Most residential real estate investors choose this asset class to create wealth and achieve financial security. Over time, investors came to know a product in an area that supports the value-add of a renovation scope and the ultimate sale price.
Their business model became set, the team of professionals replicated their scopes of work, and the plan proved profitable. But what about evaluating the exit strategy as another part of the model to improve profit?
As a hard-money lender in Los Angeles, I want investors to focus on different exit plans and know how to measure the risks of each.
The Real Definition of an Exit Strategy
The real definition of a strategic exit is the timing of the debt service against the market conditions to achieve the optimum profit.
The exit from an investment is as important as identifying a property, determining the renovation scope, and managing the process. However, investors cannot fully evaluate a deal when the options for an exit strategy remain unknown.
A well-planned exit will directly affect the return on investment (ROI), as would the time period of a renovation.
Considerations in an Exit Strategy
The key objective of an exit strategy is “strategy.” The important factors investors need to keep in mind are:
- leverage of resources
- market conditions
- financing options
- supply and demand
Each of these factors is discussed below.
1. Leverage of Resources
It is the investor’s experience, the team of professionals, and the plan that enables the team to pivot in cases of delays and changes. Leverage is not exclusive to funding; it also applies to talent. The talent within the team must be recognized, used, and leveraged to recognize “Plan Bs” when “Plan As” are no longer viable. It is essential to follow a plan, but it needs the agility to change before costs are overrun. In instances of overruns, the timing of an exit needs to be measured against the available cash and the adjusted hold period.
The forward plan is directly related to the invested capital at a given point, the location, and the market value of the renovated asset. A property purchased from a motivated seller with the value-add in place in a great area will expand the opportunities for a profitable exit. If the purchase price was higher than projected and the market cannot support the after-repair value, then the options for a strategic exit are limited.
3. Market Conditions
The current market conditions may have changed or did not change at the projected pace, rendering the exit as a negative against the profits. For example, suppose the rental market remained strong, but the value of the existing homes cannot achieve the projected sale price. In this case, it may be the decision to refinance a short-term loan and secure a tenant for cash flow.
4. Financing Options
All financing options need to be considered in case the exit strategy changes. A solid lender on the team with loan programs to accommodate the hard-money loans for the acquisition and renovation and the bridge or permanent loans for a refinance will place the investor in a better position to determine an exit.
5. Supply and Demand
The common denominator in the above considerations is supply and demand. The market conditions can change dramatically from extrinsic factors that have no bearing on the investment. The timing of an exit must be considered against the effects of supply and demand in the housing market with the continued focus on changing trends.
Sometimes, an investor’s tolerance for risk and their preference for involvement after a renovation may outweigh the extra time needed for a higher profit. Financial considerations are not the only factors in determining the exit.
Exit Strategy Risks
The significant risks in real estate investing are financial. The unknowns are the process and the exit if an investor has to change the hold period because of market conditions.
The investor with a fix-and-flip objective may need more time to recoup investment capital and achieve a profit with the recurring cash flows from rent. The investor with the buy-and-hold objective may need to sell after the renovation period if the rental market is no longer strong.
The timing of an exit needs to be fully considered and evaluated as all other aspects of an investment. The pivot in a renovation scope differs from that in an exit strategy.
Time may or may not be the friend of the investor.
If you are in the market for a hard money loan in Los Angeles for your next real estate opportunity and want to discuss exit strategies, it is in your best interest to work with a reputable and experienced hard money lender in Los Angeles. PB Financial Group is a premier, direct hard-money and bridge lender that has provided quick funding since 2007 and closed over 2,700 loans. We aim to satisfy your financing needs efficiently.
PB Financial NMLS #357614/DRE #01522495