Equifax

Finance Blog

Investing in Real Estate? Plan Exit Strategy Before You Buy

Written by Andy Heller on August 5, 2011 in Real Estate  |   4 comments

Prepare Your Real Estate Investing Exit Strategy Before You Buy By Andy Heller There’s no denying it: We’re in the middle of a crazy real estate market. While there are still many different ways investors can make money in real estate, my strongest recommendation is…

Prepare Your Real Estate Investing Exit Strategy Before You Buy
By Andy Heller

There’s no denying it: We’re in the middle of a crazy real estate market. While there are still many different ways investors can make money in real estate, my strongest recommendation is to pick a strategy that allows for long-term wealth building while remaining realistic about what one can and cannot hope for in today’s market.

In my real estate investor workshops, I teach that the first step any investor should take when investing is to determine an exit strategy. This often surprises people: Why start with the end? The reason is that an investor must be sure to purchase the right type of property for the exit strategy to work. Time and time again, I have seen investors fail because their goals and plans do not fit the properties they are buying or do not work given the margins they get upon purchase.

Six or seven years ago, when loans were easy to get, it was a very challenging market for buy-and-hold landlords. Nationwide, countless renters left the rental market and became first-time homebuyers. Rental landlords all over the country struggled, while it was a good market to be a buy-and-flip investor.

Now, we’re facing the opposite problem. I’ve seen projections that predict as many as 5 million new renters in the next five years. Former homeowners moving into the rental market are fueling this growth. In many communities, bank foreclosures are not being fixed up at sufficient pace to satisfy the growing demand for rental units. As a result, in most communities today we are seeing rising rents.

So, how does this affect your exit strategy?

In today’s real estate market, it’s very difficult for people to get loans—in fact, it may be the most difficult market in 40 years to get a loan. Today, the buy-and-flip investor may not have anyone onto whom to offload the property. Without a buyer, there are no profits for future purchases. With fewer buyers, the only thing a buy-and-flipper can do is to sell at a discount, which further eats away at profits. Therefore, in today’s real estate market, it is much easier to be a buy-and-hold investor.

The lease option

Not every investor wants to be a landlord forever, and many rental landlords tire of dealing with frequent vacancies, repairs and improvements, and rent collection challenges. My solution is that I’ve been implementing lease options in my investing practices for the last 20 years. With a lease option, you’re giving tenants the ability to buy the property in the future while you, the investor, are able to get cash windfalls to purchase more properties. Done right, we find that 25 percent to 33 percent of lease option tenants will purchase within the first three to five years.

In addition, with a lease option, tenants accept responsibility for repairs and maintenance, and they tend to take their rental obligation more seriously. Lease option leases can be as long as three to four years (with extensions going well beyond four years). All this makes for a much easier experience as a landlord.

There is no “best” strategy for everyone, but it’s up to the investor to evaluate the market, the properties, potential buyers, and tenants to determine what will work. Starting your evaluation with an exit strategy will allow you to maximize your real estate investing profits.

Come back next week for a more detailed explanation of my experience with the lease option and its benefits for both investors and tenants.

Andy Heller is the author of two best selling real estate books, including “Buy Low, Rent Smart, Sell High” which was recommended by Fortune Magazine. Andy has been investing in residential real estate for over 20 years, and travels the country teaching others how to get started in real estate investing. Most recently Andy co-founded www.RealtyJoin.com, the social networking site for the entire real estate industry. Andy can be reached on RealtyJoin, and encourages all to ask questions and friend him on RealtyJoin.

READ MORE:
Help Is on the Horizon for Unemployed Homeowners
Housing Price Predictions: When Will Prices Rise?
The Cube Project: What Would You Give Up To Live In A Tiny House?
Now is the Time of the Real Estate Investor
Pet-Friendly Housing Steering the Real Estate Market

4 comments

Commenting guidelines

We welcome your interest and participation on this forum, but be aware that comments will be published at Equifax's sole discretion. Please don't use this blog to submit questions or concerns about your Equifax credit report or raise customer service issues. Instead, you should contact Equifax directly for all such matters and any attempts to do so in this forum will be promptly re-directed.

Some other factors to consider when commenting:
  1. Registration and privacy. While no registration is required to visit our forum, participants wishing to post a message must register by creating an account. All personal information provided by forum members incident to registration is governed by our Terms of Use and Privacy Policy.
  2. All comments are anonymous. We'll delete your name, e-mail address, and any other identifying information, including details about your investments.
  3. We can't post or respond to every comment - As much as we'd like to, we can't post every comment, nor can we guarantee that we will respond to each individual message. All questions or comments about your Equifax credit report or similar customer service issues should be handled by contacting Equifax directly.
  4. Don't offer specific legal, tax or financial advice. All of the materials on this Site are for information, education, and noncommercial purposes only and this forum is not intended as a means of expressing views or ideas regarding any specific legal, tax, or investment advice. While offering general rules of thumb is both permitted and encouraged, recommending specific ideas or strategies regarding investments, taxes, and related matters is prohibited.
  5. Credit Repair. This blog is not intended as a venue for the discussion or exchange of ideas regarding credit repair or other strategies intended to assist visitors and community members improve or otherwise modify their credit histories, ratings or scores.
  6. Stay on topic. Your comment should be concise and pertain to the specific post in question.
  7. Be respectful of the community. The use of profanity, offensive language, spam, and personal attacks will not be tolerated and egregious or repeat offenders will be banned from future participation. We encourage disagreement and healthy debate, but please refrain from personal attacks on our WordPresss and contributors.
  8. Finally: Participation in this forum may be terminated by Equifax immediately and without notice for failure to comply with any guidelines or Terms of Use. As such, you should familiarize yourself with all pertinent requirements prior to submitting any response through the blog or otherwise. All opinions expressed in this forum are solely those of the individual submitting the comment, and don't necessarily represent the views of Equifax or its management.

Equifax maintains this interactive forum for education and information purposes in order to allow individuals to share their relevant knowledge and opinions with other members and visitors. We encourage you to participate in discussions about personal finance issues and other topics of interest to this community, but please read our commenting guidelines first. Equifax reserves the right to monitor postings to the forum and comments will be published at our discretion. Do you have questions or comments about your Equifax credit report or customer-service issues regarding an Equifax product? If so, please contact Equifax directly. All opinions and information expressed or shared in blog comments are solely those of the person submitting the comments, and don't necessarily represent the views of Equifax or its management.


Stay Informed Sign up for our FREE Equifax email Newsletter