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While buying a property in itself can be a very long and exciting process, it is very important to have a clear exit strategy from the day you decide on the property that you plan to invest on. You should be ready with an answer to the question – What am I going to do with this building? The wise thing to do is have an alternate exit strategy as a backup, just in case things go south. Without having a clear path ahead, you might end up losing more money than you make. At the end of the day it is all about making profit. The following are some common exit strategies.
Buy and hold
This is the most common type of exit strategy. You buy a property and do some value addition like separating a room into 2 parts or creating a garden space or a setting up a parking garage. Then you can rent/lease the property. This would mean that there is a constant cash flow. The property usually pays for itself after an amount of time, meaning the rent collected can be used to pay off the costs incurred in buying it. It can then be sold for a higher profit or it can be held longer to generate passive income and improve equity on the property.
There are certain risks associated with this strategy. If the property is vacant for an amount of time, there is a risk of the property getting sold making it difficult for you to flip or rent the property. You would be paying the loan from your pocket. Care must be taken to ensure the property is bought in a growing neighbourhood which can provide a high Return on Investment (ROI) and where the demand for renting houses is high.
Fix and Flip
Fix and flip strategy can be used to generate quick and large profits. This strategy involves buying a house below market value. Investors buy a dilapidated and run-down house, in a high-quality neighbourhood that can provide good returns and rehab it and sell it for a profit. Although this can garner huge profits if done correctly, you would be required to spend a lot of time right form purchasing the property and making the repairs to selling it.
The aim of this strategy is to sell the property as soon as the rehab is over, since holding it might incur further costs. It is very important to finish the rehab quickly and sell it as soon as possible. This strategy often involves putting down money from your pocket, since money lenders mostly will not be interested in financing in short term. However, there are banks that provide loans to fix and flip properties.
This strategy is often used by investors who want to make quick money. The investor will find a property and obtain the buying the rights to that property and sell it to a buyer. This is achieved in one of the two ways: They can either assign the contract or do a double closing.
Essentially, the wholesaler never actually owns the property. The wholesaler obtains the contract for a property from a seller and then “assigns” this to a buyer for an assignment fee. This method is called assigning contracts
Double closing is done in two parts; the A-B contract and B-C contract. The A-B contract is the deal between the seller and the wholesaler, the B-C contract is between the wholesaler and the buyer. Both the deals are usually closed on the same day. The buyer is asked to bring the money for the B-C deal earlier in the day as escrow, using which the A-B deal is completed. Once the wholesale has the property, the B-C deal is completed.
In this method, the seller of the property becomes the bank and loans money to the buyer. So, the seller essentially sells the property and lends money to the buyer to buy it. Once the sale is made, the buyer pays off the loan based on an agreement between the buyer and seller. Here they decide the interest rate, payment schedules etc., just like in the case of a bank loan.
For example, you have a $100,000 house. A buyer approaches you and says they can pay $20,000 as down payment and the rest will be loan. You can now lend the $80,000 to the buyer as loan and sell the property. You can then negotiate the interest rate, payment method, payment schedule etc.
This is win-win for both the parties involved. The seller will continue to get monthly income, just like they did when the owned the property, without the burden of maintaining it. For the buyer, this can be a method to legally own the property when the traditional money lenders are refusing to lend them money for various reasons.
A investor buys a property, does minimal fix up work and then sells it to a rehabber who can continues the fixing work. This strategy does not involve the investor spending too much time or money themselves.
For example, you buy an old building that looks worn down. You can do a paint job on the building to improve its aesthetics and sell it to a rehabber at a higher price, who can add value to it. This is a quick way to make some profit.
All the methods have their advantages and disadvantages. It is up to you, the investor to decide which method suits you the best based on your requirements and the resources you have.
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