Real estate investors have a number of exit strategies they can pursue with a property. Many use a combination of these strategies, depending on market conditions, their needs, and their goals. In this article we will give an overview of the strategies. In later posts we will go into more detail regarding each.
Wholesaling: There are a couple of primary ways to wholesale real estate… both of which involve getting a property under contract and finding an end buyer.
The first method is via an assignment of the sales contract. Using the assignment method the investor (B) enters into a contract with the seller (A) and then assigns the contract to the end buyer (C). The assignment fee is paid by the end buyer to the investory/wholesaler at settlement. The result is an A–>C transaction where only one Deed is required and thus only one set of closing costs is incurred.
The second primary method of wholesaling is a double-close. Using this method the investor enters into a contract with the seller and goes to settlement on the A–>B transaction. The property is then re-sold to the end buyer in a B–>C transaction. While this method does require two sets of closing costs, it is often preferred in certain circumstances such as when an end buyer has not been located yet or requires additional time to close or when the spread between the original contract purchase price with the seller and the price with the end buyer is significant.
Flip: Using this method, a property is acquired by an investor who plans to do some level of improvements to it before reselling it. These could be minor improvements such as repairs, paint, flooring and appliances, or major improvements such upgrading systems and undertaking larger renovations.
Buy and hold: It may not sound like an exit strategy, but it is. This is a long-term investment strategy where an investor purchases a property and holds on to it for an extended period of time. The owner typically intends to sell it down the road but will rent it out in the interim. The rents collected recoup some or all of the investment during the hold time; and in some areas appreciation is a factor.
BRRRR: A very popular buy and hold method used by investors is known as the BRRRR strategy. BRRRR stands for Buy, Repair (or Rehab or Renovate), Rent, Refinance, Repeat. By doing the repairs/renovations the investor’s initial investment can be recovered in a cash-out refinance which is based upon the after repaired value (ARV) of the property. By cashing out the initial investment, the investor can move on to the next property to be BRRRRed. This is a proven method for growing a portfolio of cash-flowing rental properties.
We’ll go into significantly more detail on each of these investment strategies, including how they are financed, in the near future!