What Is a Real Estate Exit Strategy and Why You Need One!

Exit strategy

Exit strategyJust as a great deal of planning goes into crafting a business plan, so too must an equal amount go toward preparing a solid exit strategy. By having a robust exit plan, you can hedge against the occasional bad purchase and maximize the total return on your investment when the time comes to divest.

The more exit strategies you can come up with, the more control you may have over external forces. For instance, if you purchase a house to flip and find yourself stuck with a property you cannot sell at a profit, you may rent it out instead and protect your investment.

In real estate investing, you should hold on to properties that best suit your goals and divest yourself of those that do not. When formulating goals, make sure to follow the time-honored S.M.A.R.T. model, which stands for goals that are Specific, Measurable, Attainable, Realistic and have a Timeframe.

When divesting, the best way to go about it is to spread the sale of your properties over a number of years so as to minimize capital gains taxes. If possible, try to sell assets that are at least a year old so you can qualify you for the long-term capital gains tax rates instead of short-term capital gains tax rates. In addition, by strategically harvesting gains in certain tax years, you can potentially reduce your tax liability. Many investors will purposefully await years in which they fall into a lower tax bracket to realize capital gains on their investments.

Here are some common property investment exit strategies:

Sell and Walk Away: If you go this route, keep in mind that you’ll be looking at capital gain taxes. Investors who can bide their time are more likely to maximize returns as they are able to harvest tax gains, make improvements and repairs to increase home value, and take advantage of favorable market conditions.

1031 Tax Deferred Exchange: To minimize capital gains taxes, some investors opt for a 1031 exchange and move all of their equity into a like-kind property. Like-kind properties are real estate assets of a similar nature that can be exchanged without incurring any tax liability under Section 1031 of the Internal Tax Code.

Lease Option: A lease option is an agreement that gives a renter a choice to purchase the rented property during or at the end of the rental period. This is a great option for investors who want to exit an investment in the near future but do not want to rush.

Seller Financing: Seller financing is a real estate agreement where financing is provided by the seller instead of a traditional bank or lender. These arrangements typically include a down payment of at least 30% and a balloon payment due from two to five years. While it allows move a home faster and get significant return on the investment, it is not without its risks. A buyer may default on the payment forcing you to take the property back.

Cash-Out Refinance: If you have equity in a home, a Cash-out Refinance is a method you might consider that allows you to both refinance your home and borrow money at the same time. A cash-out finance replaces your existing mortgage with a new loan with a higher balance, sometimes with more favorable terms. The difference goes to you in cash so you can perform upgrades to your home, consolidate debt, or for other financial reasons.

Do you have any questions about real estate investing? RLG has the tools and experience to guide you with your personal and investment properties. Call us today to learn more and experience firsthand the dedicated, personalized customer service and undivided attention that RLG has to offer!

Five Important Inspections for Investment Properties

Home Inspections

Home InspectionsReal estate investors may sometimes be willing to shrug off the need for professional inspections as they plan to renovate their properties. A home inspection, however, can save both residential homebuyers and investors serious headaches and money down the line.

Licensed inspectors will thoroughly examine the house for issues and conditions that sometimes are not apparent to the untrained eye. Armed with a detailed report, investors are more likely to make an informed, financially sound decision on the purchase and have more latitude to negotiate the price with the seller.

As an investor, there are some areas that you should pay careful attention to during the inspection to ensure you’re investing in the right property. Following are five of these areas of concern:

Structural Components

Inspectors will examine the foundation of the house as well as the attic space to search for any damage or water leaks. Should there by an foundation repairs necessary, many real estate investors will choose to walk away and look elsewhere for a property as these repairs can be exorbitant

Roofing

Roof inspectors examine roofs and ceilings for leaks, damage, mold, rotting wood, and more. If the house you are purchasing has a roof that is 20-25 years old or shows visible signs of damage, you may want to consider a roof inspection. Replacing a roof can be almost as expensive as some structural repairs, so investors should thoughtfully take inspection findings under advisement.

Plumbing

Inspectors will examine pipes, drains, vents, and waste systems to ensure they are free of leaks and obstructions. As plumbing is something that requires professional expertise, expenses can quickly add up. A proper inspection can save you quite a bit of cash!

Appliances

While you may expect to upgrade dated appliances such as fridge, stove, and dishwasher, there are other appliances that you are less likely to replace. These include heating and air conditioning units, hot tubs, and electric fireplaces.

Mold

Mold inspectors visually assess the house for mold and test surfaces and air. If your general home inspector picks up any mold during their inspection, it is a good idea to have the home inspected further for mold issues. Fungal growth not only poses a health risk to residents, but also weakens the structure of your property if left untreated.

Are you ready to invest in real estate and see the value it can provide? RLG would love to help you! Call us today to learn more.

The 203(k) FHA Loan: Adding on Your Rehab Costs to Your Loan

5 little red houses, The 203(k) FHA Loan: Adding on Your Rehab Costs to Your LoanAn 203(k) FHA Loan, sometimes called a Rehab loan or FHA Construction Loan, allows you to buy or refinance a home that needs work. With this FHA loan, you can include in your mortgage the dollar value needed to repair or upgrade the home. Your loan will then cover the purchase or refinance price and the cost of upgrades, allowing you to pay for the renovations over time as you pay down the mortgage. This is a superb financing tool that may allow you to get into an area where turn-key homes are more expensive. It is important to remember that in order for a lender to approve financing, the home must meet certain safety and livability standards. As 203(k) loans are insured by the Federal Housing Administration, lenders may be able to offer more lenient qualification requirements than other type of renovation loans.

The process for an FHA 203(k) loan is quite similar to that of regular home buying, but with a few extra steps:

  1. Apply with a 203(k) approved lender
  2. Get approval for the loan
  3. Select a contractor for your renovation project
  4. Get estimates for the project
  5. Close the loan
  6. Complete the repairs
  7. Move into your new home

Are you interested in a 203(k) loan or would you like more information? RLG has the tools and resources at its disposal to get you on your way. Call us today to experience firsthand the dedicated, personalized customer service and undivided attention that RLG has to offer!