ever need to! A lot of times we have seen investors not have a backup plan and once their cornered, it can affect them negatively. But, if they only focused on having an exit strategy beforehand, it would have saved them a lot of time and temporary pain!
So many investors that have had exit strategies are doing or have done great in this market. It’s about staying ahead of the game! Here are 4 exit strategies for real estate investors that are currently working great for us. Do you have a suggestion for a great exit strategy that worked well for you? Leave it in the comments below!
Real Estate Exit Strategies #1: Sell the Property
When trying to make a quick sale as an exit strategy, make sure there is a comparable standard to other homes for sale in this area. This could mean quickly replacing that old carpet or polishing it up a bit. Additionally, try to sell the property a little below cost so that you can ensure you will be able to make a quick sale. This is the most common approach investors make, and can be successful relatively quickly (given the market is in good shape)!
Even if this isn’t news for you, keep reading to learn more about other exit strategies for real estate investors.
Real Estate Exit Strategies #2: Seller Financing
If you still want a way to produce a profit from your investments, seller financing can be a great way of doing this while you’re making your way out of the market. This type of financing is generally shorter than other options and includes a balloon payment.
Seller financing as an exit strategy is when the seller acts as the bank to the individual(s) looking to purchase the property. Although this does sound similar to a rent to own, the main difference is that the buyer immediately beneficially owns the property. For example, if Bob is looking to buy a home but his bank said he does not qualify for a mortgage for whatever reason, he can get into a seller financing offer as an alternative. When the property owner agrees and takes their down payment and finances him the property on previously agreed terms, the property owner then starts collecting monthly payments from Bob.
Seller financing can take multiple forms. The example above would be a mortgage seller financing. Another one of those seller financing exit strategies for real estate investors is Land Contracts. This is essentially when the purchaser makes regular payments to the property owner for a certain period until the final payment is completed, and which time, and only after this last payment, do they receive the full legal title of the property.
The Benefit to the Purchaser
The main benefit to the purchaser from seller financing is that there is barely any qualifying. As the sellers impressions of the buyers ability to make regular payments are generally more flexible standards than when qualifying for a mortgage at a bank or mortgage broker. Additionally, there is flexibility when it comes to down payments, as sometimes the property owners let the purchaser make payments periodically rather than a one time, rather large payment. Finally, there is faster possession as buyers and property owners won’t be patiently waiting for money lenders to process the finances of the purchase. This type of exit strategy for property owners tends to be a very attractive one for buyers!
The Benefit to the Seller
The main benefit of seller financing for property owners as an exit strategy is that they are able to ask for the full list price and sometimes even higher because they are the ones offering the financing. Additionally, a massive benefit is also increased cash flow from the property, having a little cash on hand never hurts! Also, the seller can receive great tax breaks. As the sale is an installment sale, the owner only has to report the income received in each year (spreading out their tax liability), rather than the whole projected profit all at once. Finally, the main perk is that in a slower market, seller financing helps sell the property a lot faster. During times when people are having a hard time affording homes, this is a great way to keep the ball rolling, not only on your investment but the market as well!
Real Estate Exit Strategies #3: Rent-to-own
A rent-to-own, also known as a leasing option gives the buyer the ability to make larger monthly payments that go towards purchasing the home over a pre-agreed upon length of time. These payments are larger than general monthly payments because it is needed to cover the amount that is associated with the down payment. However, it is important to note that buyers agreeing to a rent to own, does not mean that they need to purchase the home by the end of their contract. It’s more like a long term test drive if they choose to purchase it at the end is their decision!
The Benefit to the Purchaser
Constant moving can be mentally exhausting physically and mentally and is also draining on your finances. The main benefit of buying a rent to own is that purchasers can partake in a ‘test drive’ of the house as well as the neighbourhood to have an idea of if that property is right for them, rather than spending money on constant moving. Additionally, purchasers build home equity through the property, even if they don’t have the best credit! Finally, purchasers of a rent-to-own are able to hold on to a purchase price when signing a contract, and this is extremely beneficial if the area they are moving to is experiencing great appreciation.
The Benefit to the Seller
When the market is slow and properties are hard to sell, a rent-to-own is a great way of getting your property eventually sold while giving regular income to yourself. Not everyone can afford a good home, but that doesn’t mean they wouldn’t love to own one! Additionally, this means that having a tenant that is participating in a rent-to-own will generally be a lot better at maintaining the property as well as their relationships with their neighbors. Finally, the regular monthly payment is generally higher than it would be with rent, because you’re giving the tenant a lot of flexibility with their decision to purchase the home afterwards or not!
Real Estate Exit Strategies #4: Flip and Sell
We’ve all seen HGTV, the amazing flips in a short amount of time. It’s definitely a driving interest for those who are just entering the market. But the main issue with this is that flips are more difficult than most would think. Flipping houses as an exit strategy involves owning a property that requires significant repairs and updates, usually purchased below market value, updated the property, and selling it quickly above market value.
A lot of times investors think going above and beyond with heated floors and automatic lights will encourage buyers to purchase that property for thousands more, but the hard truth is that if the neighbours property is on sale, will a lot fewer updates but a lower price tag, the purchasers will likely go with the neighbours. This is important to remember if you as an investor are thinking about flipping a house, as depending on the market, it can take a long time to sell really expensive houses! Additionally, sometimes repairs and updates can take longer than expected, which can be expensive to you as time is money!
There you have it!
4 common exit strategies for real estate investors that are commonly used in this booming real estate market.
In a market that requires acting fast, it’s always smart to be proactive about your back up plan! For more information on real estate investing, you can attend our free 90-minute introductory investing class. Click Here to register now!