Real Estate Investing - From Finish to Start
Sort of a strange title but one that most successful real estate investors live by.
It simply means that before any successful real estate investor makes a purchase, that person already knows the exit strategy for that particular investment. And by knowing the exit strategy, the investor knows how to structure the deal.
Let’s take a look at a few examples.
Example 1: An investor wants to buy a fourplex apartment building to add to his portfolio as a long term investment that will generate a positive cash flow from day one.
In this instance, the investor is going to look at two things. The first is the acquisition and holding costs vs revenue generated. The second is the long term trend for the neighborhood. Since this acquisition is meant to be a long term hold type investment, the investor may not be interested if the trend for the neighborhood is negative. And he definitely won’t be interested if he can’t get the numbers to work to give a positive cash flow from day one based on his projections of vacancy factors, etc.
Example 2: An investor purchases a 25, 000 sqft office building with the intent of increasing its cash flow by 50% in the next twelve months and then selling it.
Since this is a short term investment, the investor has to know what can be done with the office building. Is it in a place and a market where it can be filled to 100% occupancy if it is currently not at that level? Are the rents significantly below market? Is the investor locked in by long term lease commitments or can the tenants be handed a new lease on the day after closing? Can the building be renovated cost effectively to make it more attractive to higher paying renters?
If the investor can get a yes to the above questions that are relevant to the particular property, this could be a good investment. If some things can’t be changed, like being locked into long term below market rate leases, this is a deal the investor will pass on because it did not meet her exit requirements.
There are obviously tons more examples that could be offered but with these two you get a clear idea why the exit strategy would be so important in each of the above two examples. Without knowing it, the investor could make a choice that turns a seemingly good deal into a don’t wanter deal.
End result - do your planning before you start knocking on doors. And make sure any potential deal fits your checklist of requirements before you open negotiations.
