“When in doubt, know your way out” ~ Zombieland Rule#22
If you’re just now investing in a piece of rental property and don’t have a tenant lined up at this time, you’re probably thinking it’s way too early to begin devising an exit strategy. This is one of the most common mistakes new investors make!
Your goal today may be to hold on to the property until you die, perhaps even pass it along to your children so that they can have income generating property someday too. But, the plans you make today may not materialize the way you want them to in the future.
Over time your investment property should gain equity, provide you with substantial income from cash flow, and eventually appreciate.
If the need for a large lump sum of cash arises in the distant future or the market is experiencing an all-time high, you may change your mind and decide to sell your property for a large cash profit.
The first step in planning your exit strategy is familiarizing yourself with what your options are for selling:
- Traditional selling with a real estate agent
- For sale by owner (FSBO)
- Lease-to-own option
Once you are familiar with each selling method, you must then ask yourself “what type of buyer will be interested in purchasing this property in the future?” If it’s going to be another investor just like you, FSBO may be a good option, as many serious investors are comfortable doing business in non-traditional settings. If it’s a first-time buyer looking to call a place “home,” they’ll likely be drawn to properties offered by real estate agents and traditional lending products. Does your selling strategy match your potential buyer’s purchasing strategy?
Tax planning is another important step in planning your exit strategy, as selling a property at a certain time could put you into a higher tax bracket and significantly limit your profits, or you might want to set up a 1031 exchange to avoid any capital gains tax from the sale. Knowing the tax consequences or gains of each scenario should be considered before assuming which one will provide the best ROI.
We started out as a Real Estate Brokerage and Property Management company. As the Property Management end of the business took off, we developed an increasing number of investor clients, many of whom were looking for extra services outside the company’s scope – including exit strategies. Today, we do it all! If you’re new to investing, we recommend you fill out the Investor Profile Sheet.