What Is an Exit Strategy in Real Estate? (+ 9 Steps to Create One)

Disclaimer: PropStream doesn't offer investing advice. Before creating an exit strategy, we recommend consulting the necessary professionals and doing your due diligence.

You’ve probably spent hundreds of hours figuring out how to find the best deals on properties. But how much time have you put into thinking about your exit strategy? While getting a great deal is critical, all your hard work can go down the drain if you don’t plan how you’ll eventually make a profit and cash out.

In this article, we’ll explore what a real estate exit strategy is, why you need one, and how to create your own.

What Is a Real Estate Exit Strategy and Why Do I Need One?

An exit strategy in real estate describes how you will cash out your investment. In other words, it’s planning when and how you’ll liquidate your equity and, in most cases, sell your property. Crafting a real estate exit strategy is essential to maximize your ROI and avoid breaking even or losing money on your property.

Although most exit strategies involve selling, they can also include other ways of accessing your home equity. For example, you could use a home equity loan to liquidate some of your equity and buy another rental property.

It’s wise to start thinking about your exit strategy as early as possible—perhaps even before you buy your property. This gives you time to determine and prepare for the most profitable cash-out method.

9 Steps to Create an Exit Strategy for Your Investment Property

Now that you know what an exit strategy is, you can use the steps below to create your own.

Step 1: Define Your Investment Goals

Do you want to build long-term wealth through appreciation? Would you prefer to cash out quickly? Maybe you’re looking for steady cash flow.

Whatever your goals are, flesh them out now. This will help you create a timeline and specific financial goals for your investment property.

Step 2: Analyze the Market

Research current economic conditions, market trends, and property values to make an informed decision. You should also analyze interest rates, supply and demand, and demographic data in your area.

Next, look at future developments in your area that may impact the real estate market. This includes new apartment buildings, residential neighborhoods, business developments, and economic or employment projections.

Step 3: Weigh Your Exit Options

Before choosing an exit strategy, make sure you weigh your options. Here are a few exit strategy examples to consider:

• Sell: Selling on the open market is the most common way to liquidate your real estate assets. This strategy works best in a seller’s market when home prices and buyer demand are high.

• Seller financing: If you don’t need the equity immediately and want to earn interest on the sale, consider seller financing. This means you act as the buyer’s lender. They give you a down payment on the home and pay you the rest in regular installments with interest. Be sure to carefully vet a buyer before going down this route.

• Refinancing or home equity loan: While not a true exit strategy in the traditional sense, refinancing or taking out a home equity loan allows you to access some of your equity—perhaps for a down payment on another property.

• 1031 exchange: By selling your property and using the proceeds within a specific timeframe to buy another one, you can potentially defer paying capital gains tax. In theory, you could keep doing this until you decide to leave the real estate business for good, should everything be planned and executed strategically.

• Leave it to someone else: You don’t have to sell if you don’t want to. You can buy and hold perpetually, leaving your property to your spouse, children, or business partner in your will.

Step 4: Set Financial Goals and a Timeline

With your exit method in mind, consider a precise financial goal for your property. Maybe you want to make $25,000 on a 2-bedroom fix-and-flip project. Or, perhaps you want your property to appreciate by at least $250,000 before you sell. Whatever your goal, make it specific and write it down.

Next, create a timeline for your exit. This will involve research, such as talking to professionals or analyzing your local market. Will it take you six months to renovate your fix and flip’s bathroom and add a bedroom and then another two months to sell it?

Or, based on average appreciation rates in your area, maybe it will take 15 years for your property to be worth $250,000 more than you bought it for.

Step 5: Plan for Taxes and Fees

The easiest way to make less profit than anticipated is to forget taxes and fees. We recommend consulting tax and real estate professionals to determine the amount you may need to pay when you sell, refinance, or give your property to your children.

For example, when selling a property, you’ll likely need to pay capital gains tax, seller closing costs, any outstanding mortgage debt, etc. When refinancing, you don’t have to worry about capital gains tax or commissions, but you’ll still have to pay closing costs. If you gift the property to your children or leave it to them in a will, you or your children may have to pay taxes (plus lawyer fees if the home goes through probate).

Step 6: Have a Backup Plan

Unexpected events like economic recessions and new regulations can derail your exit strategy. That’s why a backup plan is essential.

For example, if you plan to flip a home but it doesn’t sell due to a market downturn, you could choose to rent it out and allow it to appreciate in value. Or, maybe you decide to refinance instead. Think of scenarios that could negatively impact your exit strategy and devise a few alternatives that would still allow you to reach your goal.

Step 7: Prepare Your Property

As you approach your exit, start getting your property ready.

That might mean adding a fence or repainting the outside to enhance curb appeal before you sell. Perhaps adding an extra bathroom or bedroom would increase the selling price by $30,000. Or, maybe you need to work on paying off any liens so your children don’t have to settle them when they inherit the property.

Take stock of your property’s needs and make a plan to complete them.

Step 8: Monitor the Market and Adjust Accordingly

Keep your eye on any market trends and new regulations that could affect your exit by monitoring real estate data, reading the news, and keeping in touch with other investors and agents in your area. The real estate market is relatively unpredictable, so be ready to adjust your exit plan if things don’t go the way you expect.

Step 9: Execute Your Strategy

Congratulations! It’s time to execute your exit strategy and cash out your investment. You’ve worked hard to earn your profits, so take a moment to celebrate your success. Afterward, be sure to take time to review and refine your strategy for future investments.