Hello everyone, welcome to this week's #InvestingTipTuesday!
A couple months back, I gave a virtual presentation to the New Hampshire Real Estate Investors Association about my first real estate deal--not the first deal that I brokered, but the first properties that I bought. I ended up buying a duplex and a 4-unit in Concord, NH, and I spent about an hour on camera detailing the process that I went through.
In short, it got me thinking about the exit strategy. The way that I bought those properties, I had a plan in place, with a budget in place, and I had a lot of good contacts for it. But because of circumstances beyond my control, and just my inexperience, the project ended up taking longer than I expected, costing more than I expected, and at the end of the day, my exit strategy was different than what I had planned on in the beginning.
When you're investing in real estate, it's important to begin with the end in mind, no matter the property you're buying. If you're buying a property, it's important to know the financial position you're going to be in, how long you're going to be in that financial position, what your plan is to get out of that property at some point down the road, and also what your back-up plan is, because sometimes things go wrong and you need a plan B.
Looking at it when you're starting an investment, it's important to understand what your investment horizon is. For example, if you're planning on buying a house that you want to turn around and re-sell, then your horizon for having this property is extremely short, and the quicker that you can sell it, the better. You might have a 3-6 month turnaround time, being realistic of course about how long you're going to hold onto that property, because every single day up until the day that it sells, you're losing money. You have nothing supporting that. Then, you make a big, lump-sum profit at the end and recoup all of that money.
Talking about longer-term properties, some investors will purchase a property with the intent to hang onto it for 3-5 years after it's been renovated, after some of the rents have gone up, it's stabilized, and they can exit it for a profit. It's important to understand what your plan is at that point in time. Maybe the exit strategy is to refinance it and hang onto it for the longer term at an increased value. You're able to pull out a little bit of cash, recover some of the money that you spent on renovations, and then you can fund the purchase of another property from there. Or, perhaps at that point in time, your exit strategy is to sell the property and using a 1031 exchange, purchase a larger property with the gain that you've made.
There are also some people whose exit strategy is death. They'll wait until the day that they die and pass on that property and those assets to their children. It's important to understand that too, and to know what that plan is so that going in, you know how to better analyze a deal to see if it makes financial sense.
Now like I mentioned before, you also need to have a back-up plan. In my first deals, I made some changes to my exit strategy on the fly, and as such, that's something you should be aware of as well. What is the back-up plan? Is plan A to sell the property? Well, maybe plan B should be to look at refinancing options. My goal was to keep the properties for the long-term, refinance them, and pull out the equity, but ultimately, I ended up selling one of my properties.
Thinking about what your back-up plans are, what your contingency plans are, if you'd be okay with breaking even, if you'd be okay with a certain profit, if the market turns down, if an unexpected crisis comes up like what we've been dealing with regarding COVID-19--these are all different points to consider when purchasing a property.
As always, if you have any questions or comments, we'd love to hear them!