exit strategies for real estate investors

How often in life does everything go exactly to plan?

Real estate investing is no different, except the stakes are much higher. You need contingency plans for your contingency plans, a depth chart that would make an NFL team proud.

In other words, you need multiple exit strategies. You can’t always sell properties conventionally, and you can’t always hold them as rentals, either. What do you do if your flip turns into a flop, and you only have short-term financing? Or if you can’t keep your rentals after all, because your spouse walked out and hired a pit bull of an attorney to requisition your assets?

Our plans don’t always work out, but when we’re working with assets worth hundreds of thousands of dollars, failure isn’t an option. Consider the following unconventional real estate exit strategies, that all investors should keep warm on the back burner in case their main dish gets burnt.

 

1. Lease Option/Rent-to-Own

While most investors understand the concept, most have never actually used a lease option agreement. The idea is simple: if you’re not in a rush to sell, you can sign a lease with Spencer Renter that gives him the option to buy the property within a year or two, for a preset price.

The tight time frame protects the seller in several ways. First, it provides urgency for the buyer, and pushes them to act quickly. Second, it protects against the seller committing to an outdated price, if the property appreciates quickly.

Lease options can be especially effective in slower markets, where there isn’t enormous demand at the present moment. In red-hot markets, it’s just not necessary, and is likely to leave the seller burned by losing out on the appreciation over the course of the option term.

To help the renters purchase, you can opt to provide seller financing. This creates both work and risks for you as the seller though: you have to service the loan, and if the buyers default on their payments… well, the foreclosure process is a lot more expensive and time-consuming than the eviction process

Then there’s the question of your existing mortgage – are you paying it off? With what money? Are you doing a wraparound mortgage and leaving your original mortgage loan in place? That could violate your loan terms, which nearly always require payoff in the event of a change of ownership.

Still, seller financing can combine well with a lease option, to sell a property for top dollar without paying a real estate agent commission. It just takes more patience than, say, auctioning the property off.

Tip: Make sure your lease agreement includes a “no-equitable interest” clause. Double check that your state permits them, as they protect your property – and your ownership of it – until the tenant-buyer actually settles.

 

2. Convert Your Property to a Short-Term Rental

Signing a long-term lease agreement doesn’t always deliver the highest real estate cash flow. In your market, the property could generate better rental cash flow as a vacation rental on Airbnb. 

Use our free rental cash flow calculator to run the numbers as a long-term rental, and then try Mashvisor’s short-term rental calculator to run the numbers as a vacation rental. Every market is unique, and becoming an Airbnb landlord may or may not make financial sense for your particular property. 

Granted, there’s more to the decision that cash flow. Managing a vacation rental takes far more work than managing a long-term rental. You can hire a property manager of course, but expect them to take a heftier cut than your typical long-term rental manager. 

 

3. Bundle Multiple Properties

Have several properties you need to sell? Consider selling them as a bundle.

The properties could be bundled to offer a “package discount,” or they could be fully renovated, turnkey properties selling for a pretty penny. Matt Andrews of REFreedom.com uses this tactic all the time: “After we find, fix, and rent the properties, we package and sell them (sometimes 5, 10, 20 at a time) to large funds, buying groups, and international investors.”

Sure, there are fewer buyers in the market for property bundles, but they are serious buyers with deep pockets. They can move fast and settle quickly.

Consider also that rented properties are self-sufficient, on a monthly cost basis. It costs a lot of money to carry vacant properties while trying to sell them, but sellers have the luxury to wait for the perfect institutional buyer to come along if they’re rented and earning money while on the market as a performing bundle.

There’s also an economy of scale at play here. It’s no picnic marketing seven vacant properties separately, but selling as a bundle means only one “product” to market and sell. This helps investors and marketing agents focus their efforts, and frees up more time and resources to market that bundle more aggressively.

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4. Guerilla FSBO Tactics

Real estate agents are expensive, and aren’t always necessary. Sure, unique and upscale properties probably need a realtor to do some serious sales maneuvers, but an average middle-class house? The primary marketing is a simple MLS listing.

Today’s real estate investors can list their properties on the MLS using flat-fee listing services such as Clever and Houzeo that cater to For-Sale-By-Owner customers, at a fraction of the cost of a traditional realtor. But MLS listings are just the beginning.

There are entire Facebook groups dedicated to local real estate available for sale. If you’re targeting investors, there are also Facebook groups for local real estate investors, not to mention local real estate investing clubs. For that matter, you can take advantage of our nationwide Facebook group for real estate investors, with roughly 32,000 members!

It doesn’t take a realtor to put a “For Sale” sign in the window, or host an open house. Or, for that matter, to post flyers in the local grocery stores, fitness clubs, coffee shops, etc.

In some ways, this technique is the opposite of hiring an auction house. You’ll do all the work yourself instead of handing it off, but you’ll maintain much more control over the process, and you can wait for the right price. You’ll also be in an excellent position to offer seller-financing as part of the package, to help encourage buyers along (more on this later).

 

5. Auctions

Auctioning off properties works great when you need a quick sale.

Don’t expect top dollar – auctioning real estate prioritizes sale date over sale price. But when you absolutely, positively need to sell a property by a certain date, auctions are a reliable way to sell.

As anyone who has auctioned anything can tell you, who you choose as the auctioneer matters. A lot. Reputable auction companies attract serious, reputable bidders, who trust that the auctioneer is not deceiving them. It takes time for auctioneers to build trust – just ask Sotheby’s, who has been around since 1744.

Established auctioneers also have powerful marketing machinery in place, to reach the maximum possible audience. They cultivate extensive mailing lists, standing ad slots with local publishers, familiarity with the best ways to reach the right prospects in the local market.

But even when you use a reputable, experienced auctioneer, the outcome remains a gamble. Your final price will come down to who turns out that day, which can be affected by random variables like the weather, or seemingly unrelated events like a conference taking place across town. Maybe the traffic is just exceptionally bad that day, and prospective bidders decide not to make the drive.

Auctions aren’t quite an act of desperation, but they certainly won’t attract top dollar, either.

 

6. Dodge Taxes by Rolling Your Profits into a Larger Property

Taxes suck, even lower capital gains taxes on real estate. They siphon off money you could otherwise put toward building passive income and reaching financial independence. 

Fortunately, you don’t have to pay taxes on your profits from selling real estate. Not if you use them to buy another property, using a 1031 exchange. 

Within 45 days of selling your old rental property, you identify a replacement property you plan to purchase. You must then settle on the new property within 180 days of selling the old one. 

The new property must cost at least as much as the property you sold — it’s a tool for scaling your real estate portfolio, after all. 

Read up on how 1031 exchanges work before pulling the trigger, and keep rolling your real estate profits into ever larger rental properties with greater cash flow!

 

7. Pull Out Equity with Loans (Which Your Tenants Pay Back)

You could sell the property to cash out the equity. But then you lose the asset, and no longer benefit from ongoing cash flow or appreciation. Where’s the fun in that?

Alternatively, you could keep the property and still pull out the equity through a rental property loan. It clips your cash flow, but you get to keep the property, which continues appreciating, and you can keep raising the rent each year. You get paid out for your equity, but you don’t have to pay taxes on it. Quite the opposite: you get to deduct the interest as a landlord tax deduction!

In other words, you can have your cake and eat it too. And your tenants can pay the mortgage back down again, just like they did the first time around. 

Win, win, win.

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What short-term fix-and-flip loan options are available nowadays?

How about long-term rental property loans?

We compare several buy-and-rehab lenders and several long-term landlord loans on LTV, interest rates, closing costs, income requirements and more.

8. Pass the Property to Your Children

No one says you have sell the property at all, as an exit strategy. The property can exit at the same time you do, becoming part of your estate. 

In tax year 2021, the first $11.7 million in assets that you leave to your children is exempt from federal estate taxes. You can leave your investment properties to your children, for them to keep as passive income sources or sell as they see fit. 

Between now and then, you can keep taking out rental property loans, letting your tenants pay them down for you, and then doing it all over again to keep cashing out even as you earn cash flow and the property appreciates. 

 

9. Donate the Property to Charity

When you donate an investment property to charity, you pay no real estate capital gains tax on it. As a registered nonprofit, they don’t pay any taxes on it either. 

You do get to write off the equity in the property as a charitable donation deduction however. Which means you can avoid the hassles of hiring a real estate agent, marketing the property for sale, and carrying it vacant while you list it. 

Plus you get to sleep easy at night knowing that you helped make the world a better place. 

 

10. Use a Niche Realtor Specializing in Investors

The best realtors have a deep niche; they may not do everything, they do one or two things extraordinarily well.

That niche of course includes your property’s location – your realtor should be an absolute expert on that market. But if you’re trying to sell to another investor, and you want to use a realtor, you need to find the local realtor who knows every investor in the market worth their salt.

In this case, you’re not paying for their MLS access, or their ability to bake muffins while hosting a hunky dory open house. You’re paying for their network. You’re paying them to get on the phone and call every investor they know until they find one who bites.

The right investor specialist realtor can find you a buyer in a day. They have a (virtual) rolodex overflowing with hungry investors, and they’ll know exactly who to call for your specific property type. “Two-story brick rowhouse in Federal Hill, rented for $1,900? Yep, Wendy loves those. I’ll give her a call right now.” Done. Fini. Past tense.

 

Final Thoughts

As real estate investors grow their portfolios and tackle larger projects, they need to understand all the options at their disposal for, well, disposing of their properties. Life is not predictable, and the higher the stakes, the stronger the need for contingency plans.

Scaling your real estate business means both risk management and creating systems for exiting with a profit. “What made these strategies successful was our ability to systemize then scale up the process,” explains Matt Andrews. Once a system is refined so that it’s easy for any employee to handle it, the sky’s the limit for real estate investing businesses.

 

What unconventional real estate exit strategies have you used? How’d they work out for you?

 

 

More Real Estate Investing Reads:

About the Author

G. Brian Davis is a landlord, real estate investor, and co-founder of SparkRental. His mission: to help 5,000 people reach financial independence by replacing their 9-5 jobs with rental income. If you want to be one of them, join Brian, Deni, and guest Scott Hoefler for a free masterclass on how Scott ditched his day job in under five years.

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