You have funding. You found a property. You’re eager to try your hand at real estate investing. What should you consider before you go all in?
How you’re going to get out.
Real estate investment exit strategies
From the start, you should know how you will make sure the property you’ve purchased does not become a liability.
One exit strategy is to immediately start earning income by renting the property. This is called Buy and Hold.
Another exit strategy is to renovate the property and realize a profit by selling the improved home. This is called Fix and Flip.
Which one is right for your situation? Let’s take a closer look at each.
Buy and Hold
Here are the most important criteria for a Single Family Residence (SFR) rental:
- Location and affordability. Renters want good schools, low crime rate, and reasonable rents.
- Type of home. Single story, 3BR/2BA homes on corner lots, with fenced back yards (avoid chain link fence), and 2-car garages are always in demand.
- The 1% rule. If you buy an investment property for $150,000, you should be able to rent for $1,500, But do your homework and know the market! In a hot real estate market, you will pay more for a rental and may not be able to achieve 1%.
Fix and Flip
Many fix-and-flippers land in hot water when they don’t anticipate pitfalls in the process. Always have a contingency plan in place, and consider these issues:
- Be realistic about your timeframe. If there is a lot of work, don’t think you are going to knock out the rehab in 8 weeks if it is really going to take 12.
- Be realistic about your repair costs. How will you handle it if you exceed your budget, or if your contractor walks out on the job? (Both happen more often than you think.)
- Remember to calculate your holding costs (also called carrying costs). These include insurance, utilities, yard mowing, and interest-only payments if you have a hard money or private loan. Figure out your daily holding costs to know how much your rehab will cost every day it is not done.
- Be realistic about the housing market. What is the price point of your fix and flip property? Is the market shifting while you are working on your rehab? What time of year will you start and finish your project? Houses will sell during year-end holiday season due to less competition, but you need to be realistic about how many days your house might sit on the market before you sell your rehab.
Now that you know more about key strategies for making your real estate investment pay off, which one fits your property better? Or is there another strategy you’re considering? Share your thoughts in the comments!