When the real estate investment leads start coming in, and you’ve got properties on your wish list, it’s time to sift through your options and determine which property to move forward on (and which align with your overall real estate exit strategy).
But how do you know whether a property syncs with the best real estate exit strategy? And if you’ve got numerous properties simmering on the stove, what criteria should you use to pick a winner that will help you achieve that residential real estate investment exit strategy you’ve been dreaming of?
Here are three questions to ask that will ensure the property you’re thinking about acquiring is congruent with your real estate exit strategy and pushes you ever closer to your investing goals.
3 Real Estate Exit Strategy Questions
1.Do I Have a Real Estate Exit Strategy?
This may sound obvious, but it’s difficult (and nearly impossible) to ensure a property matches your real estate exit strategy, if you don’t actually have a strategy.
Too often, many new real estate investors will frantically want to close deals, either to boost cash flow or their standing as an investor, without developing a long-term view of their activities. But each property must be looked at separately, and filtered through the lens of how it relates to your exit strategy.
Determining what your exit strategy is will usually come down to many factors, two of which include:
- Goals: Yes, we all want to close deals and make money. But how exactly do you want to do this? Do you want to make a small, lump sums with little time expended? If that’s the case, wholesaling is the way to go. Do you want passive income over the long haul? Perhaps a buy-and-hold listing is your best shot.
- How much capital (or access to capital) you have: You don’t need unlimited resources in the bank to start that rehabbing project or rental property you’ve got your eye on. But you will need to be able to tap into some form of private money or other type of lending. And if your network is a bit on the skimpy side, for the time being at least, you may need to wait a little longer for that big flip project.
2. Do the Numbers Crunch?
When the numbers don’t pan out, and the Excel sheet doesn’t show room for profit at the end of the deal, no amount of marketing and negotiation will make up for the fact your real estate investing techniques aren’t grounded in dollars and cents.
This is usually because an investor paid too much for a property and didn’t allow for enough of a cushion at the back end for them to recoup costs — plus a nice, tidy profit. No matter how beautiful those kitchen cabinets you put in are, if you don’t know your numbers — and what a particular market will bear — then you’ll be hoping somebody buys at your price, instead of investing strategically.
This means doing your due diligence by asking questions such as:
- What repairs need to be done? Make sure your contractor or inspector walks through the property. You don’t want surprises. Are the repairs just cosmetic or are the problems much more systemic? Remember, as investors, what most homebuyers consider deal-breakers, we consider opportunity.
- What’s the potential resale value of the property? Don’t think you can just do upgrades to boost the resale price; it doesn’t work that way. You must be comparable to other properties in the area. Be sure to account for that in your number crunching.
- What’s the neighborhood like? This is more for investors looking to add rental properties to their portfolio. But you want to know things like vacancy rate, population growth, proximity to a large city, big infrastructure developments — such as a college or university going in, or a big employer coming to town. Real estate strategies based on rental property acquisition require you to do a bit of fortune telling to predict how a market will be, not just six months down the line, but rather five years and beyond.
3. Am I Ready to Pull the Trigger?
Once you’ve determined your real estate exit strategy and figured out if the numbers work for you and your lenders (if you go that direction) to hopefully get a return, the last hurdle will be to determine if you are ready to take on the property.
This means answering a few challenging, though important, questions:
- Do I have the experience (or mentorship) to pull this off? Everybody was a first-timer at some point. But you want to make sure you either have the hard-knocks experience to tackle a project, or the mentor and knowledge base, to guide you through. Without either of those you could make some financial costly mistakes that could have been avoided.
- Do I have the time? Time is a resource we can’t magically make more of. If you’re in a situation where you don’t have the bandwidth for a seemingly good deal, either from an energy or time standpoint, then it’s okay to walk away or turn it over to somebody. (This is where many wholesaling deals start from: “I can’t flip this myself, but I know somebody who can.”) Knowing what you physically can — and can’t do — can often make you more money in the long run.
- Do I have systems in place? A lot of advice about the best exit strategies for beginners will talk about the viability and profitability of a potential deal. But many of them neglect to talk about the systems needed before moving forward with a more complex investment, such as a rehab or rental property acquisition. This includes having a clear scope of work, all legal documents in order, a firm relationship with a contractor, and a marketing plan for how to sell the property. (Just to mention a few.) You don’t want to wait until you’re putting in the kitchen tile before your start trying to market a property. Having everything systematized (and ready once you hit “go”) is probably one of the biggest factors that separate the entrepreneur from the “want-re-preneur.” (And will radically boost your chances at exit strategy success.)
It Begins With a Simple Step
As that great real estate investor William Shakespeare once said — yes, it’s true; he was a property investor — “All things are ready, if our mind be so.”
When you’ve got your mindset straight, and backed it up with diligence and preparation — you can walk into that next investment deal confident and fairly secure it aligns with your real estate exit strategy.
And more importantly, you’ll know the actions you’re taking have a direct bearing on moving you toward the lifestyle you want and deserve. (Perhaps the best exit strategy of all.)
