Newbie Question Re. Exit Strategy . . .
I just signed a contract on my first multi-unit today! I'm very excited. But I have a sort of dumb question . . .
Everyone keeps telling me to make sure I have an exit strategy. Here's my deal: I'm buying a total of 3 units, which is actually both sides of a duplex (and purchased/deeded seperately). One side is divided into 2 apartments and the other is a single family home. They were listed as a package, but I chose to keep them deeded seperately, made 2 seperate contracts and will hold 2 seperate loans. I did this in case I wanted/needed to sell/drop one of them and not the other.
Here comes the dumb newbie question . . . Is that all there is to an exit strategy????
I'm rehabbing the properties to keep as rentals anyway (roofing, flooring, walls, curb appeal, etc.), and since I bought them seperately, I can always sell one or both of them for a profit if I decide not to hold them. Is that all there is to an "exit strategy?" Just a contingency plan in case they don't work out well as rentals??????
Create multiple exist strategies.
Things you can do to get out or shift the risk if your first plan does not work.
In no order
Flip.
Rent
Move in one unit and rent the others
Sell on a contract
Lease/option
Each of the above is different. Some provide more control and more ownership. Others shift the ownership and can be used or raise what is received monthly.
Exit strategies are all about finding ways out of a situation that works for you and the deal. Having more then one allows for the fact that maybe you missed something on the way in or the market changed (rates rise, lender changes the T&C's).
I like to know 2-4 ways out of a deal before I get in. If all are profitable then the deal is worth my time.
John
[addsig]
You've pretty much got the right idea. This isn't rocket science. It's just that different investors purchase property for different reasons. And it's always a good idea to know what options are available to you in your market if you decide to sell. And following on from that, it's a good idea to understand what options are available in different circumstances, like if you need money quickly or if you're willing to get paid top dollar but over a longer period of time.
Good luck.
If you're holding it for the cash flow (rather than the appreciation) you don't need an exit strategy. If you want to sell it at the most strategic time then you will need an exit strategy.
In the mean time you'll need a management strategy until that time comes.
Holding property for rental income is not really an exit strategy. It is, instead an investment strategy, with its own set of cash flow criteria to determine whether holding for rental income is productive for you.
Once the property ceases to be a desirable holding, your exit strategy might provide several ways to sell the property. You may also identify specific triggering mechanisms to engage your exit strategy -- rent plateau, stagnant appreciation, declining neighborhood, return on equity calculation, internal rate of return calculations, longer rental vacancy at turnover, increased turnover rate, etc. Maybe you are just moving out of the area and don't want to be a long distance landlord. For whatever reason you might decide it is time to sell your rental property, you now need to engage your exit strategy.
For example, for one property I owned for several years the market rents had peaked and my rent had stagnated at the same point for several years. My monthly cash flow stayed at $205 per month for many years with no potential increase in sight. The neighborhood was maintaining value and the property had appreciated to about twice what I paid for it with the rate of appreciation at or near zero.
I decided to use a 1031 exchange to trade my rental property for another property in another market where future appreciation and the rental market was stronger.
Once I determined that I would use a 1031 exchange, my selling options were limited to a straight sale to cash out my mortgage. This eliminated seller financing and a contract for deed to facilitate the sale. Lease option would not work because my timeline was too short. Even with a straight retail sale, I still had options -- FSBO or MLS listing.
My first option was to offer the property to my tenant at a slight discount to FMV. If this did not produce a quick sale, then I was going to market the property through the MLS at a higher list price when my tenant's lease expired. I decided not to market the property to investors with a tenant in place because I would have had to discount the property too much from FMV. Fortunately, my tenant decided to purchase the property and qualified for 100% financing.
That was in 2001. The property I exchanged into has now appreciated to roughly twice what I paid for it, while market rents have started to retrace. I am going to exchange out of this property, into two condos -- doubling my cash flow.
Hope this helps
Dave,
Thanks for sharing all of these details as they gave clarity to what is meant by exit strategy.
Thanks,
Robert
[addsig]
Dave,
Thanks for sharing all of these details as they gave clarity to what is meant by exit strategy.
Thanks,
Robert
[addsig]