With the average 30-year fixed-rate mortgage rate recently hitting a 23-year high of over 8% and seasonally-adjusted monthly home sales falling to a 13-year low of under 4 million, now can be a tough time to invest in real estate.
The last thing you want is to get stuck with a property that’s losing money and you no longer want—which is why having a real estate exit strategy is so important.
In this article, we’ll go over what a real estate exit strategy is, ten exit strategies to consider, and how to choose the right one. Let’s get started!
Contents
What is a real estate exit strategy and why have one?
A real estate exit strategy is a plan for getting out of an investment. It’s about knowing when and how you will cash out. Most of the time, this is done by selling the property, but not always. There are different ways to remove yourself from a deal.
The goal is to have a plan to get out of the investment from the start so you don’t get stuck in a bad financial position. In fact, it’s best to have multiple exit strategies in case one doesn’t work out and you need a backup plan.
By having real estate exit strategies, you minimize your investment risk, maximize your profits, foster better decision-making, open up opportunities, and reduce stress.
So here are ten real estate exit strategies to explore:
1. Sell
By far the most common exit strategy is to sell for cash. This is a good option if you want to liquidate your position completely.
To turn a profit, you can take a long-term buy-and-hold approach or a short-term fix-and-flip approach. The former relies on the property appreciating in value over time due to positive market conditions, while the latter relies on adding value to the property manually through renovations and then selling it at a premium.
Either way, only sell if you can achieve the profit margin you desire.
Have multiple properties to sell? Bundle them together and sell them as a group to an institutional investor with deep pockets.
2. Wholesale
To get out of a real estate deal quickly, consider wholesaling. This is the practice of putting a property under contract and then selling the contract to an interested investor. In fact, you never actually own the property. You own a purchase agreement that you assign to a buyer for a fee. In other words, you serve as an intermediary between the seller and buyer.
Most wholesalers charge 5-10% of the total property price. On a $500,000 house, that’s anywhere from $25,000 to $50,000. It may not be the most lucrative type of real estate investing, but it’s a good way to start building funds to go in on larger deals.
3. Refinance and recapitalize
Instead of selling, you can also refinance an existing mortgage. This isn’t a hard exit, but it helps refresh your investment.
Here’s how it works: You take out a new loan to pay off your existing mortgage. This can help you lock in a better interest rate, reduce the loan term, change the mortgage type, or lower the overall cost of the loan.
By borrowing more than you owe on your current mortgage, you can also tap into some of your equity (aka a cash-out refinance). This gives you extra cash to renovate the property or put toward other investments. For example, you could perform a cash-out refinance as part of a buy, rehab, rent, refinance, repeat (BRRRR) investing strategy.
What’s more, you won’t owe tax on the equity you withdraw. In fact, if you take out a home equity loan or home equity line of credit (HELOC) and put the cash toward rehabbing the property, you can deduct the loan interest as a landlord tax deduction.
4. Conduct a 1031 Exchange
Another way to exit a property investment is to conduct a 1031 exchange. This is a special tactic used by real estate pros, in which you swap one property for another to defer paying capital gains tax. It requires finding a similar property of equal or greater value within a certain time frame of selling the original property (which may be hard in some market conditions).
1031 exchanges can be a convenient strategy to build up your investment portfolio because they leave you with more money to invest. In fact, you can perform 1031 exchanges multiple times in a row to put off paying capital gains taxes indefinitely.
5. Add another investor
To reduce your risk exposure to a particular investment, consider bringing on another investor. This means selling them a portion of the investment for cash.
Of course, going in on a joint venture requires giving up some control over the property and the profits it generates. So vet your partner carefully to ensure you feel comfortable doing business with them long term.
6. Offer seller financing
If you struggle to find a buyer for a property, consider offering seller financing. This means lending money to the buyer yourself. In other words, you become the bank to which the buyer makes monthly payments so they don’t have to go to a traditional mortgage lender.
Seller financing can help you attract buyers and earn regular interest on the home loan. It’s a creative technique that can be a win-win for both parties. Just ensure you carefully vet potential buyers by reviewing their income, credit history, and debt-to-income (DTI) ratio just like a bank would. Otherwise, you may take on a buyer whose risk of defaulting on the loan is higher than you’d like.
7. Provide a lease option
To get out of a rental property investment with current tenants, consider providing a lease option. This means giving the tenant the right to buy the property from you at a specified price within a predetermined period for an option fee. This is a convenient arrangement if your tenant is interested in buying the property but needs more time to save up for a down payment or get a mortgage.
A lease option can also be combined with seller financing so the owner becomes the mortgage lender once the tenant purchases the property. Either approach lets you leverage interest in your property from existing rental tenants.
8. Auction
If you need to sell an investment property fast, auctioning it off might be the best way to go. Work with a real estate auction company or online property auction platform to sell your property to the highest bidder. The final sale price may be unpredictable and you may not get top dollar, but your property might sell faster than it would otherwise.
9. Pass on to heirs
Don’t want to own your investment property but don’t want to sell it either? Consider passing it on to your children as part of your estate. You can do this in a few different ways: writing a will, creating a living trust, entering into joint ownership with your heirs, or creating a life estate deed (which allows you to live in the property until you die). Work with a reputable estate attorney to create a well-structured estate plan.
Passing real estate on to children also comes with tax benefits. In 2023, estates valued at less than $12.92 million aren’t taxed (though states may levy their own estate taxes).
10. Donate to charity
Lastly, you can always donate investment property to charity. This may not be a very lucrative option, but it does have benefits.
For one, charitable donations aren’t subject to capital gains tax. And if the charity is registered as a non-profit, it won’t pay tax on the transaction either. Furthermore, you can deduct the donation from your federal income to reduce your overall tax liability.
While not a direct financial benefit, donating a property to charity also helps you support a cause you believe in, which can be personally rewarding.
How to choose the right real estate exit strategy
As you can see, you have many real estate exit strategies to choose from (and that wasn’t even an exhaustive list).
To choose the right one, define your goals, assess your risk tolerance, analyze market conditions, weigh your options, and seek professional advice. And remember, that it’s best to have a few exit strategies up your sleeve just in case one falls through.
Real estate investing with Invest.net
If you’re looking for your next long-term real estate investment with proven exit strategies built in, consider investing with Invest.net. Our SFR Fund I provides a fixed-income portfolio of single-family rentals (SFRs) across the Midwest United States with the goal of achieving above-average capitalization rates.
Contact us today to learn more!
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