When investing in real estate, it’s important to have an exit strategy, in the overall plan. This is especially important when choosing to use a private lender for funding. For example when determining the exit strategy ask yourself; is this a property you want to renovate and sell as quickly as possible, or are you looking to hold the property as a rental and refinance with a conventional lender? These are the questions your lender is likely going to ask when determining if you are a qualified borrower, and how much they can lend on the project.
What is an exit strategy?
An exit strategy is how you plan to pay back your loan at the end of the agreed upon term. It’s basically how you will get out, or exit, from the investment property, earn your return on investment (hopefully) and pay back the loan. With a sound exit strategy in the plan before you purchase the property you will be able to prevent any losses, or at least keep those to a minimum.
The Fix and Flip Exit Strategy
With this exit strategy the intent is to purchase a house that needs repairs, complete the renovations and then relist the home on the market for a profit. This method typically produces the fastest short-term profits for investors who want to then repay the loan and move on to another property to fix and flip. The overall exit strategy is to sell the property.
The Fix and Lease Exit Strategy
Fixing and leasing a property means that you are typically planning on refinancing the property with a conventional lender and holding the property as a rental unit. If you plan to refinance the property you will need to have stronger credit scores than a fix and flip exit strategy. Typically for a fix and lease scenario, lenders only lend to investors with a 660-credit score or higher. Your credit score needs to show your ability to secure another loan by the end of the term.
Do Your Homework!
It’s important to know what you are going to do with a property before you buy it. So do your homework! Experienced real estate investors also have a backup plan or a “Plan B” in their investment plan as well. Having more than one exit strategy gives you options and doing your homework before investing shows you those options. Before you invest do your homework. Plan your exit strategy.
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