When you are searching for new investment acquisitions, do you know your exit strategy before you close on the deal? What measuring stick do you use to determine if you are going to hold a property short term or long term?
Once you think you’re going to get into real estate investing, you should set up either an LLC or a similar entity. This helps protect you and your investments. It will also help boost your chances of getting tax benefits thanks to your business dealings.
Investors use varying matrix’s to determine how long they are going to hold a property. Depending on your investment strategy, you might achieve your financial goals sooner than later, so a short term hold may be the answer. You might be in a high growth market and want to hold longer to capture more of the appreciation.
Find people that are in this business and learn everything you can from them. There are lots of people that want to get into investing in real estate. There are a lot of people who like to speak about this subject. If none are located in your area, you can find forums online where other investors hang out. Get out there and learn from your peers can teach you.
I recently interviewed one of the successful investor who built large portfolio in short time period. Here’s how he determines if the exit strategy will be short or long term:
Problems with tenants can waste a great deal of time for you.
“If I see property, and I do my rehab, and if my rents per square foot are below 70 cents, that’s going to be what I call the Casa. Casa’s usually are deals that I’m going to hold for two years because I’m below 70 cents (per foot per month), usually I’m in a submarket that – it’s okay. It’s not the strongest, and I don’t believe that submarket is going to actually improve maybe for the next five years. However, I’m buying that property for a very good discount.
Be sure to choose regions that have good reputations and where lots of people want to live. This is very important as it will give you the most amount of resale value when you go about your purchase. Try finding property that you can easily be maintained.
If I’m in a submarket that my rents per square foot are above 70 cents, I call that property a Villa. Villas are properties that my holding time is going to be anywhere between 3 to 5 years, or even more than that. I’m going to be in a submarket that I have a much stronger retail – not only mom and pop – but you’re going to find a Home Depot; maybe we’re going to find a Wal-Mart.
Properties near businesses or water can earn you a lot of money.
If I have a Casa and I have a Villa, my rehab changes a little bit. It’s going to be a little bit cheaper for Casa’s. For villas, everything’s a little bit more expensive because it’s directly related to my tenant profile. All my rehab is going to change a little bit, depending whether it’s a villa or a casa.
Understand that your time is money. You may love rehabbing properties, but is all the manual labor really the most productive use of your time? Or would you be better suited to looking for the next opportunity? This will let you to focus on the important details.
It gives us very good direction. For us, before we buy the property now, we have a very clear plan. If it’s above 70 cents it’s a Villa and below 70 cents it’s going to be a Casa. We always have a plan. “
Be very patient when you are first starting out. Your initial real estate investment transaction may not happen as fast as you expected. Don’t get anxious and the perfect investments. That is not a recipe to waste money. Wait a great investment that’s great.
Decide on a short term or long term plan and exit strategy for your properties. If your properties are in low growth markets, and you can quickly realize value, then a strategy to sell sooner may make sense. If your properties are located in high growth markets, then riding the appreciation tide may be the answer. Whatever matrix you use, make sure you have a strategy and a plan for your properties.