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Exit strategies

yveskleinsky

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Jul 26, 2007
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I hear the term "exit strategies" thrown around a lot. What does it mean to you? ...I find myself using the term, but after reading several posts I feel like I am the Sicilian from "The Princess Bride". The scene where Indigo confronts him and says, "You use that word a lot. I do not think it means what you think it means." For example, I am looking at this multifamily (4 plex). Assuming that everything (numbers, financing, etc.) jives, what would an exit strategy look like on a property like this?
 

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RAiMA

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Aug 24, 2007
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Normally means protecting assets from massive loss to me either through cutting losses or if you've made a bundle, to cash in when the market is turning around. I normally associate the term more with stocks than real estate (maybe I'm biased).

I'm not sure on how it would be calculated with property. On stocks, an indicator that is useful is to calculate the return on risk. It's normally done by the following formula:

total $$$ return on investment divided by total $$$ risk, times that by the time frame of the number of days per year it's at risk for.

For example, lets say on the stock market you make $310 profit (after expenses etc) in a profit, the capital may worth tens of thousands of dollars, but you've got a stop loss to minimise your risk to $1000 maximum. The exposure time from is 6 weeks, so this is how you'd work it out

310 / 1000 = 31% for the risk of return for the transaction.

To give us a true indication of how much within the time frame we further have 31% * total number of days in a year divided by the number of days that it's exposed for.

So 31% * (365/42) = 269% return on risk

With this formula you can use it to simulate what's an acceptable return on risk to devise your exit strategy. In this case, it was a stop loss.

In property things move a lot slower due to a number of factors, like owner occupied houses, trends, etc. Good Investors can generally out manouver general property owners cause there's very little emotional attachment. I'm not sure if there is an exit strategy without taking a capital gains hit. With the trend that land and land/property getting more scarce, the prices are only going to keep going up. Yes it may make it less affordable to new people to purchase a property, imo the trend is moving towards where people will eventually end up renting as the only viable option to put a roof over their heads. There's plenty of scenarios this is already happening. I heard germany is one of them. As investors, we provide the properties for them to rent and where the government can not afford housing commision to look after them.

So having said that, the only scenarios where I can think of where you would want to exit the market it is if the location where the property is badly influenced by a situation (nuclear meldown, natural disaster) where the property can no longer be inhabited. The only exit strategy I can think of for this is possibly insurance.

I'd be interested to hear other people's views on this topic
 

ProInvestor

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Aug 15, 2007
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Usually if you are a flipper or a cashflow 'expert' you will have only one or two exit strategies - sell / keep for cashflow. However I like to think an exit strategy can be a 'what if'. For example what if I can't flip this property? Well I can simply rent it (because it has +CF), or even wrap/LO it.

Also an exit strategy might be when you've had a certain amount of appreciation and you might start to look at selling if you believe you can find a better investment (your exit strategy might be a 1031 exchange).

So when people talk about their exit strategy usually it means what they are going to do, however if there is only one exit strategy then beware!

Rgds.
ProInvestor
 

andviv

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To me it means the plan for what to do with the property.

For example:
You buy it for cashflow, and you plan to leave it to your heirs. BUT you also have planned that you would sell it if you receive and offer for X amount and would 1031 into a bigger one.
Or, you buy for improvements/appreciation and will sell when the FMV is now 100K more than what you paid for it.
Or, buy 20 acres, subdivide in 4 5-acre lots, build on one for you, keep another one and sell the other two.
 
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yveskleinsky

yveskleinsky

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So, if my strategy is to buy a multi-family for cashflow, and hold it until FMV goes up by a minimum of $50k, this would be a viable plan? ...Where does the cashing out part come into play? Such as planning on 1031ing the money into something else or how to handle the taxes. How are you guys handling the cashing out part?
 

andviv

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well, the question whether it is viable or not is not the right one, in my opinion. I would have to ask you back, Is this part of your plan? Yes, given enough time and certain factors about location/job growth/ economic conditions, all properties could increase in value 50K. The right question for you is how long would this take? IF you decide to buy this property and plan to keep it for two years, is that enough time? Would you have to do some improvements to get to that value? Would you control the value or will it depend only on the sales price of other properties around?

So yes, it is a viable plan. But it depends how this fits in your big financial plan.

There are two clear ways of cashing out: Refinance (no taxes paid at this time, but it will reduce your cash flow) or Sell. Yes, 1031 is the preferred way to delay taxes, but I've also paid taxes in other occasions (thanks to the 15% rate, which made it less 'expensive' to pay... I needed the cash for paying some debts and new toys and it was time to sell this property).
 

nomadjanet

Contributor
Aug 28, 2007
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TX
I believe exit strategies ultimately boil down to three factors:
1.The level of risk you are comfortable with.
2. An honest informed expectation on the speed of return.
3. Your ability to change strategies as circumstances within the deal change.
If you have unrealistic expectations of the time involved to do a deal this can be more damaging than under budgeting the cost of the repairs or other expenses not just because of loan service but because of the other deals you may miss.
For those just starting out that have limited financial resources to draw on the velocity of the return on the investment may out weight the ability to get the highest return. You plan has to include the time factor to be a real plan. If I have 100k plus a mil in credit tied up in a project, how long can I afford to tie up that resource in order to achieve the rate of return I want. This is not just about the amount of interest I will pay but about the other deals I may have to pass up due to my resources being tied up. If you tie up your assets and have all your numbers calculated for the cost of the loan and the payments you must also factor that there may be other deals that come along that cannot be pursued because you have committed this much of your resources to this deal. This is a risk you are taking; can you live with this risk? Or are you better suited to take on only smaller deals? This way you have money available to do multiple deals until such time as your resources are built up enough so that you can do multiple deals at this level.
If you have only one strategy formed out for the deal and something goes wrong or changes, are you equipped to make a decision quickly if needed or will you keep trying to force the deal back into the plan you had formed. Sometimes having several strategies just helps us keep our sanity when we are looking at that 10k monthly loan service debt. :banana:
 

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