Why Knowing Your Exit Strategy in Real Estate Makes You a Better Investor

Have you aligned your investment goals? 

Have you set a goal for the short and long term that support each other? 

Today we will review exit strategies and how they relate to your short and long term planning.

It is evident that you definitely need a solid plan and team when investing in real estate. 

Every step along the way is crucial in supporting your end-goals in real estate investing for beginners. 

Overall, your planning will involve execution of operations, financials and exit strategies. 

Ultimately your exit strategy is the most essential portion because it involves you reaching your end-goal. 

This doesn’t remove that fact that your entrance into any investment is also highly essential. 

We all know you secure your investments’ potential when you buy. 

However, before you buy, you should always have an exit strategy. 

Your simplified planning should look like so:

1. Enter an investment at target price.  
2. Achieve expected results financially and operationally. 
3. Perform exit strategy for the investment and transition to the next plan.

Knowing your exit strategy is the key to meeting your long term goals. Every exit strategy should align you closer with your long term goals. Be mindful that a plan to hold or a plan to sell is a plan. Ultimately, there is a reason for each and they should align with your long term goals.

If you aren’t planning your exit strategy prior to making any purchase, you could be wasting time, money and energy toward tasks that aren’t helpful to reaching your goal efficiently. Lack of planning can easily extend your time to reach your goal which no one wants. Therefore, long term planning is key.

Ultimately, your ability to earn will support your plans. So first and foremost, insure you are profitable. Successful business practices will show inclining profits over time. Be sure you are evaluating your business practices as a leader. Your practices will directly reflect your results.

So how do you align your exit strategies? 

You align your exit strategy based upon targeting the best outcome. After aligning your target goal, align each step in obtaining that goal. Goals for each investment can vary, but after you reach each particular goal, your next step is the initiative where you will capitalize on your investment. 

Each goal is supported by your ability to perform most efficiently, operationally, and financially. Provided you meet the expected performance, next will be your transition to the next part of your plan. This is the exit strategy and the catalyst to growth toward supporting your long term goal.

• Let’s create an example to see this through…please follow along.

EXAMPLE – Tom the Investor

Tom’s business consists of primarily renovations, but Tom is targeting to operate more so in buy and holds for the long term. Tom’s objective is to invest in value-add buy and holds and performing buy and holds. 

• Value add opportunities are where Tom will force the appreciation of the asset by either renovating, increasing the net operating income, or by decreasing the operating expenses. 
• A performing asset is an asset that is already at top value and already performing at peak operation. 

For a performing asset Tom would just sustain the current cash flow and asset value. Ideally Tom would select a performing asset in an asset class that appreciates well. 

With each renovation, Tom is averaging $15,000 in profits after taxes. Tom is also averaging 15 renovations per year. Therefore, Tom’s profits from his renovation business is $225,000 per year. 

• So how does Tom align his goals to enter into his planned buy and holds? 

Here is how Tom will do it…

In year one, Tom achieved 15 renovations and his profits are $225,000 as mentioned. In year two, Tom will begin to devote capital toward his buy and hold goals. After-all Tom wants to achieve investments that are more passive that allow him more of his time back.

The renovations are very time consuming for Tom and his goals are to be more effective with his time for future engagements.

Tom definitely wants to create a plan to sustain his capital development, but he also wants more passive investments. Tom decides to pursue both value-add opportunities and performing assets both within multifamily real estate. 

Of the $225,000, Tom will purchase a performing asset and it will require him to put down 25% using a traditional funding source. When Tom invests in value-add opportunities he will be required you to put down 10% using a non-traditional funding source.

So with each entrance into a new renovation, Tom’s exit strategy is to reinvest those profits into opportunities in multifamily real estate. Tom’s ideal purchase strategy is to focus on value-adds because his end goal is to achieve $1,000,000 in cash and $25,000 in monthly cash flow.

Tom’s target for value-adds will be to purchase properties with the $15,000 cash profits. So Tom will target assets where the purchase is $100,000 or less, and the property has a potential value of $150,000 or more. 

The repairs will need to be between $20,000 and $50,000 for Tom to stay on target. Tom has noticed several potential properties that fit these characteristics and the properties actually have the ability to reach a $200,000 to $250,000 value after renovations. Tom also noticed that each project will take about 3 months to complete. 

Since Tom will refinance these projects after completion, Tom’s plan is to get 50%-150% of his initial invested capital back. Tom’s lenders do not require a seasoning period upon refinancing so when he gets the property renovated and rented he will refinance.

Let’s review.

Tom will need  approximately $10,000 for the down payment (10%) and approximately $5,000 for the closing costs for each targeted multifamily opportunities identified. Tom will use the $15,000 in profits from each renovation to complete these purchases. The $225,000 from year one will be used for the purchase of the performing assets.

Each performing asset is in the same price range as the after-repair-value (ARV) of the renovated multifamily value-adds of $200,000 to $250,000. However, these performing assets are already renovated and performing at a cash flow of $800 per month. Each acquisition of these performing assets will cost $50,000 (25%) toward the down payment due to the total cost being approximately $200,000.

Since the team is renovating 15 properties per year, Tom is averaging 1.25 renovations per month. Therefore, Tom will be able to apply profits starting in the second month to purchase the first value-add multifamily property. 

• Tom’s plan is to purchase eight multifamily value-adds in year two and two performing assets.

At month two, three, four, five, six, seven, eight and nine Tom buys a value-add multifamily. Each renovation is completed in months; five, six, seven, eight, nine, ten, eleven and twelve.

Post refinance Tom is averaging 90% of his invested capital back. Tom also has been able to acquire the two performing assets in months three and six.

The Numbers – Using Tom’s Timeline So Far...

In months 2-9 Tom reinvested the capital earned from each renovation that Tom is averaging at 1.25 renovations per month. Each renovation’s average profit is $15,000 each.

Each of the eight multifamily value-adds that Tom purchased in months 2-9, were completed in months 5-12. Tom averaged 90% of his initial invested capital back, post renovation and tenant occupancy.

• 1.25 renovations per month x 12 months = 15 renovations completed in year two. $225,000 earned profits thus far from renovations.
• On average Tom spent $15,000 for each acquisition and $40,000 for each renovation. This totals $55,000 x 8 = $440,000 | $440,000 x 0.9 = $396,000 received back post renovation and refinance. Total out of pocket is $44,000.

Expenses

• $50,000 x 2 = $100,000 – was spent on the two performing multifamily purchases.
• $440,000 – $396,000 = $44,000 spent on the eight value-add multi-families. 

Each are now achieving (on average) $700 per month of cash flow. Although, cash flow will increase as rents are raised to reach market value by $15-$20 per unit, each month until market value rent is achieved. This will likely take approximately 6 months and then the cash flow will be at $800 per month – per property.

• $44,000 + $100,000 = $144,000 – spent on buy and hold investments through year two.
• $225,000 – $144,000 = $81,000 realized income in year two. These funds will also be available for investments for year three.

Due to these exit strategies in year two, Tom is now earning $7,200 per month, 8 properties at $700 each and 2 properties at $800 each, from his buy and hold investments. 

Tom has $306,000 in capital and $7,200 per month in cash flow at the end of year two. 

Tom’s goal is achieve $25,000 per month in cash flow and $1,000,000 in capital. 

• So when will Tom reach his goal?  How long does Tom need to continue renovating to meet his goals? Should Tom implement a change in his plans?
• These will not be answered.  Consider it homework…please feel free to comment your answers.

Unlike Tom, maybe there is a component of wholesaling in your business that may support more income abilities. 

• If this were you, would you have bought more value-add or performing assets throughout the term of year two? 
• What would your year three look like? 
• How would you align your pay-off schedule, to lenders, for the multi-families you’ve acquired? 
• When will you want to reach your goal and how long will it take?

This was an aggressive example that would take a highly effective team on all avenues from entrance to exit. However, you get the point of how your exit strategy supports your targeted goals. You also should have noticed that the exit strategy is highly important in meeting your goal. The planning in the next years to come for Tom is essential in him meeting his goal sooner or later – depending on the plan.

The effectiveness of the plan is in the actual planning, execution and exit strategy.

Thank you for joining us today faithful readers-future leaders!  

Hopefully this has helped your ability to plan effectively and align exit strategies and goals based upon your ability to perform. 

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Please feel free to comment your experience, the earliest Tom could achieve his goal, or if Tom should alter his plan in year three, etc.  Or comment your experience setting exit strategies for long term and short term goals.