In any business — real estate included — we benefit from a plan. While we might regard having an exit strategy as planning for failure, this is not the case. As real estate investors, establishing this “way out” of an investment not only allows you to more clearly define your measures of success but build the best portfolio possible.
There are many different reasons that someone may want to use their exit strategy and they don’t always mean that what you have has turned out to be a bad investment. Buy-and-hold investors are less likely to consider their exit strategy until they need to use it. This is because, by the nature of their investment strategy, they intend to hold their property for at least five years — and often, many, many more.
Unfortunately, investors are prone to jump to their exit strategies, not as a means of maximizing their profits and refining their portfolios but to mitigate losses. When we consider exit strategies as an integral part of the investing process, we are not only better able to plan for the future but we avoid disadvantageous deals.
Let’s talk about exit strategies that actually help build a long-term, lasting legacy of wealth.
3 Advantageous Exit Strategies for Buy-and-Hold Investors
A 1031 Exchange
We’ve discussed the 1031 Exchange at length. (You can read all about it here!)
In short and simple terms, the investor will sell a property tax-deferred in exchange for like-kind property or properties. By deferring capital gains taxes, investors save versus a traditional property sale when they intend to invest elsewhere. This strategy is best utilized for real estate investors looking to enter new markets or to use the equity they have built to upgrade the kinds of properties they have in their portfolios.
Of course, many rules and regulations guide a 1031 Exchange. It’s something you want to plan to do far in advance to ensure that all of your ducks are in a row!
Sometimes, an investor just wants to cash out. This is at the heart of a flipping model, but buy-and-hold investors benefit more. Buy-and-hold investors have a few things going for them. First of all, they don’t have to time the market. When an opportunity presents itself, they can sell — or not. As they hold their investments, they benefit from monthly cash flow on top of growing equity.
Not only do they gradually pay down any mortgages through cash flow, but they force appreciation through renovations and benefit from natural appreciation over time. Additionally, attentive maintenance and property management maintain the value of the property. As a result, buy-and-hold investors can maximize their sales prices.
In many cases, investors will take their profits from a sale to reinvest elsewhere. This strategy is valuable if you’re looking to diversify the kinds of investments you have, move into new markets, or put some of the money aside for savings while you re-invest the rest.
Pass It Down
When we invest, we’re not just thinking about ourselves. In many cases, we invest with the long-term goal of benefitting our children, their children, and beyond. One of the best things a buy-and-hold investor can do is pass their investment down to their children. In most cases, this is as simple as putting the property (or properties) into a trust and having a well-written will in place.
Even if your heirs don’t want the properties, they can benefit more from selling them themselves versus your selling them to leave cash behind — namely because they may be able to avoid paying capital gains taxes.
If you don’t have heirs, there are still other ways to ensure that your legacy lasts. Properties can be left to non-profits, churches, or other benevolent organizations.
While we don’t like to consider our mortality, the things we leave behind will go somewhere. It’s best to not let them go to waste.
While not all exit strategies are about getting out of the real estate investment game, that is usually when we most consider them. Before you employ your exit strategy, you need to ask yourself some harsh questions.
3 Questions to Ask Before Using Your Exit Strategy
Am I fearful?
Fear can be an awfully good motivator. When we’re in the middle of uncertain times as we are now, we might allow fear to guide our investment decisions. That might be a fear of failure or a fear of missing out. We might feel like we have to jump on certain opportunities lest we miss out on untold wealth. Be honest with yourself about why you want to jump ship. Is it because it makes sense, or is it because you’re afraid of something?
Am I frustrated?
Frustration, like fear, can lead to rash decision-making. Even passive investors are prone to frustration. While a hands-on investor, such as a landlord-owner or flipper, is more likely to grow frustrated with setbacks, conflicts, and complications, none of us are immune. Don’t let your desire to remove an irritation determine your investment future. Investing is tough and it will come with its seasons of difficulty and challenge.
Does this investment still make sense?
Ultimately, this is the question we must ask. Does this investment make sense for me, my portfolio, where I am now, and where I want to be in the future? The simplest thing to do here is to look at the numbers. Look at past performance. How do they compare to your other options? If an investment doesn’t make sense anymore, whether it’s not providing the income or equity you wanted or you want to move into a different real estate market, it may be time to explore your exit strategies.
Numbers are true and unchanging, unlike our feelings. You can rely on them to help make the best possible decision for your portfolio!
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