Please ensure Javascript is enabled for purposes of website accessibility

Tag: exit strategy

Exit Strategies for Real Estate Investors: Maximizing Profits and Minimizing Losses

Investing in real estate is an exciting venture. It comes with many opportunities to make a profit — if you can overcome the challenges that arise. Expensive surprises often occur while you own a property, which is why it’s important to do your due diligence before making a purchase. 

Even seasoned real estate professionals encounter unexpected expenses. What’s important is learning to minimize them as much as possible, so when you plan an exit strategy, you’ll collect maximum profit. 

An exit strategy is when an investor liquidates a financial asset. This can include the sale of a property, business or shares when a company launches an initial public offering. Below are some common exit strategies for real estate investors. 

READ: The Pros and Cons of Investing in Real Estate During a Recession

House flipping

With house flipping, you purchase a house, renovate it, and sell it for a profit. If you plan on using this strategy, it’s important to think beyond cosmetic improvements, such as replacing light fixtures. The renovations need to align with the layout and functionalities that modern buyers want.

Buyers love purchasing houses that are updated and move-in ready, but investors should know that house flipping renovations can come with a high price tag. However, they’re worth it if they offer a solid return on investment. Make sure to have a financial cushion in case you need to make more extensive renovations than you expected.

READ: Mastering Residential Real Estate Flipping — 10 Essential Keys for Success

Wholesaling

Wholesaling is a real estate strategy where you, as the investor, act as a middleman. With wholesaling, you purchase a house but already have a buyer lined up to purchase the house from you. 

To maximize profit, find a seller who is motivated to sell their property quickly and doesn’t want to waste time with lengthy negotiations. Then, find a buyer who will purchase it from you for market value or above market value.

Buy, Hold, Rent

Flipping houses and wholesaling can create short-term profit. However, many real estate investors focus on long-term profit by buying, holding and renting property. With this strategy, you can rent your properties at a monthly price that covers your mortgage payment and other expenses.

Depending on the market, you’ll likely experience positive cash flow and increased equity over time. When you’re ready, you can choose to sell your rental property — whether that’s five, 10 or even 30 years later.

Although you’ll be responsible for the maintenance of your properties, this is a good way to have someone else pay your mortgage over time. The key is to carefully vet your renters to ensure they take care of your investment while they live there.

How to maximize profit during an exit

Regardless of which exit strategy you choose, here are a few tips to maximize profit when planning an exit.

Time your exit carefully:

Timing is everything in real estate. The market goes through cycles. Sometimes it’s a seller’s market, and other times it’s a buyer’s market. 

Although no one can perfectly predict market peaks, there are economic indicators — such as interest rates, inflation rates, employment rates, and vacancy rates — that can help you determine the ideal time to sell. For example, when interest rates go down, the demand for housing goes up — meaning there will likely be plenty of buyers willing to pay top dollar for your property. 

Monitoring these indicators can help you time your exit to maximize profit. Make sure to watch the news and follow economic trends to determine the best time to sell. When the time is right, get multiple home value assessments so you’ll know how much profit you stand to make.

READ: Exploring The Economics of Housing Inflation in Colorado

Network with real estate professionals:

Having solid relationships with others in the real estate industry is a good way to learn about exit strategies you might not have considered yet. 

Network with bankers, real estate agents, real estate brokers, real estate attorneys, real estate wholesalers and other investors who might be more knowledgeable about laws and tax strategies that could help you exit your properties with more profit.

Real estate agents can give you valuable insights that will help you get a solid return on your investment. They can also recommend contractors who do good work, saving you time and money when repairing and renovating your properties. 

Plus, if you decide to get your own real estate license to save on commission rates, it’s possible a seasoned agent or broker you know will show you the ropes or even employ you.

Ultimately, having a solid network can help you strategically create an exit plan that will make your real estate investment profitable. No one can time the market or plan an exit perfectly, but there are many steps you can take as a real estate investor to mitigate risks and improve your chances of success.

 

Screen Shot 2021 12 28 At 113128 AmLuke Babich is the Co-Founder of Clever Real Estate, a real estate education platform committed to helping home buyers, sellers and investors make smarter financial decisions. Luke is a licensed real estate agent in the State of Missouri and his research and insights have been featured on BiggerPockets, Inman, the LA Times, and more. 

Northwestern Mutual Guest Column — Key Considerations for Selling Your Business

When it comes to your business, understanding how much it is worth can be challenging and involves answering many different questions. Do you plan on selling your business any time soon? If so, who are you planning on selling it to? Whether it’s an employee, family member or strategic buyer, with 2023 right around the corner, now is the time to consider developing a financial preparedness plan for business succession planning.

READ — Exit Planning: New Study Shows Most Colorado Business Owners Are Not Ready to Sell Their Businesses

Value Your Business

The day-to-day challenges of running a business often impede our ability to understand its value and formulate a game plan around getting the outcome we desire. Not only do I encounter this with clients as a wealth management advisor for the Colorado Northwestern Mutual office, but as a business owner myself looking to sell down the road, I have a front-row seat to the same set of challenges.

Rather than basing how much your business is worth on a recent sale of a similar enterprise, or performing a Google search of earnings before interest, taxes, depreciation and amortization (EBITDA) multiples in your industry, consider scheduling an independent valuation with a professional to help you understand where value is attributed. It can be both surprising and enlightening to find out what the outside market values most, or least, about your business.

Once you have a valuation, you have a benchmark to drive and clearly understand future growth, and can spend time performing in those areas that enhance value. Furthermore, when the valuation is updated each year, you receive quantifiable feedback about the changes you are making in the business.

Develop a Financial Plan

Selling your business at the price you desired and finding out later you must unexpectedly return to work due to the market environment, taxes or unforeseen health changes is not ideal.

“Reverse engineering” what your future lifestyle and estate plan requires is the first step, and you can achieve this by working with a certified professional to create a comprehensive financial plan. Some of the considerations for a successful financial plan include:

1. Tax implications

This should address current tax issues, tax that is related to the business sale and tax implications during retirement and upon passing.

2. Asset management

Do not mistake an investment portfolio for a financial plan. How your assets are allocated now, how they will be allocated post-sale, where assets are located (taxable or non-taxable account) and what performance is needed to allow your plan to work are all common themes surrounding asset management.

3. Risk management

In the event of a disability or premature death, where will the money come from to execute on your buy-sell agreement with your partners? Was your life insurance structured as an asset or established for a finite period of time to cover death? Do you have a plan for long-term care during retirement? Protecting your current ability to run the business along with weighing your future desires are all important considerations.

READ — How to Avoid Risk While Running your Business

4. Estate planning

When the financial plan reveals that you will be unable to spend all of your wealth, would it make sense to gift shares of the company to children or future grandchildren before the explosive growth of the share value? There is so much to address on this front that having a plan that works in concert with an estate attorney is essential.

Tax Considerations

Is your business structure today the most tax-efficient for current income and a future exit? Do you have a business structure that will award you the best tax outcome when you plan on eventually selling your business?

In addition to engaging your planner, consider hiring a law firm with knowledge of the tax and estate planning front to work alongside your CPA to determine the best strategy.

Build a Team Around You

In addition to building a management team to help run your business, you should also invest in a comprehensive financial planning team. Now is the time to take a fresh look at what advisors are on your team, who is needed and who needs to be replaced.

In addition to a CPA, a valuation expert and an attorney who can bring business organization, estate planning and tax knowledge to the table, a CERTIFIED FINANCIAL PLANNER™ professional or CFP® will make sure the outcome you desire is never out of focus when tax strategy, business organization, estate planning and differences in opinion surface.

Exiting the business that you started and/or ran for years is complex and emotional. The earlier you begin the methodical process of building a trusted team around you and creating a financial plan, the higher likelihood of receiving the true value of what your hard work has built.

Royce ZimmermanRoyce Zimmerman is the wealth management advisor for Northwestern Mutual.