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What’s Your Exit Strategy?

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What’s Your Exit Strategy?

By Hewlett Santos. 8 minute read.

You make your money when you buy.

I expect that this might sound backward to some readers, and rightly so. You might think to yourself, “how the hell does me spending money = me making money?”

Let me explain.

When prospecting for your next opportunity, it’s in your best interest to pick up an off-market property that you can add value to, in order to generate a profit. You want to purchase a property that is not listed on the market, at a lower purchase price that what it would sell for if it were listed. The goal is to purchase low enough that you can make money even if you decide to sell it the very next day.

Who the hell is going to agree to sell you their home at a discount?

Most people will happily list their property with a realtor, wait 6-8 months for the sale, and pay out 12% of their proceeds (not including any potential Capital Gains Tax), as the rest of 95% of the population does. It is what it is. However, there are many reasons why someone would sell their property at a discount. I’ll save that for another post.

You still don’t understand, so here’s an example.

I’m going to provide scenarios where the use of one of the 5 exit strategies discussed here would be appropriate.

(There are many more exit strategies than I have listed here. Additionally, a savvy investor can get creative and use a combination of these strategies to achieve their goal with any particular property.)

That being said, I present to you a bird’s eye view of five of the most popular exit strategies that Investors employ with a property they’ve acquired, listed from most popular to least.

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1. Buy & Hold.

In my opinion, Buy & Hold is the most popular exit strategy in the real estate industry. Though it isn’t the most publicly praised, it is definitely the exit strategy that is most known. If you own your own property, you are doing some form of Buy & Hold investing (a poor version in my opinion). If you are currently renting, the owner of the property you live at used Buy & Hold as their exit strategy. The semantics might be confusing; you technically don’t “exit,” as you continue to hold the property. When you think of Buy & Hold, think of the 4 houses, 1 hotel strategy employed in Monopoly. I don’t care what anyone says. Having your note automatically paid down every month. Positively cash-flowing. Proper management in place. Solid.

The most appropriate scenario for this strategy:

When you purchase a property, can rent it out for slightly higher than the property’s expenses, are able to hold it for 15 or 30 years (or more, or less) , and can reap the benefit of having the tenant(s) pay down your debt and build up your equity for you, all while property values are hopefully increasing in the area. If you’re a ninja, you picked this opportunity up as an off market deal, well below market value.

After Repair Value: $100,000.00
Purchase Price: $85,000.00
Sell Price: $??????.??

Hopefully the values have increased significantly in the area. Even if they haven’t been drastic increases, the mortgage pay-down by your tenants have gained you equity which you should easily be able to capitalize on.

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2. Flip.

Commonly known as “Fix & Flip.” This is probably the strategy you believed to be the most popular, since it’s all over all of our favorite shows on HGTV (as unrealistic as some of those shows are, I also enjoy them). Savvy investors who have capital in reserves or cash that they can buy cheaply will use this strategy in hopes of achieving a high Cash on Cash Return. The goal with this strategy is to buy as low as possible and make cost-effective improvements that will maximize the value of the property, making it competitive in the current market, very quickly to mitigate all holding costs. The goal with these renovation/rehab projects is to finesse them.

The most appropriate scenario for this strategy:

The property requires substantial repairs or updating in order to be competitive in the current market. Let’s call it $25,000 in repairs. You want to pick this property up low enough that , even throwing $25,000 into this project is profitable.

After Repair Value: $100,000.00
Purchase Price: $40,000.00
Repairs and Holding Costs: $25,000.00

If you’re all in on a rehab project at $65,000.00 and the ARV is $100,000.00, all of the space between these two numbers is your potential profit. You can maximize and try to sell to an end buyer at $100,000, or you can price slightly lower at $90,000 in order to sell quickly and focus on the next flip. This is a very realistic scenario and occurs every single day.

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3. Wholesale.

Wholesaling is one of the more popular exit strategies amongst people in the real estate industry (I’m not talking about Real Estate Agents). This is because it is the first step in any non-conventional real estate transaction worth the paper it was negotiated on. Wholesaling houses is like wholesaling in any other industry: you want to sell at a price that is higher than what you purchased for. I wont bog you down with the back-end minute details. Let’s get to the numbers.

The most appropriate scenario for this strategy:

To effectively wholesale a house, you want to lock in the rights to purchase the property (equitable interest) at very low, and sell to your end buyer and not so low, in order to allow them to profit as well. You gotta leave some meat on the bone.

After Repair Value: $100,000.00
Purchase Price: $35,000.00
Sale Price: $45,000.00

If I were to take my rights to buy a property at $35K, and sell it to someone else at $45K, I get to make a nice profit from the sale of the rights, and they get to make a nice profit after making the necessary repairs to the property and listing it with a realtor on the MLS.

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4. Rent To Own.

Also referred to as a Lease Option, this exit strategy is not as clear cut as any of the previously mentioned methods, as it requires quite a bit more “skin in the game.” With this strategy, a seller will lease the property to their end buyer, at a rate that will at least cover their monthly costs, or will exceed their monthly costs, potentially producing positive cashflow. Seasoned investors will get in between this deal, connecting a seller with their end buyer, and profiting from making the connection. The seller will lease the property out to a tenant, who will have the option of buying the property for a predetermined amount, at any moment within the agreed time.

The most appropriate scenario for this strategy:

After Repair Value: $100,000.00 (assuming the property has no mortgage)
Purchase Price: $90,000.00
Down Payment: $10,000.00
Agreed Upon Length of Terms: 24 Months
Agreed Upon Monthly Payment: $650.00 (all principal)
Agreed Upon Balloon Payment at end of Terms: $74,400.00

I left out the interest in this example and assumed that the property was owned free and clear in effort to illustrate the complex nature of this exit strategy, without blowing any fuses! It can seem complex, but once you understand all of the moving parts, it is quite the beneficial strategy for everyone involved.

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5. Seller Finance.

Seller Finance is a strategy that ninja investors use when the seller is in a tough situation and needs to sell, but has little to no equity in the property. The gist of this transaction is, the investor will keep the seller’s loan with the bank in place (hence Seller Finance), while the deed is passed onto them, and they take on the responsibility to make sure the monthly payments are made on the property. Very similar to "Lease Option,” this strategy requires a lot of know-how. There are many moving parts to this, but I will provide a very surface level example of the math on this.

The most appropriate scenario for this strategy:

After Repair Value: $100,000.00
Loan Balance: $80,000.00
Monthly Payment: $500.00 (all in)
Interest Rate: 3%
Purchase Price: $85,000.00
Down Payment: $5,000.00
Agreed Upon Length of Terms: 36 Months
Agreed Upon Monthly Payment: $650.00 (all principal)
Agreed Upon Balloon Payment at end of Terms: $56,600.00

I made this transaction super simple for the sake of this post (left out newly agreed upon rate, structured so that down payment removes any balance above the balance of the loan), but you can see how complicated it can get. Lots of moving parts. If the down payment didn’t cover the difference between the purchase price and the loan balance, it is likely that a lien in the second position to the first mortgage would be put in place, at an agreed upon interest rate. I know. My head is also spinning.

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You collect your money when you sell.

The point is that you can only truly profit on a property if you purchased it at the right price, or the right terms. Maybe, by stroke of luck, you pick up a property that’s worth $100,000.00 at a purchase price of $100,000.00, and it happens to be inside of an Opportunity Zone, and 10-15 years later it’s worth triple that. Luck is on your side.

If this is your style of investing, hit me up right away. I have a bridge in Brooklyn that’s right up your alley.