For the vast majority of us, investing is about making money. That’s all we think about, not the potential losses that may come. But that is part of an investor’s life: knowing when to get out before the losses become too great.
However, the genuinely savvy investors know when to get out at the right time. Sure, a loss is still a loss, but getting out at the right time can mean having the capital to make another investment. This is why investors should have an exit strategy at all times. Here are a few tricks that investors use for their exit.
1. Know the Current Financials
It is essential to understand the current financials, whatever financial property you own. This allows you to craft a multiyear model that focuses on enhancing the property’s value. From there, it can allow for the creation of a value estimation.
With that proper estimation, you can see precisely where you should be and what a property could be worth. Then, if it doesn’t meet your expectations, you can plan on getting out accordingly.
2. Set Clear Objectives
Before you get into investing at all, you should have clear objectives. Know what you want out of that financial investment. When you have that clearly in mind, you can better find what you want to invest in and how to get out if it goes wrong.
“Winging it” can feel like a good thing to do at times, but it is the wrong thing from an investing standpoint. Emotional investing usually means costing yourself a lot of time and money.
3. Know Tenant Law and Sale History
Investing in a rental property offers the chance for wealth growth over time. But with any investment, you should have an exit strategy for when it doesn’t work out. Ensure local tenant laws, rental rate history, and development within the area.
When new inventory comes, rent will decrease. Check out five-year trends to see how rent has been impacted in the area before you make your investment to give you an idea of how you will fare in that area.
4. Stress Test
Stress-testing it at purchase is essential if you want to see how strong a deal is. There are factors to consider – never running out of money, increasing vacancy, increasing exit cap rate, and so on – that the stress test will put to practice.
By stress-testing the deal, you see whether it can hold up under the specific parameters you need to succeed. It is as close to “guaranteeing” the investment as it gets without doing so.
5. Plan for the Worst
The simplest explanation for exit strategies is that they are a plan for the worst-case scenario. We want investments to work out, but not all of them do. This is why having an exit strategy is vital to general investing.
While doing your research for a particular investment, do your research to see the worst-case scenario. When you know what the absolute worst thing that can happen is, you can make the plan to invest or potentially getaway. It is never pleasant, but it is a necessary part of the plan.
6. Buy a Property That Is Easy to Sell
The simplest way to get out from beneath an investment is to buy one that is easy to move. For example, when it comes to real estate, single-family homes are the easiest to sell over any other type of home that you could buy.
This at least gives you the cushion of knowing that you can get out from beneath that investment if it starts to turn sour. Although it isn’t the most feel-good moment to realize that you want to get out from an investment, being able to do so is better than not being able to.
7. Make Your Exit Strategy Multipronged
When you think of getting out from an investment property, it is rarely a simple one. Therefore, having a multipronged exit strategy is necessary from the get-go.
Watch the trends and analyze scenarios to consider what may happen in the market or with quickly changing demand trends. Exit strategies can be simple, but they rarely are most of the time. So make sure that you are prepared to get out through various means.
8. Give Yourself an Out
When it comes to investment property, far too many investors don’t think to give themselves an out when they draw up the paperwork. But having an out – which is known as a “weasel” clause – is a must for any investor.
This can be for many reasons – “subject to lender approval” is a simple one – but it can save you when the deal falls apart at the last minute. Make sure that you have an out clause because you never know when the value could potentially fall apart and leave you and your investment in a less than favorable position.
9. Hire a Home Inspector
For real estate investing, the key is to make sure that you know the property from top to bottom, back to front. If you don’t know all the details, there is a chance that you will miss an essential element that could cost you money in the long run.
With a home inspector, you can ensure that you won’t miss a potentially important detail in the home’s construction. The inspector can point out many “minor” issues that may or may not impact the property on the whole. But the inspector can save you from significant problems that would have otherwise kept you stuck.
