Author Topic: Exit Strategy: When do you sell a property?  (Read 4506 times)

frugally

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Exit Strategy: When do you sell a property?
« on: June 17, 2014, 08:47:55 PM »
My wife and I are building our business plan for getting into real estate, and are trying to figure out various exit strategy plans we'd want to have.  Here's our list so far:
  • If the property's cash-on-cash return becomes <7%
  • If the property puts a significant strain on our marriage.

Obviously not a comprehensive list.  I'm trying to get ideas from others who have been through this on what their criteria are.  Do you have a vacancy threshold (e.g. 9 months and can't replace/get a tenant), rehab exceeds $X, etc.  Sorry if this has been posted before, I did a search on exit strategy and didn't see a comprehensive guide or anything like that.

Thanks!

arebelspy

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Re: Exit Strategy: When do you sell a property?
« Reply #1 on: June 18, 2014, 08:03:01 AM »
The steps I'd follow (roughly, off the top of my head, so I may have missed something):

1) Calculate the return you are getting.
2) Calculate how much you could get if you sold, after selling costs, paying taxes, etc.
3) Calculate the expected return on those funds if invested elsewhere.

If 3 > 1, sell right away.  If 1 > 3, keep as long as the difference is enough to put up with the hassles (may be minor or large, depending on various factors and how you have it set up).  If the hassles are too large to make the difference still not worth it, sell.
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SunshineGirl

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Re: Exit Strategy: When do you sell a property?
« Reply #2 on: June 18, 2014, 09:43:38 AM »
I'll just point out that after managing our rentals ourselves for 15 years, we were at the point where we wanted to sell just to get rid of that increasing headache. Instead, we decided to hire a management company for six months and see how we felt after that.

Well, after only one month, we're thrilled with the cash coming in and the lack of work we have to do. I wish we'd done it years sooner, as we would have been much more likely to buy more property knowing we'd have a good manager to manage it. This guy filled two vacancies immediately that would have taken us much longer, just because it's a PT gig for us vs. a FT job for him.

My point: If you plan to manage it yourself, add in a tier of "hire a professional manager" before you decide to sell. It might make all the difference in your #2 scenario.

johnhenry

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Re: Exit Strategy: When do you sell a property?
« Reply #3 on: June 18, 2014, 09:46:44 AM »
One part of my exit strategy is to buy places that my family could live if necessary. If a property performs poorly and you have trouble selling, or if you experience long vacancies or consistency high expense ratios, you have options.  You can put your residence up for rent or sale and if you get an offer that makes sense, take the offer and move into the under-performing property.

With proper planning and evaluation, you should only need to use that exit strategy in very dire circumstances, but I liking having that option as part of my insurance policy.

Concerning your specific list of criteria that would "force" a sale:
a) It is a good idea to be on the same page with the wife before proceeding.  Just be aware that being in "the business" will present challenges. If those challenges put a strain on the marriage early on, there's a good chance that you won't be able to break even if you sell.  So maybe an alteration to the plan could be: Look for a place that will meet our desired return even if we have to pay a property manager to manage it.  Then try to manage yourselves, but if the marriage experiences strain, hire a property manager instead of selling.  At least until you've held it long enough to recoup closing costs, etc.

b) Falling below 7% cash-on-cash : I'm curious what kind of cash-on-cash return you have estimated?  If its in the 25-35% range, that leaves you a big cushion and you'd need to have a pretty bad year to dip below 7%.  But if you are estimating 8-10% as an expected return, 7% is not out of the question.  Now that you've defined 7% as the cutoff, it's important to make an accurate estimate what your expected return is.... so you'll know how likely it is that it will/won't meet your 7% worst acceptable case.

In short, it's good to have metrics that define successful/acceptable.  But it's also important to be able to estimate feasibility BEFORE you give it a try.  That's my take as a conservative investor.

Also, cash-on-cash isn't everything since it is affected by your down payment.  I look at the cap rate (even on SFH) alongside cash-on-cash.  I have 2 places that I bought for $45K, but one of them was on file at the PVA office for $55K and my lender's policy allowed them to lend up to 80% of the appraised value or current value at the PVA.  I was able to buy that place with only a $600 downpayment.  It's cash-on-cash return is about 295% while the other is about 30%.  The cap rate on each is nearly identical, but cash-on-cash is skewed due to that low downpayment.  Just a thought about using multiple metrics to evaluate performance.

-- Looks like as I was posting, someone else had a vote for considering a property manager...

frugally

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Re: Exit Strategy: When do you sell a property?
« Reply #4 on: June 18, 2014, 12:31:39 PM »
Hey guys -

Thanks for the responses.  We are expecting a 13-15% cash-on-cash return on any property we would purchase and are planning to put significant chunks of money down (20-100%).  Perhaps this is a terrible idea for a first-time investor, but I haven't seen anything yet that indicates otherwise if you have the extra money.  The reason we're doing that is we feel like having one (or two) properties in the first year/two will allow us to get our feet wet, still produce nice cash flow, and introduce to all the various intricacies of landlording without inundating us.  Our plan is to build up wealth over a period of 10-15 years, so I'm not itching to hit home runs right away.  One follow-up question - have you guys had long vacancies on properties before?  How long?  How did it end up playing out?  My wife and I seem to be much more worried about that than others I've seen who already invest in real estate, so I'm guessing it's not a big deal in most cases.

arebelspy

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Re: Exit Strategy: When do you sell a property?
« Reply #5 on: June 18, 2014, 12:35:25 PM »
planning to put significant chunks of money down (20-100%).  Perhaps this is a terrible idea for a first-time investor, but I haven't seen anything yet that indicates otherwise if you have the extra money.

Use whatever leverage makes you comfortable.

One follow-up question - have you guys had long vacancies on properties before?  How long?  How did it end up playing out?  My wife and I seem to be much more worried about that than others I've seen who already invest in real estate, so I'm guessing it's not a big deal in most cases.

No.

Assuming you aren't in a tiny market with only a few thousand people or something, a long vacancy is a sign that your rent is too high.  If no one is renting your property, drop the rent.  Then again.

Someone will rent it at the right price.  It just means you overestimated what market rent is.  Try to avoid that - vacancies burn money, so better to quickly correct your prices.  :)
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
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LostInTheWoods

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Re: Exit Strategy: When do you sell a property?
« Reply #6 on: June 18, 2014, 12:54:54 PM »
Try running an ad in the free newspapers - offer to poor credit people - give them a helping hand

arebelspy

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Re: Exit Strategy: When do you sell a property?
« Reply #7 on: June 18, 2014, 01:47:35 PM »
Try running an ad in the free newspapers - offer to poor credit people - give them a helping hand

That's potentially a good "how," but doesn't really answer the "when" question.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
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frugally

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Re: Exit Strategy: When do you sell a property?
« Reply #8 on: June 18, 2014, 04:03:33 PM »
I appreciate the responses, arebelspy.  Time to go learn some more!

arebelspy

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Re: Exit Strategy: When do you sell a property?
« Reply #9 on: June 18, 2014, 06:54:10 PM »
I appreciate the responses, arebelspy.

Sure.

Time to go learn some more!

Always a good idea.  Feel free to post more questions as they arise.  :)
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
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SDREMNGR

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Re: Exit Strategy: When do you sell a property?
« Reply #10 on: June 18, 2014, 07:59:28 PM »
Try running an ad in the free newspapers - offer to poor credit people - give them a helping hand

This is a potentially horrible idea.  You do not want to get into the business of helping others through your rentals.  People are in financial dire straights because of their spending habits.  get ready for reasons why they are late with rent and eventual eviction.  Give money to a charity if you want to help the poor, don't rent to bad credit tenants.

If you haven't rented a place in more than a month you are doing something very wrong.  Either your rent is too high or your place is very undesireable.  Fix one or other or both.
« Last Edit: June 19, 2014, 12:29:01 AM by SDREMNGR »

arebelspy

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Re: Exit Strategy: When do you sell a property?
« Reply #11 on: June 18, 2014, 08:12:43 PM »
Try running an ad in the free newspapers - offer to poor credit people - give them a helping hand

This is a potential tally horrible idea.  You do not want to get into the business of helping others through your rentals.  People are in financial dire straights because of their spending habits.  get ready for reasons why they are late with rent and eventual eviction.  Give money to a charity if you want to help the poor, don't rent to bad credit tenants.

If you haven't rented a place in more than a month you are doing something very wrong.  Either your rent is too high or your place is very undesireable.  Fix one or other or both.

He's not talking about renting to them, he's talking about selling to them (see thread title).  Owner financing as an exit strategy.  You'd require a substantial down payment to overlook their bad credit in case they stopped paying and you had to take the property back.

It's very different than renting to people with bad credit.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

SDREMNGR

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Re: Exit Strategy: When do you sell a property?
« Reply #12 on: June 19, 2014, 12:32:52 AM »
Ah, my bad.  Seller carrybacks?  One of my clients is a pretty decent sized hard money lender and had to take back a lot of properties during the downturn.

Do go into it with realization that you will have to legally wrestle some properties back from these people through foreclosures.

usmarine1975

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Re: Exit Strategy: When do you sell a property?
« Reply #13 on: July 02, 2014, 12:07:53 PM »
I have only today spent some time reading this forum.  I find it interesting to say the least.  I have been buying rental properties for 14 years with the intention of never selling them.  I don't flip as I don't see it as profitable.  I know others have made it profitable (not saying it can't be) for me it's just not the desire.  I manage my own properties.  Tried a management company for a couple months and found that no one cares about my money as much as I do.  Again not saying it can't work it just didn't in my experience. 

I have had rentals rent very quickly and have also had them sit up to 6 months.  Interestingly only 1 of my units has sat for 6 months and it has happened twice since we have owned the property.  It was a 2 bedroom unit with 1 bedroom being smaller then the other.  Also in a City setting.  I came to the conclusion that we needed to list it as a 1 bedroom unit with a spare room for closet, office etc...  The 2nd time it rented much quicker.  We didn't change the price of the Unit.  It had everything to do with how we listed the property.  Just another thought for when a unit is not renting quickly. 

I had looked into having a realtor list it for us and found him to be outside our price range basically wanted 10% of annual rent on first year and every year after if the tenant stayed.  He maybe could have rented it faster but at a long term cost that in my mind didn't make sense.  Granted more than one way to look at that.

We have refinanced all of our properties to 15 year mortgages with low rates.  With the idea of paying off the properties and hopefully at least on my part adding properties in the future as we go.  When mortgaging we look at 30 year mortgages but in the long term they are a lot more expensive.  In my opinion it's a personal preference.  Some prefer cash flow now compared to cash abundance later.

mooreprop

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Re: Exit Strategy: When do you sell a property?
« Reply #14 on: July 03, 2014, 05:17:02 PM »
I agree with Arebelspy that the time to sell is when you can get a better return from another investment, but would also like to add that the time to sell is when you can foresee that something is about to change that will alter the return on your investment.  For example, the property taxes are going to go up due to changes in the rules in your state.  Another example, someone is building new units in the area which will provide significant competition to yours.  If you sell before these changes occur, then you will get a far higher price than if you wait until your cashflow has been negatively affected. 

It is important to pay attention to what is happening in the areas that you invest:)  Other than that, if there is a good return (enough to pay for management if I get too old), then the planned time to sell is never.