Real Estate Investment Financing Strategies: What is Your Exit Strategy?
Recently, I wrote about Developing a Solid Financing Arsenal. After reading one of the comments from our readers, it sparked an interesting question in my head, “How does an investor’s financing arsenal effect their choice of exit strategy?”
When I use the words “exit strategy,” I mean WHAT IS YOUR PLAN? Because you better have one especially in this market!
Here is what it comes down to:
The less options that you have to finance a deal, the less options you have for your exit strategy. The more options you have to finance a property, the more ways there will be to structure the most effective and profitable exit strategy to suit your investment goals.
For instance, you have a property under contract that looks like a good deal. The only financing resource that you have available is a private lender that will let you borrow the money for 4 months. At the end of the 4 month period, you must pay the loan off in full. If your only way out of this loan is to sell the property, you are putting yourself into a pretty tight corner. What if the small renovation that’s needed costs $5K-10K more and takes an extra month to finish? What if 2 other houses in the neighborhood hit the market at competitive prices right after you buy? What if you find out the property is really worth 5-10% less than you originally thought once you go to sell the property? What’s Plan B?
Since your only financing resource above is short term money from a private lender, you’re pigeon holed into having to sell the property whether you like it or not. And what if it doesn’t sell?
A Good Exit Strategy
Let’s say you have built up your financing arsenal to include a hard money lender, several longer term private lenders, an equity line on your primary residence, and you can qualify for conventional financing. Your exit strategy could include a Plan A, B, and C.
Plan A - Buy, renovate, and list the property for sale.
Plan B - Property doesn’t sell within time frame needed so you already have conventional financing lined up. You close on a bank loan to refinance your private lender out. You continue to market the property for sale.
Plan C - Property still doesn’t sell so you begin marketing the property as a rental. You have already done your homework. You can rent the property out and have a positive cash flow.
This is the cornerstone of good financial planning for your investments and THE WAY to develop long term business relationships with your financing team that just keep on giving.
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