When purchasing commercial real estate, it’s important to have several exit strategies. Most owners are excited about the acquisition of their new investment property but few are concerned about the exit. It’s like buying a car. We all love the new car but don’t care about selling the old one. Well I got news for you, unlike a car, commercial real estate is an investment and you’re in it to make cash money. Having an exit strategy in place can help you maximize value by selling at the best time.
MAXIMIZING VALUE = MORE $$$ FOR YOU
Sure you could end up changing strategies a year, two years, or even ten years down the line but it’s important to at least have a rough idea of your exit plan. So let’s get to the 5 questions about an exit strategy and then we’ll outline some commercial real estate exit strategies. Or you can just jump down to the the 3 Main CRE Exit Strategies.
5 Questions about an Exit Strategy
1. What is an exit strategy?
Exactly what it sounds like: a plan for how you will get out of (exit) an investment property. This is done through the disposition (fancy word for sale) of your asset (another fancy word, this time for commercial real estate property).
2. I forgot, why do I need an exit plan again?
Believe it or not, there will always be an exit for an investor. If for no other reason, it’s cause we all eventually hit the grave. A more positive reason – it’s time to cash out of your investment and realize your new riches. Most investors use this capital for reinvestment in a new property. Others investors might cash out for retirement purposes or to pay for the wife’s new wardrobe.
3. Who needs one?
Well everyone should have one.
4. When do I need to plan for the exit?
Again, it’s best to outline a few scenarios at acquisition. If you’ve already purchased the property, start planning now.
5. Where do I formulate this exit strategy?
Using the power of Microsoft Office, we suggest outlining a plan within MS Word. While you’re at it consider putting together a few basic financial projections in MS Excel.
3 CRE Exit Strategies
Now that we have the basic questions answered. Let’s get to the reason you’re here. Below are a few real estate exit strategies implemented by sophisticated (and non-sophisticated) real estate owners:
#1 Your Loan is up for Maturity
Most commercial real estate loans have a 25-year amortization. This means every year the owner is paying down their loan balance according to a 25-year balloon payment. However, since most commercial real estate mortgages have a 10-year term, the owners will have a large balloon payment. So at loan maturity, the owner can either: (a) take out a new loan or (b) sell the property. Given that refinancing can be a time consuming and cumbersome process, this could be an excellent time to take your money out. Most owners should start the sale of their current property at least 12 months in advance of loan maturity. In general, the shortest time span for selling a property is 3 months. If your sale falls through then you will still have enough time to find a new investor looking to purchase your real estate.
#2 Maximizing Occupancy then Flipping
If your strategy is to acquire properties, rehab, re-tenant, and then sell then you’ve already got an exit strategy. You’re simply looking to exit when you have occupancy at a stable term. For these types of investors it’s important to flip as quickly as possible because the longer you hold the lower your internal rate of return (IRR). Again, speed is king for flippers.
#3 Holding Long-Term until CAPEX
Some investors try to hold a property as long as possible until capital expenditures (CAPEX) are about to occur. Capital expenditures include things such as: new roofs, parking lot repaving, new air conditioning units, excreta. This can be a good strategy for owners not looking to infuse any additional equity into the property. However, on the backend it’s likely you will be taking a ding on the selling price.
So what’s the best exit strategy? Well as usual we say – it depends. Every owner has their own time frame and strategy to investing in commercial real estate. We recommend putting together a simple exit plan so all owners and investors are on the same page at acquisition. Because strategies can change, a detailed plan is not always your best use of time. Having a simple exit plan is better than no exit plan at all.
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