Picking the Right Exit Strategy on an Investment Property
Unless they are a part of a trust or estate, investment properties are not generally designed to be held indefinitely. So, sooner or later, you will inevitably need an exit strategy, and making the right choice is often significantly more challenging than investors realize.
Disposing of an investment property is more complicated than simply placing a “for sale” sign in the front yard. While this can, of course, result in a successful sale, a lot more thought should go into the process. Disposing of an investment takes a lot of time, planning, and research. The goal with an investment property is to maximize the proceeds you receive from the sale.
Evaluating Your Exit Options
Exiting an investment property goes far beyond a simple sale. Instead, you have a wide range of opportunities that should all enter into your deliberations. Rather than sticking to the easy way out – selling as-is – you should make sure you’re well aware of the pros and cons of the alternatives.
- Sale: the easiest and most common option, a sale allows you to fully dispose of your property without preserving any remaining ownership. This option is best when you no longer want to manage your property and the market conditions are appropriate.
- Preserve: your property may not be generating big returns for you, but that’s not to say it won’t pay off in the future. If the conditions are right, you may consider keeping your property for the time being, or holding it for future generations.
- Flip: some properties could bring in a great return with a little TLC. If the market is right for a remodel, fixing and flipping your property could provide the boost necessary to generate an appropriate ROI on your disposition.
- Rent: renting can be an excellent passive income stream, providing a positive way to use your property instead of just holding on to it. Keep in mind that getting a rental home off the ground can be a big undertaking.
There’s no one right answer, but it’s important to make your selection carefully. Without adequate due diligence, you may inadvertently choose a path that is not the best for your particular circumstance.
Choosing Your Exit Strategy
Exit strategies, like most things in real estate, aren’t one-size-fits-all. What worked for one investor may not work for another, and the best option today may no longer be viable tomorrow. As with all aspects of investments, research and analysis should be a critical part of the process. In order to find the best opportunity for your portfolio, these points should be a part of your exit strategy.
The Burden of Maintenance Costs
The costs associated with a property go far beyond the purchase price and any upgrades you make after purchase. As a property owner, you’re likely investing hundreds to thousands of dollars a year into the costs to preserve landscaping, pay utility bills, keep things clean, and make any necessary repairs.
While minor on the whole, these kinds of costs can add up, creating a big drain on your available cash. If the costs of keeping your property up to par outweigh the benefits you can gain from selling, it may be better to sell the property now. However, if you’re still largely happy with your property and you’re not losing much money in maintenance, you shouldn’t feel pressured to sell.
Transitioning into a rental property can alleviate these burdens, as well; in this situation, you can place the responsibility of recurring costs on your tenants, adjusting rents in accordance with the maintenance expectations. Rental properties can be quite time-consuming, however, so be sure you’re prepared for the increased workload.
Current Interest Rates
Lending is often a big part of the property transaction process, both for buyers and sellers. The kinds of rates available can affect how much a buyer is willing to spend, how aggressive negotiations may be, and even how much you are comfortable borrowing to finance future property investments, if necessary. If interest rates are good and potential buyers can secure an affordable mortgage, you may be able to play hardball with buyers to walk away with a great offer.
Additionally, if interest rates are currently low, refinancing your property may make long-term possession more affordable. Before selling because you’re paying too much on a monthly basis, take time to review interest rates and, if necessary, speak to lending resources in the industry. With a good deal, you can save potentially thousands of dollars a year on the cost of owning your property, deterring the immediate need to sell.
No one can predict how interest rates will ultimately change in the near future, but economists often have a relatively clear idea of what’s to come based on current trends and the state of the local economy. With a little foresight, you can more accurately weigh out now vs. later.
Local Sales Trends
Like all industries, real estate rises and falls, but will have a consistent return throughout a longer period of time. Experienced investors know this, and are willing to bide time until they see data that the market is at an optimal point. It’s hard time the market perfectly, but following local trends can help in making your decision.
Before listing your property, conduct careful research into the current transactions going on in your area. Find similar properties, evaluate recent sales prices, explore valuation fluctuations, and develop the most accurate picture possible of the real estate market.
As an investor, it’s up to you to stay on top of the general state of the economy, the local state of the economy, and the going rate for properties like yours in your location.
Rents in Your Area
Making the choice to transition your property into a rental isn’t one you should take lightly. While the potential for big gains is certainly there – countless investors make a significant amount of income from rental properties each year – a novice in the rental field likely won’t see huge returns without a well-researched approach.
If selling isn’t a possibility and you need an alternative, a rental property can be beneficial. Offering a steady income stream, a way to offset the costs of maintenance, and a way to increase the return on your investment, renting has many benefits to a seasoned investor.
However, before listing your vacant rooms and demanding a princely sum, tread carefully. Unrealistic rental rates won’t endear anyone to your property, and you may end up creating ill will in your community. Worse, you may invest money to create an appropriate rental space, only to have it sit empty because your prices are too high. Before committing, be sure you know what to expect.
For many investors, a need to sell usually means a need for cash. While real property is a wonderful addition to a portfolio, it is relatively illiquid. As such, most investors with cash in mind only sell when they are truly in need of money now.
The need of cash isn’t an ideal reason to exit an investment property, but it can certainly be a reason. For investors who find themselves strapped for other reasons – bad investments in other areas of their portfolios, an emergency in the family, an unforeseen relocation, etc. – selling an investment property off for the cash benefit can be a worthwhile choice.
Before selling for cash, however, it’s important to evaluate current needs versus future benefits. If the market is bad, interest rates are high, and rental rates are low, selling for cash may provide an immediate advantage – but it will likely come at the expense of a greater return in the future. Be sure to weigh all the pros and cons before taking this leap, including evaluating other potential cash sources or lending resources.
As alluded to in many of the other points to consider, your plans for the future should play a major role in what you choose to do with your investment property. While there are always pros and cons to exit opportunities, some possibilities will be better than others.
If, for example, you’re nearing retirement and have held your property for a significant time, waiting to sell may be a detriment, not a benefit, no matter how much the market may improve over the next few years. If your property is to be your retirement kick start, you need to sell when the time is right, even if the real estate market in your local area isn’t at its absolute best.
On the other hand, if you’re newer to the market and plan to continue investing for the foreseeable future, selling in haste could hurt you more than it helps. When real estate is a permanent part of your portfolio, it may be worth your while to wait for things to turn around. If you have plans for the proceeds of your property, the market is on an upswing and you have an eager buyer lined up, now could be your best chance. In this situation, the other factors to be considered will play a larger role.
Your Overall Objectives
When you purchased your property, you likely had a goal in mind. Did you buy simply to diversify your holdings, or were you testing the waters of property investment? Were you hoping to leave a legacy to your children, or to fund your retirement?
While it’s only natural that things change over time, the vision you had for your property when you first made the purchase should be a part of your consideration process. As a savvy investor, you likely put significant time, energy, and money into your acquisition, and that shouldn’t be discounted. Instead of allowing your property to meet needs now, think about the potential it has for the future.
If your investment is indeed what you expected it to be – valuable and attractive to buyers, with a unique facet that will ensure future value – it’s worth sticking to it. Selling in haste for an immediate need may be a detriment in the long run, compromising the potential left in your property.
The Bottom Line
As with all things in real estate investing, the choices you make need to ultimately align with your current, future, and long-term goals, your financial situation, and the position of the local and national economy. There’s no right answer for investors, and only you can determine whether the time is right to propose a sale or other form of exit.
Needing to pull out of an investment can happen for many reasons. Some are good, some are bad, and some are just a reality of investing. However, with a little expertise and a strong understanding of the unique dynamics of your situation, it’s possible to come to the best determination for you.
Scott Clift is a licensed real estate broker with Westpark Loans. He has been in the real estate industry since 1994. His team of seasoned professionals specialize in providing real estate loans for investors and other self-employed individuals. When you are ready to invest in real estate, call Westpark Loans to secure your financing at (844) 574 LOAN or by visiting westparkloans.com.