Hey there real estate investors! Lee Arnold here…
So, one of the questions I get fairly often has to do with exit strategies — how I choose the right exit strategy for any kind of deal.
Well, I share with folks that I actually have a 5-tiered sequence of exit strategy preferences that I use as a filter for almost every single deal that lands on my desk.
And, here they are in order:
- Wholesale
- Wholetail
- Fix it and retail it
- Lease option
- Hold it and rent it
Now, you may notice that wholesaling is at the top. And you may be thinking, ‘Are you saying that you actually try to wholesale every single deal?!’
Well, yeah, I almost always do.
And, here’s why…
When you write an offer or purchase a property, your first exit strategy should be to wholesale it.
Now, seasoned veterans know that we always want to wholesale every deal — whether we’re buying it for flipping it as a wholesale, or we think we’re going to buy it for cash flow — we always wholesale it first.
Here’s a prime example…
I had a fourplex deal. And as a standalone asset, it’s a great investment. We’ve got $1,500 a month in each unit, so we’re bringing in $6,000 over the four.
We picked it up for $645k.
So we’re safely in the rule of 1%.
And it’s going to cash flow if we keep it at $1,800 to $2,200 a month… and for most, that’s really good cash flow.
However, I’m listing it on the MLS for $899k. Seem high? Well, here’s why…
Because if I don’t get it, I don’t care.
But, think about it in these terms: I paid $645k. If we sell it for $899k, that’s a $254,000 profit. Now, let’s call it $2,000 a month in rent. That’s pretty good. But it’s going to take me 12 months to make $24k, and it’s going to take me about 10 years to make $220,000.
So, I can generate the same income in a matter of weeks that it would take me 10 years to do if I keep it as a rental.
Now, of course, there is a reason to buy cash flowing properties and hold them for rent — because we need the consistency of income.
The nice thing about buying cash flow real estate is I do the work today and I get paid every month moving forward.
With an Exit Strategy, keep goals in mind
Many of you know my rule: Goal No. 1 — I want you to have a quarter of a million dollars in cash. So, unless you have a quarter million dollars in cash, be careful about simply buying to hold.
And, we want to be mindful of the strategy of wholesaling — the order is wholesaling, retailing, and then renting — because wholesaling and retailing is the fastest path to get to that first goal of $250k in cash.
And then there’s goal No. 2: 1 million dollars in investable assets (excluding equity in your primary residence).
Now, maybe you’re an accredited investor, which means you’ve got $1M in investable assets (excluding the equity in your primary residence), and you’re doing pretty well financially… but you’re probably getting killed in taxes.
Now, I don’t know about you guys, but April 15th sucks big time, because I have to pay a fortune in taxes.
Why?
Well, if you make a lot of money, you’re going to pay a lot of money in taxes. But, we can offset and eliminate a lot of that tax burden by owning rentals where we get cash flow…
But we also get appreciation, depreciation and cash flow, and a lot of that we can write off.
So, some of you are in that place where you need to have a more balanced, blended portfolio, where we don’t want to be flipping all the time because it creates this massive tax burden, and we need to be looking at buying and holding for the tax benefits and the cash flow.
Now, you may not realize the full potential of the profit as you would if you fixed and retailed it, but you can begin building your liquid capital faster, which will eventually allow you to fix and flip multiple properties and truly build up your wealth in the future.
My 5 preferred deal exits, in order…
#1 Wholesale
#2 Wholetail
#3 Fix it and retail it
#4 Lease option
#5 Hold it and rent it
And there you have it…
My 5-tiered approach allows you multiple extra strategies. So, regardless of where you ended, you’re going to make money.