5 Real Estate Loan Exit Strategies to Consider | Woodbridge Wealth
03 15 2017
It may sound counterintuitive, but your real estate exit strategy should be planned right alongside your initial acquisition. The roadmap for walking away could be the difference between earning a profit and losing money.
Whether you're approaching your first home purchase or are a seasoned financier with your sights on investing in a multi-use commercial building, we've got you covered.
We've done the homework, and identified the top five real estate exit strategies to know and understand before your next investment:
1) Maximize occupancy and sell.This strategy works best for the investor who buys a property in a strong rental market. Under these circumstances, it can be most profitable to maximize occupancy of the property quickly and sell to another investor looking for steady rental income. After all, investors are looking for supplemental monthly rental income they can count on.
2) Capitalize on good times.It's as simple as quit while you're ahead. Potential buyers are typically willing to pay more for properties that are performing well, and have no strings attached. Why? It's a smoother transition, the financing process is uncomplicated, and in general, it ups the ante on the property value. Get out while times are good before the property's value begins to decline.
3) Wait until loan maturity.At the end of the day, most commercial loans are in accordance with a 25-year pay off schedule. However, the majority of commercial mortgages call for balloon payments 10 years into the loan. And that means a pivotal decision must be made at loan maturity. Do I take out a new loan or is it time to say goodbye? It all depends on your skill level, long term goals, market factors, and accompanying investments. Remember, refinancing real estate can be a very difficult, time crunching, and frustrating process. If it's too much of a lift for you, or you simply can't afford to go on, it could be the right time to take your money and invest elsewhere.
4) Make it a fixer upper.From HGTV's "Rehab Addict" to the legendary "This Old House," everybody seems to be buzzing about the latest DIY craze, transforming rambling eye sores into profitable renovated show stoppers. But should you jump on the bandwagon? Inexperienced investors often assume that any and all improvements will result in a windfall. But the truth of the matter is, if you don't make the right choices within individual markets and regions, you could end up losing money, and never receive the cash flow that you were counting on. Remember, the longer the home is on the market, the more likely it is that you won't achieve the return you envisioned. Ask yourself. Do you truly have the wherewithal, expertise, and construction contacts to make the judgement calls, pricing decisions, and every critical choice along the way? If the answer is yes, this exit strategy could be the profit prince you've been waiting for.
5) Hold until capital expenditures kick in.Every property requires significant capital expenditures over time. It could be a new roof, furnace, air conditioning unit, pipes, or parking lot repavement. Any one of these alone can cost you tens of thousands of dollars. For investors not looking to increase their equity in a property, this may the best time to sell and exit your loan. Though it's important to understand that this strategy can result in a lower selling price, since a smart prospective buyer will account for the need to make these capital investments.
What Exit Strategy Works Best for You Depends On Your NeedsSo what is your best exit strategy? It's as individual as you are. Every investor has unique timelines and circumstances to shape their decision process. Retirement, college, the next big opportunity, and how the sale could favorably or unfavorably sway your taxable income are just a few of life's circumstances that should influence your approach.
Let a Financial Expert HelpAnd most experts concur, savvy investors should have multiple contingency strategies in place that account for everything from changing markets, to employment layoffs, and everything else that life throws at us. If you are new to the game, or simply have questions, don't go it alone. The real estate investing industry is chock full of experts who not only have the experience help you navigate the process, but can identify the next potentially game-changing opportunity.
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