If you’ve been a real estate investor very long at all, you should know how important having an exit strategy is. Frequently, the first question I ask new real estate investors is – “How do you plan to profit from the investment you are about to make?” Way too often the answer I get is – “Hmmm… I like the price I’m paying but I haven’t thought about how I’ll profit.”

When you invest in real estate without first having an exit strategy, you don’t have a plan to make a profit. When you don’t have a plan for a profit, you can’t determine what the property is worth to you. The asking price compared to the value to you can be very different depending on your exit strategy.

Make sense?

Long Term versus Short Term Investing

You’re first consideration should be whether you plan to hold the property long or short term. When you can invest in a property for little or nothing down, you probably want to go with a long term investment strategy allowing you to build equity over time.

There are many strategies to getting into a property with little or nothing down. Seller financing is one way. A seller offering seller financing has a much larger pool of buyers. They do this to obtain the maximum price for the property. As an investor, you can get in for very little cost but you have no equity. Your exist strategy should holding long term while profiting from rental cash flow.

If you want a short term investment to turn a fast profit, you’re going to want to buy the property as cheaply as possible. Probably wholesale. In today’s market, getting the best price on a property means paying all cash when others are making financing contingency purchase offers. When a seller is willing to sell at a deep discount, they usually wanted the money yesterday. You’ll get the best price when you offer all cash and can close in a matter of days – not weeks. Now you have plenty of equity in the property and can flip it to a rehabber or sell on the retail market for a nice fast profit.

What You Need to Consider in an Exit Strategy

Now you understand the first question to answer about your exit strategy is whether you’ll hold the property long or short term. Here are other points you need to consider.

• If you have a staff or use a CPA or attorney, make sure they know your exit strategy so they treat the investment accordingly. For example, a CPA needs to plan either for depreciation or capital gain, depending how long you’ll hold the property.
• For long term investments, you should have a specific amount of time in mind. 5 years, 10 years, 20 years? Then you can calculate expenses like putting a new roof on if holding for 20 years.
• For long term investments, you need a plan to review the financials regularly. At least every six months you need to look at expenses, profits, and market value. If the investment isn’t going as planned, you need to either adjust the plan or start looking at a different exit strategy to cut your losses.
• When it’s a short term investment, you need to have a good idea who your end buyer will be. With that in mind, be sure you’re buying a property they will be interested in. Don’t buy a mansion when your end buyer is interested in white picket fence houses.
• Remain flexible. When holding the property long term, someone might come along that values the property much more than you do. They may offer you a price you can’t refuse.

You can make money in real estate regardless if the market is skyrocketing, sliding sideways, or in a down turn. However, your chances of succeeding greatly improved when you have an exit strategy before you invest.