Real estate investment planning enhances investors’ agility to adjust to unforeseen challenges–none more important than a well-formulated exit strategy. With investors’ liquidity often tied up in assets, it’s critical to have multiple exit strategies in place to foster confidence and ensure a steady cash flow.
Below, we will discuss popular alternative exit strategies for real estate investors. But first, let’s further define what an exit strategy is and why it’s so important.
What is an Exit Strategy in Real Estate?
An exit strategy in real estate is a well-thought-out plan developed by investors to sell or transfer ownership of a property. In football terminology, an exit strategy represents the goal line you hope to reach. Each step in the purchase and selling process inches you closer to the goal line.
Why Exit Strategies are Important
Exit strategies are formulated for two key reasons:
- To conceptualize the opportune time to move on from a property with maximum profits. Preemptive considerations for timelines, costs, market conditions, and other selling factors help determine the “when” and “why” it is the best time to sell.
- To mitigate risks and plan for the unexpected. Unpredictable roadblocks (e.g., unknown mold in a property, market downturn) can slow the selling process. If the sale doesn’t come overnight, you must have alternative exit strategies in place to quickly pivot.
The Right Exit Strategy for Real Estate Investors
The most common real estate exit strategy examples include refinancing, lease options, and auction sales.
Refinancing: Refinancing a property is an exit strategy for investors not yet ready to move on from a property. Through refinancing, investors gain access to the property’s equity to pay off any debts. However, the property must have accrued equity since its purchase date to qualify for refinancing.
Lease Options: Leasing is a great way to slowly transition from property ownership. Through leasing, you can rent to tenants and sometimes you can even create a rent-to-buy agreement. This is enacted when tenants are interested in eventually purchasing the home. This gives the buyers time to save for the purchase while the investor maintains a steady cash flow.
Auction Sales: If you want to exit a property quickly while avoiding the headaches of listing and selling a home, the real estate auction process is ideal. Auction sales entice motivated buyers and eliminate back-and-forth negotiations entirely. Unfortunately, this exit strategy comes at the expense of your overall profits. While the aforementioned real estate exit strategy examples are nice considerations, they do not fully meet the needs of scaling real estate investors. Most are either slow-moving, require a lot of checks and balances, or significantly limit ROI.
3 Alternative Exit Strategies for Real Estate Investors Looking to Scale
The right exit strategy for savvy real estate investors looking to grow their portfolio depends on several factors:
- Time frame: How long do you wish to hold the property?
- Liquidity: Do you have the funds available to cover any unanticipated expenses?
- ROI: Have you determined the return you expect?
- Financing: Do you have robust and flexible financing to simplify your exit strategy?
Let’s look at the top alternative exit strategies for real estate investors looking to flip houses and rapidly scale their businesses:
Fix and Flip
Fix and flip is the most popular strategy for growing real estate investors. With the average fix and flip property yielding over a $66,000 return on investment, it’s no wonder that nearly one in every ten homes sold in the US was a fix and flip property in 2023.
This strategy requires the purchase of below-market properties that need renovations. After purchasing and rehabbing the home, the investor turns and sells the property on the open market for a significant profit.
This go-to exit strategy for real estate investors requires a reliable and flexible short-term fix and flip financing, with quick approvals and no pre-payment penalties.
Buy and Hold
The buy-and-hold strategy is great for investors looking to scale their rental portfolio. Similar to a fix and flip strategy, except rather than selling the property after renovations, the investor opens it up to the rental market–creating monthly cash flow through rental income. Usually, the rental income is more than enough to cover the loan payments–relieving the investor of financial burdens while their property accrues equity.
To execute a buy-and-hold strategy, investors may have to utilize multiplemust acquire rental financing options to fund rental renovations and maintenance.
Wholesale to Another Investor
The wholesaling to another investor exit strategy is for real estate investors looking to move multiple rehabbed properties annually, but can’t wait for the slower pace of traditional real estate markets. Through this strategy, you purchase a home below market value, renovate it, and then sell it wholesale for a small profit.
Wholesaling to another investor:
- Speeds the selling processes
- Generates quick profits
- Enables investors to move on to their next real estate venture fast
In most cases, wholesaling to an investor is as quick as an auction sale but garners a higher ROI.
Creating an Exit Strategy: Step-by-Step
Leveraging the right alternative exit strategy will facilitate constant cash flow, quick profitability, and business growth. Whether you are looking to fix and flip, buy and hold, or wholesale your property, investors should follow this step-by-step exit strategy:
Step-by-Step Exit Strategy
- Find an investment property to purchase
- Calculate the costs to renovate the property (ROI Analysis)
- Set your ROI goals
- Determine your exit timeframe
- Choose the right financing partner
The #1 Real Estate Investment Partners
Fix and Flip Financing
Our fix and flip loan programs offer streamlined, common-sense underwriting and aggressive leveraging with:
- Up to 100% of rehab budget financing
- Up to 90% LTC
- Up to 75% ARLTV
Single Property and Rental Portfolio Loans
For beginners looking to fund 1-4 family rental units, Finance of America Commercial offers Single Property Rental Term Loans with:
- 30-year fixed or hybrid ARM options
- No prior experience requirements
- Flexible refinancing and cash-out options
- A $2MM loan amount
- 80% LTV on purchase and refinancing
- 75% LTV on cash-out options
FACo’s bridge and term loans give real estate investors the flexibility and reliability necessary. And, Finance of America Commercial’s experts are available throughout the loan process to facilitate the purchase, renovation, and profitable exit strategy for real estate investors.
Ready to scale your real estate investment business with Finance of America Commercial? CLICK HERE to get started today.
