An Investor Should Always Have an Exit Strategy

An Investor Should Always Have an Exit Strategy

Regardless of what type of commodity you invest in, you should always go into that investment with an exit strategy: that is, how and when you will sell your investment and take your profit. In this article, we'll be looking at exit strategies as they relate to real estate investments.

As a real estate investor, you'll constantly need to be aware of the economy in your area, the job situation, and interest rates, all of which can affect your ultimate profit when you go to sell your property. You'll also need to be thinking ahead about whether you want to take your profits and use them to buy a new piece of property with even more investment potential. How much money are you ultimately hoping to make? When will you need it? What will you be using that money for? All of those questions should be considered on a regular basis, since a person's needs and desires will change over time.

It's also wise to give some thought to what you'll do if real estate values begin to decline. If you can't find a buyer for your property right away, or within a reasonable amount of time, what will you do then? Can you add a second mortgage to the property to help carry the investment? Cam you refinance the current mortgage, without a prepayment penalty, to lower the payments so they match rental income? Setting up your initial financing with the future in mind can be critical if you find yourself needing to hold a property longer than planned.

Choose your partners carefully in the beginning, as well, to protect yourself when it comes to selling the property. If one of your partners gets into serious trouble and wants out, how will you handle that? This can happen due to many things, such as ill health, but it needs to be considered as part of your exit strategy.

Another consideration: income taxes. If you buy investment property and make a substantial profit, you can sell the property using the 1031 tax exchange to defer taxes. However, this must be planned for and included in your sales contract.

Knowing how and when you plan to get out of a piece of property begins even before you write the offer in the first place. Take care of the details, and you'll be well on your way to achieving the real estate success you're seeking. Remember: buying real estate BEGINS with a well thought out plan for your exit strategy!