What’s Your Residential Real Estate Investment Exit Strategy?
By Kerry Curry, Contributing Writer
It’s a great time to be a residential real estate investor: Rents are on the rise and return on investment is robust in many markets.
Even in a “hot market”, there are multiple reasons why a residential real estate investor may want an exit strategy. Exiting your residential property investments may boil down to a desire to tap your equity in real estate to pay for college, fund your retirement, pay off bills or invest in something else.
“My exit strategy is determined before I purchase the property,” says John Agostinelli, a residential real estate investor and the owner of Agostinelli Realty Group, based in the Boston area. “I invest money where there will be an appropriate return on investment and then I sell it expeditiously once the project is done,” says Agostinelli who does some fix-and-flip investing.
“Study your market and whether it is a good time to sell,” suggests Barbara Rossberg. Rossberg is an asset manager and real estate broker in Orange County, Southern California, who represents real estate investors, including retirees who have multiple properties. “It also depends on the investor and what their goals are — short-term and long-term.”
If you plan to exit your residential property holdings, there are a number of things to consider:
- Look at options to lessen your tax burden. If you are open to investing in another property, a 1031 exchange is an option. The swap of one investment property for another may allow an investor to defer the recognition of capital gains upon sale, essentially deferring the taxes due. But there are other options to defer taxes and leave a legacy for your children as well, says Rossberg. Be sure to consult a tax specialist for more information on how your taxes will be affected by a property sale.
- If you are going to sell, decide how. You can hire a real estate professional to market your properties or sell the property yourself. You may want to focus on selling to another investor, or you may want to market to a broader range of buyers including owner-occupants. You may even want to consider auctioning your property if you need to liquidate quickly. “Typically, if the property is in good and financeable condition, you’ll get more from an end-user buyer than you will from a real estate investor who is looking to make a profit,” Agostinelli says.
- Prepare your properties. A property in move-in condition with the latest upgrades will sell for a higher price than one that needs considerable work. Properties that have been used for years as rentals will often have a “worn” appearance that will affect the sales price if they aren’t renovated, said Agostinelli. Agostinelli said he would treat a long-term rental property being prepared for sale in the same way he would a fix-and-flip: Replace or refinish heavily worn flooring, upgrade appliances, replace countertops and add curb appeal. Rossberg said investors should also make sure to clean the property and do necessary repairs before listing. Marketing is also important, she said. “Know your area and how to market the property to the targeted buyer profile. Know what is valuable — the schools and parks. Be aware of those kinds of things.” Investors may need to decide whether the cost of the renovations will allow the investor to recoup their renovation investment plus a return. If they start to do repairs and then run into serious issues, it may be best to offer a reduction in price to an investor to move the property, she said. “If I had $10,000 in repairs and could get $15,000 more in the purchase price, then it would make sense. Even if the repairs don’t return 1.5 percent on cost to cure, if the repairs will improve marketability and decrease time on the market, it may be advisable, especially if you are trying to sell in an off season time-frame,” Rossberg said.
When investing, it’s always smart to think ahead. Know what you want to accomplish with your residential real estate investments. That means exploring exit strategies and what will work best to meet your investing goals.
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