Image by Alvaro Reyes from Unsplash.
With high inflation and multiple rate hikes since March 2022, investing in real estate and planning an exit strategy has become highly challenging, making industry players anxious. The higher rates are reducing the profitability of new deals and, at the same time, spoiling already planned exit strategies.
Although investing in real estate in the current economic environment is not without challenges, and investors and lenders alike are taking longer to evaluate potential investments, deals continue to happen. However, with these added uncertainties, it is more important than ever to have a well-constructed business and exit strategy in place. In this article, we’ll explain the most popular exit strategies for multifamily investors and why planning a way out is important.
What Is a Real Estate Strategy and Why Is It Important?
To put it simply, an exit strategy is a plan for how you will eventually sell your investment property. This is important for two reasons. First, it allows you to have a timeline for your investment. Second, and more importantly, it allows you to maximize your profits when you eventually sell.
Your exit strategy should be detailed and specific. It should take into account your long-term goals as an investor, as well as any short-term needs or objectives. For example, if you are looking to quickly generate cash flow, you may want to consider a buy-and-hold strategy (more on that below). But if your goal is to maximize profits, you may want to explore a value-add approach.
Ultimately, your exit strategy provides a roadmap for how you will eventually make a profit from your investment. Without a clear plan for how you will sell your property, it can be very easy to get stuck in the ownership phase and never realize any return on your investment. Exit strategies are not one-size-fits-all; the right strategy for you will depend on your specific goals as an investor. Without further ado, below are the five most advantageous exit strategies to consider.
Top 5 Multifamily Exit Strategies
1. Buy & Hold
This strategy is exactly what it sounds like — you buy an investment property and hold onto it for an extended period of time, usually five to 10 years or longer. The benefits of this strategy are that it allows you to build equity in the property and eventually sell it for a profit. The downside is that it ties up your capital in one property for an extended period of time, which limits your ability to invest in other opportunities.
2. 1031 Exchange
A 1031 exchange is a tax-deferred exchange of one investment property for another. The main benefit of this strategy is that it allows you to defer paying capital gains taxes on the sale of your property. The downside is that you have to find another investment property of equal or greater value within a certain timeframe, which can be difficult depending on market conditions.
3. Refinance & Recapitalize
Although this is not a hard exit, refinancing your property can help you refresh your investment. Refinancing your investment property allows you to pay off any existing debt and/or free up cash to renovate your asset, allowing you to increase the value of your property. Refinancing a property can also help you obtain lower interest rates, which is especially advantageous during volatile economic conditions.
4. Add Another Investor
This strategy involves bringing on another investor to help you finance the purchase of an investment property. The benefit of this strategy is that it allows you to buy a property with less money down, which frees up capital for other investments. The downside is that you will have to give up some control over the property and will not see as much upside when the property appreciates in value.
Investing in a value-add property is a popular strategy with those who wish to maximize profits. This strategy involves buying a somewhat dated or poorly managed property and reviving it through renovations and other improvements. The benefit of executing a value-add strategy is that it allows you to significantly increase the value of your property and potentially charge higher rents after the improvements are made.