Chapter 05
Types of Properties & Exit Strategies
Now, before you get too excited about getting some experience under your belt, you need to understand why comping is so important.
When you compare similar properties you can accurately determine the value of a potential investment.
But here’s the thing to keep in mind: jumping into the game isn’t enough. You need to know when to jump out. That’s what I call your ‘exit strategy.’ And trust me, it’s as important as your entrance.
A well-crafted exit strategy helps you enter and exit investments while minimizing risk and maximizing profits. You should always enter a property with an exit strategy in mind. Know what you’re aiming for from the start. You do this because deciding when to sell shouldn’t be based on how you feel. It should be based on facts.
So, here’s how you find your exit strategy.
Based on the comps you did before…
Considering your property’s value and your big dreams, jot down your dream selling price and the least offer you’d accept without regret.
Then, imagine three scenarios:
- The market skyrocketing
- You suddenly need a pile of cash
- The neighborhood is not a sought after place to live anymore
How would you react and would you treat this property any differently in the buying process based on any of these three things happening?
And because those scenarios can change the way you’d approach a property, then they should be top of mind before ever diving into it as a potential investment.
Imagining these scenarios can help you determine your sweet spot for profit in your exit strategy and where you’d be if the worst case scenario happened and you end up only breaking even.
The other things to consider besides profit when weighing an exit strategy are also:
- How much time you want to spend maintaining the property
- How much experience you have in real estate investing
- How involved you want to be with tenants
- If you need the tax benefits of owning another property
If you want to be involved with tenants’ needs, remodeling and maintaining properties for long-term profit, then you might find yourself using the long-term rental exit strategy. But if you’re new to real estate investing, you may just want to make an assignment fee and sell the property to someone else.
In general, the most common exit strategies are…
It’s the real estate version of buy low, sell high. Give the place a makeover and sell it for those big bucks.
Even though these strategies are common, they may not be the best option for the property you’re looking at, because if you can find properties that you can own without ever putting money into them, then wouldn’t that maximize profits for every deal?