What Is An Exit Strategy In Real Estate?

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Every investment and/or business needs an exit strategy. Even with the best-laid plans, things can fall apart or you can just burn out and want to stop, eliminating the investment from your life. Like most investments or businesses, you can’t just stop cold turkey. You need a plan to properly exit the strategy for the benefit of you and anyone else involved in the transaction, especially your finances.

Real Estate Exit Strategy Options

Your real estate exit strategy will depend on your situation and your final goals. Ask yourself, are you looking to get out for good or get out and invest in something else? Are you stuck in a bad investment and want out or are you ready to reap the reward of your capital gains?

Your end goals determine the exit strategy that works the best for you. Here are the top options:

  • Sell the property – This is self-explanatory. If you own an investment property and you don’t want the responsibility anymore, you can sell it. You can’t just up and sell a property though. It requires strategic planning.

First, determine what the home needs. Work with a licensed real estate agent to get his/her opinion too. Does it need repairs or a few upgrades to maximize your return? Next, look at the market. Is now a good time to sell? If not, can you wait so you maximize your return?

Discuss your options with your CPA too. Remember, you’ll pay taxes on your capital gains since it wasn’t your primary residence. Plus, you don’t want to be in a rush to sell or you’re more likely to take a much lower sales price than you may be able to get.

  • Like-kind exchange – If you intend to invest in another piece of real estate after selling one property, you may be eligible for a like-kind exchange (1031 exchange). The benefit of the 1031 exchange is you defer the taxes you’d owe on the capital gains.

There are strict rules, especially with the timing so make sure you work closely with your CPA if you choose this option. You have a total of 180 days to complete the transaction, but a shorter time to find and identify the replacement. This is a great exit strategy for those who want to up-level their portfolio.

  • Seller financing – If you don’t mind keeping your money tied up, but want to get rid of the property, you can consider seller financing. In this transaction, you become the bank. The buyer pays you a large (usually at least 30%) down payment and makes payments on the rest.

The term is usually short (no more than 5 years) and ends with a balloon payment. You earn the interest on the loan, plus the overall profit once the buyer makes the balloon payment. This may limit your capital gains taxes, which you can discuss with your CPA.

  • Tap into the home’s equity – If you aren’t ready to get rid of the property but need to liquidate it, consider a cash-out refinance. Depending on the lender, you may tap into as much as 80 – 90% of the home’s equity.

This means you receive the cash in hand while keeping possession of the property. You’ll have a mortgage payment to cover, but you’ll have the lump sum of cash to do with as you intended while still benefiting from property ownership.

  • Leave it for a legacy – If you’re intent in investing was to leave the properties to your beneficiaries, you’ll need a trust and a will. This sets up the properties for proper transfer, limits the inheritance tax they’ll pay, and reduces the time it spends in probate.

How To Choose The Right Exit Strategy In Real Estate

As with any investment, there isn’t a one-size-fits-all approach to your exit strategy. Before you make one, think about your end goal. Ask yourself the following questions:

  • Do you want to keep the property or get rid of it?
  • Are you concerned about capital gains taxes?
  • Will you invest the money in another real estate investment or something completely different?
  • Do you intend to leave a legacy?

The answers to these questions will narrow down your options.

For example, if you want to keep the property, you can refinance it to get a hold of the equity, rent it out, and/or add it to your will or trust.

If you want to get rid of the property, you can sell it outright, use seller financing, or consider a like-kind exchange.

Weigh the pros and cons of each situation and see how they pertain to your goals and the final outcome. As always involve your CPA so you understand the tax implications of any decision.

Take Your Time Planning Your Exit Strategy

The key is to think carefully about your exit strategy. Once you implement, it’s done. Many investors plan their exit strategy when they make their investment plan. They create a short and long-term plan and include an exit strategy in it.

Even if you put it in your business plan, you can always change things. If your situation changes or you decide you don’t want out, you can always pull back on the strategy, holding off for another time.

The key is to have a basic plan in place and to know what the home and/or you need before you can put it in motion. For example, you can’t just throw a house on the market the day after you decide to sell it. All homes need work, even if it’s minor repairs, plus you need a marketing strategy.

If you’ll rent it out or become the financier, you’ll need a plan, contract, and proper terms in place to carry it out. Work with professionals to determine the best outcome for you and make the most of your real estate investment.