Not Creating an Exit Strategy for Your Real Estate Business (2)Posted by at November 14, 2012 in Business | Exit Strategy | Management | Real Estate
I’ve already talked with him and verified everything in writing. He’ll borrow the money using his credit; we’ll buy the home together and rent it out as 50-50 partners. Plan D: I have included a contingency clause in the contract; therefore, if nothing works out, I’ll just back out.
You should have at least three or four exit strategies for every property— even for your rental properties. Know how you’re going to get out of them. Are you going to sell them to tenants or another investor?
Are you going to do a tax-free 1031 exchange? The point is that you need an exit strategy. Real estate is easier to get into than you think, but it can be difficult to get out of. An exit strategy matters even if you think a deal is really bad.
Let me tell you about one of the worst deals I ever made. I bought five duplexes for $18,000 and planned to spend $18,000 to fix them, which means I’d invest a total of $36,000 in them. I determined they’d be worth about $60,000 in the marketplace.
I wanted to wholesale them, so I put them under contract. Unfortunately, these duplexes were in a really bad neighborhood. Even though they were appraised for $60,000, no one would buy them because of the part of town they were in. I thought I was stuck with them as rentals, so I borrowed money to fix them. (They really needed a lot of work—trash everywhere. I almost cried.)
After I fixed them, I rented them fairly quickly and sold them a while later for $95,000. Sometimes the deal just doesn’t work. But even if you do a bad deal in real estate, time will cure it unless you’re in a negative cash-flow situation and can’t hang in there. If you can hang in there long enough, you’ll likely come out ahead over time.
In 1986, there was a nationwide real estate depression after the tax laws changed, and real estate values plummeted 30 to 40 percent. Yet most investors who hung on to their properties have seen their real estate values double, triple, or quadruple since 1986.