Best Real Estate Exit Strategies

Best Real Estate Exit Strategies

October 5, 2023

Produced by:
Carmel Woodman

With over 8 years of expertise, Carmel brings a wealth of knowledge as the former Content Manager at a prominent online real estate platform. As a seasoned ghostwriter, she has crafted multiple in-depth Property Guides, exploring topics such as real estate acquisition and financing. Her portfolio boasts 200+ articles covering diverse real estate subjects, ranging from blockchain to market trends and investment strategies.

The Short Answer

Exit strategies in real estate are a key feature of a solid investing plan. Real estate exit strategies are essentially the plan that an investor makes, in order to complete a real estate deal. Real estate exit strategies are important to mitigate the risks that come with real estate investing by providing a quick exit route, they’re also useful for ensuring that real estate investors are more flexible and adaptable to changing market conditions.

 There are a variety of exit strategies that are successful, including the following:

Fix and flip projects: In this case an investment property is bought for a lower value, renovated and then the real estate exit strategy is the sale of the property. The property sale is typically at a higher value than the original purchase price, earning the investor a profit.

Rental property investing: For this investing approach, there are various options to use as a real estate exit strategy. A rental investment property generates a steady stream of income, however real estate investors can sell the property if they need a fast exit strategy. On the other hand, investors can also implement the rent-to-own method for a longer exit strategy.

Build and refinance: This investing strategy involves building an investment property, and once the project is complete, refinancing in order to access the equity in the property. This allows investors to conduct a form of exit strategy, that doesn’t require selling the property, but still allows for access to funds that may be needed.  

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What Is A Real Estate Exit Strategy?

Real estate exit strategy

A real estate exit strategy is a vital element of any real estate investing plan. While this may sound like financial jargon, it’s an important phrase to be aware of. Knowing how and when to use an exit strategy is crucial when it comes to investing.

A real estate exit strategy refers to the plan that a real estate investor uses to cash out on the investment and realize the returns, typically by selling the property. It’s essentially the way in which an investor intends to exit or cash out of their investment.

There are various exit strategies that can be used, and these vary depending on the real estate investing strategy being used. Below, we’ll cover some of the most prominent real estate exit strategies and how they work, along with some of the main benefits that go along with each option.

Real estate exit strategies are an important part of the investing process for the following reasons:

  • Mitigate risk: A detailed real estate exit strategy allows real estate investors to mitigate the risks that they take on with real estate investing. A clear plan and goals will take into account the potential outcomes, and investors can plan accordingly, to avoid the pitfalls.
  • Creates versatility: Real estate investors can become more flexible and adaptable when it comes to investment decisions. This enables them to quickly change direction and sell a property, for example, when they need to make changes based on the real estate market.
  • Informed decisions: Real estate exit strategies foster a framework that can be used to make informed decisions. By contemplating potential outcomes and strategizing for diverse scenarios, real estate investors can make the best decisions for their needs. Having a clear, organized plan also alleviates stress and takes this out of the decision-making equation.

Best Real Estate Exit Strategies

When it comes to real estate exit strategies, there are 7 important strategies to be aware of. Let’s take a look at each strategy, and how it can be used.

Exit Strategy 1 - Rental Property Investing

Rental property

Rental property investing involves acquiring residential or commercial investment properties with the intent to generate income from these in the form of rent. Purchasing rental properties is typically a long-term strategy where real estate investors are likely to hold onto a property for an extended period of time. The consistent income generation is a big drawcard for rental property investing, as well as the fact that real estate generally appreciates in value with time.

The exit strategy for this investing opportunity can vary. One strategy involves selling the investment properties once a real estate investor has achieved their financial goals, or when the local real estate market conditions are favorable for selling.

Another strategy is the rent-to-own option, whereby a landlord rents out a property to a tenant who rents the property for a defined period, and then has the choice to buy the property. When the rental period is finished and the tenant decides to proceed with the purchase, the monthly payments they’ve been making towards rent will contribute toward the property’s purchase price. These payments are similar to mortgage installments but are directed to the property owner rather than a traditional lender.

Both of these strategies, while they may have different timelines, allow a rental investor to exit the investment and cash in on their returns.

Exit Strategy 2 - Flipping Houses

House flip

Flipping houses is a dynamic real estate investing strategy. The premise is that investors find distressed or undervalued properties that they can purchase at a bargain price. Then they renovate the property and sell it for a higher price than they bought it. As such, making a profit on the project, and then doing the same thing again.  

One of the primary attractions of flipping houses is the potential for substantial short-term profits. However, investors need to be savvy when it comes to timing, because holding onto a property for too long can have detrimental effects on profits.

The exit strategy in house flipping is straightforward: sell the property once the renovations are complete. Flippers often aim for a quick sale, ideally within a few months, to minimize holding costs and maximize returns. The sale price should cover the renovation costs, the property’s purchase price, and still have a profit left.

Exit Strategy 3 - 1031 Exchange

Investment properties

This may sound like a complicated strategy, however it’s a smart way to defer tax. Named after Section 1031 of the Internal Revenue Code, this strategy entails selling an investment property and immediately re-investing the proceeds into another property without paying capital gains taxes. This is used by real estate investors who want to defer on their tax liabilities (capital gains taxes) and upgrade their investment properties.

The benefit of not having to pay capital gains taxes on the sale and purchase of investment properties is that the investment can grow without the immediate burden of being taxed. The two properties should be “like kind” but this term isn’t well defined, so it can include various property types including residential rentals, commercial real estate and vacant land. Bear in mind that compliance with IRS regulations is crucial.

 The exit strategy in this scenario is the sale of an investment property in order to reinvest the funds in another property that is of equal or greater value. As such, investors can defer paying tax on the property until the new property is sold without using the 1031 exchange.

Exit Strategy 4 - Build And Sell

Construction project

As the name suggests, the build and sell strategy is about buying land or existing properties in order to develop more properties and sell these for a profit. Property development is a vital skill when it comes to this strategy. The main benefit here is the potential to make a large profit from selling properties at a much higher price than the cost of purchasing the land and developing it.

The exit strategy here is of course selling the developed property for a profit and therefore getting the returns on your investment. This is often done using a real estate agent, but this isn’t crucial to the deal.

To be successful at this strategy, the timing of the sale is key, so investors must be aware of housing market conditions and demand for the type of properties they plan to develop. The goal is to sell properties when market demand is strong to maximize returns. A real estate agent could help in this regard, as they are usually on top of market trends.

These development projects can take months or even years, so managing these projects requires cost control, working with the zoning for the area, and marketing the property correctly to attract buyers and sell for the right price.

Exit Strategy 5 - Build And Refinance

House building

The build and refinance strategy involves developing or renovating a property, but instead of selling it, investors choose to refinance the property to access equity. This approach allows investors to leverage the increased property value while retaining ownership.

Through refinancing, investors can access the equity that has been created in the property through development or renovation. This equity can be used for other real estate projects, and if the property is a rental, refinancing will allow for better cash flow through lower monthly repayments.

The exit strategy here is a little different, as the property is not sold. Instead, it is held in order to refinance, and in the future potentially even refinance again. This approach can be used to build and scale a real estate portfolio by using the equity in each income-producing property to purchase a new investment property. However, investors need to be mindful of the property’s cash flow and interest rates, as with any situation where debt is being used, there are risks involved that need to be mitigated.

Exit Strategy 6 – Wholesaling

Wholesaling real estate

Wholesaling is a successful real estate strategy which involves finding properties for investors at a significant discount, and then selling the purchase contracts to investors for a fee. This strategy doesn’t typically require any property purchases and is in essence a “middle-man” approach that is about finding good real estate deals and passing them on.

Speed of sale is key in this strategy, and wholesalers need to find motivated sellers so that they can secure good deals and then connect these sellers with investors who are on the hunt for new opportunities. Essentially, the faster the deal can be done, the faster the wholesaler will make a profit.

The exit strategy in wholesaling is the second part of the deal, where the wholesaler sells the purchase rights to a real estate investor. Wholesalers don’t invest significant capital in these deals, so the risk is lower as there is no property ownership. A wholesaler must, however, possess strong negotiating skills and an understanding of the local real estate market.  

Exit Strategy 7 - BRRRR Investing

House to rent

The BRRRR (Buy, Rehab, Rent, Refinance, Repeat) strategy is a comprehensive approach to real estate investing that combines elements of several other strategies. It’s focused on acquiring and improving properties to build a portfolio with strong cash flow and equity growth.

Once a property is bought, it is then renovated and refinanced in order to purchase another property, and this process is then repeated. The exit strategy used in this approach is present in the refinancing phase, this involves obtaining a new mortgage or refinancing the existing loan based on the property’s improved value.

After refinancing, a real estate investor would hold onto the property for a longer period, in order to continue earning an income from it. This phase involves ongoing property management, rent collection, and maintaining the property to make sure that it is attractive for tenants.

While the BRRRR Method is fairly intricate to execute, one of the major benefits is that it is scalable. You are effectively tapping into a new source of equity every time you start a new BRRRR cycle.

Alternate Real Estate Exit Strategies To Consider

The exit strategies mentioned above are not the only strategies however, and there are some alternative options to consider that can also be effective.  

Alternate Strategy A: Tap Into Your Home Equity

Pulling equity out of your home is an effective alternate exit strategy used to access the value that has accumulated in a property. This can be an attractive option for homeowners looking to free up funds for various purposes, such as investments, debt consolidation, home improvements, or retirement planning.

Home equity refers to the difference between the current market value of the property and the outstanding balance on the mortgage. A home appraisal may be required to determine this number accurately.

There are various ways to tap into home equity and these include:

Home Equity Line of Credit (HELOC)

A HELOC is essentially a revolving line of credit that allows homeowners access to their home equity almost like a credit card. Funds can be borrowed as they are required, within a specific limit that is set at the start. Borrowers only pay interest on the funds that they have borrowed and can enjoy the flexibility that is offered by this option when it comes to using it as an exit strategy.

Home Equity Loan

A home equity loan, also known as a second mortgage, allows you to borrow a lump sum of money based on your home equity. The interest rates for home equity loans are typically fixed, and you repay the loan over a specified term through monthly installments. As an exit strategy, the access to a lump sum of cash can be very useful for those who need quick access to a large amount.

Cash Out Refinance

A cash out refinance involves replacing an existing mortgage with a new one of a higher value. This allows you to get access to the difference between mortgage amounts, as a cash payment. Using this as an exit strategy is a great way to retain one monthly mortgage repayment and get access to your home equity in the form of cash which can be used immediately.

Alternate Strategy B: Leave The Property In Your Will

Another exit strategy that is a long-term approach is leaving a property in your will. This means that, upon your passing, your real estate assets will be transferred to your heirs or beneficiaries according to your will.

This requires careful and detailed estate planning, particularly for homeowners and real estate investors. Key components of estate planning include drafting a will, establishing trusts, designating beneficiaries, and considering tax implications.

Determine who you’d like to inherit your real estate assets and consider these options carefully. Your will or trust document needs to outline what you’d like to happen with your property, leaving no room for error. It’s important to get legal advice on this.

Alternate Strategy C: Exit The Real Estate Partnership

For those who are part of a joint venture in real estate, one way to get out of the deal is to exit the partnership. This real estate exit strategy is implemented when one or more partners choose to discontinue their involvement in the partnership for various reasons.

The foundation for exiting a partnership successfully is to review the partnership agreement. This document outlines the responsibilities of each partner and should make provision for a partner to exit the agreement.

Exiting a real estate partnership allows a partner to assess the value of their partnership and use this to either sell their shares, or whatever else the agreement specifies. A valuation process that considers the partnership’s assets, liabilities, and other relevant factors is typically done to determine the partner’s value.

There may be post-exit obligations as well, consider the agreement and make sure to fulfill these. Such obligations could include non-compete agreements, non-disclosure clauses, or ongoing responsibilities related to the properties or projects within the partnership.

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