Find your Primary exit strategy (Landlord, Wholesale, Fix/Flip and more)
As an experienced investor I utilize multiple exit strategies. When I first began, I utilized only 1. And that is the way it should be. Start with one, master it. Put the blinders on and ignore all the others. Or learn about them but do not do anything with them.
Almost all the exit strategies have lots of moving parts. Lots of things to learn. And you cannot learn them all at once. Its overwhelming. Even just focusing on one strategy can be overwhelming.
Let me back up, what is an exit strategy? There are entrance strategies and financing strategies and exit strategies. The one that matters the most is Exit Strategy. How are you going to dispose of the property? Are you going to Wholesale it, do a fix and flip, make it a rental, or sell it on lease option (or land contract)?
So, let me walk thru each, So, you can understand them. Each has its advantages and disadvantages and based on where you are in your life then different ones may be workable.
Fix and Flip
Let us start with the easiest to understand – Fix and Flip. We all have seen the HGTV shows where they find a house make it pretty and sell it. That is Fix and Flip. You must Find a property, purchase it, find contractors to fix it up, maybe just paint and carpet or maybe a full gut job, get it all ready and sell it. So, the investor (or TV actor) finds a house, pays too much for it, pays too much to fix it up, doing things to make it more functional (maybe), and much prettier and then finally sells it for a fortune. Well, sometimes this is true. The key is you make your money when you buy it but collect it when you sell. You must buy it right. This is where the 70% * ARV – Repair equation comes in. See other posts to understand the equation.
Don’t overpay to purchase the property, an easy thing to do, and don’t overpay for the repairs. Don’t let project creep occur, for example: “Sure, lets replace the kitchen instead of fix it up”.
Advantage:
- Can be Very profitable, $20,000 to $100,000
Disadvantages:
- It’s a job, once the house is sold you have start all over again
- You can lose your shirt – if you misestimated the repairs, the ARV, found problems you didn’t see originally, etc.
- It takes time, the process is not quick – 2 to 6 months is common
Wholesaling
This is an odd beast. Every guru under the sun will sell you a wholesaling course. The pure definition is You (the wholesaler) get the property under contract, then you sell THE CONTRACT to another investor. Keep in mind you must have it under contract and you are advertising selling the contract to buy the house, not selling the house! Otherwise, you could be accused of being a Realtor without a license. The buyer gives you your wholesale fee and goes to closing in your place and purchases the property. You are not in chain of title. This is the pure definition, a less pure solution is where you actually buy it and then immediately re-sell to the buyer with no fixup. You are now in chain of title.
Advantages:
- Quick – you do this type of transaction in easily less than 30 days to get you some money
- Not in chain of title – So, no liability – this is a low risk set of transactions
Disadvantages:
- Smaller amount (for less time) – typically 5% of ARV – but this varies a lot!
- Also, a job, once the property is sold, you have to start again
- You have to find buyers and sellers at the same time. Two transactions have to be coordinated.
Rental
I think this is the easiest for beginners. All the transactions occur one at a time. So, you don’t have to know it all at once. This also, starts to build long term wealth. You still have to buy right. The standard 70% * ARV – Repairs equation almost does not apply. You have to look at cashflow. How much in each month, and how much out. You have to get a loan (seller, private or bank) and have to pay it. (More on financing in another blog). You can use your own money but then you’ll run out of money pretty quick. And a quick note, nobody likes property management, some can tolerate it and others hate, hate, hate it. You need to know who you are.
Advantages:
- Builds wealth
- Passive income (well, mostly passive)
- Pretty easy to do, find a house, fix it up (to rental standards), and rent it.
- You can do your own property management
- Banks like this kind of investment and the first few are pretty easy to get financed
- Most tenants are great
Disadvantages:
- More work
- Property management is not fun, image: tenants and toilets
- You have to screen your tenants – to hopefully get better ones\
- Some tenants can be serious problem children
- You will have to evictions eventually
- You have to stay on top of:
- Paperwork
- Laws – ex: are you discriminating? What is the difference between a pet and a comfort care animal and how do you verify that difference?
- Payments come in monthly – how to deal with late or no payments
Lease option and Land Contract
I won’t go into the difference here, but Lease Option and Land contracts are where you ‘sell’ the property to tenant occupant over time. Also, called an Installment Sale. These are great ways to make a more passive income (than rentals) but you are selling the property.
Advantages:
- Buyers generally treat the property as their own, So, they take better care of the property
- They require less hand holding, less hassle
- Passive income (again mostly passive)
Disadvantages
- You are selling the house So, after a while it goes away, So, you have to do it again
- They can re-finance anytime, So, you have to do it again
- Some tenant buyers treat is just same as a rental and thus are really just rental tenants
Those are major ways you have for Exit Strategies. There are others but they are more advanced. So, when you purchase you need to keep in mind your primary and secondary exit strategies. You may be targeting a Fix and Flip but fall back if it does not sell to being a rental.
It is my humble opinion, wholesaling is the hardest for a beginner, you must find both a buyer and a seller at the same time. Yes, absolutely it can be done. The REIA groups (you should be a part of at least one REIA) are a great place to find buyers and sometimes sellers.
For Beginners, I think is the easiest to get started with is rentals and has the added advantage of building long term wealth. You do each task (find, fix, rent) one at a time. So, if a specific step takes a little longer, no problem. Keeping in mind that every month a house sits without a tenant is lost money. And to start with you can do some of your own rehab to reduce the out of pocket money.
There are several exit strategies and you should understand them and pick ONE primary and ONE secondary. Master them. Put your blinders on and ignore the shiny objects of the others.
Keep in mind the first property is always the hardest. The second is easier, and they get way easier as you do more of them. There is a lot to learn and being able to learn one step at a time makes it easier.
Good Investing
Scott