Make sure you know why you are buying your investment property and when it’s time to let go!
People who plan ahead for the future always have an exit strategy in place before they get into a situation. You may be thinking, “What in the world is an exit strategy?”
Putting it into a perspective for investing – if you’ve ever bought stocks, saved money in a savings account, or opened a money market account, you typically know that when you put the money aside, you’re putting it aside for a reason.
Whether that reason is that you’re saving for your child’s college education, to buy a boat, or to buy a new home, you have some sort of reason. Then, you typically are going to look at what the cost is to achieve that goal and break it down to how much you can afford a year, or a month, or a paycheck, and then when you get to that amount, that’s when you can stop or “exit” that investment strategy. This is the same principle for knowing your exit strategy for real estate investing.
The first question I ask myself when looking at an investment property, is “What is my exit strategy?” and consider my options. Do I want to own it for retirement? Do I want to buy it, hold it for a year, and then re-sell it? Do I want to buy the property so that when I retire, it is paid for, I then could rent it out to give me monthly income? Factors like the neighborhood and location may make this a better investment for resale or maybe it’s a place that I want to actually live one day in the future. Knowing the why to the investment can tell me when I need to exit the investment.
When I bought my first property, I didn’t have a clue what an exit strategy was. I really didn’t think about it. I just bought it because it sounded like a good idea. You know…what did I have to lose?
My husband has tried to get me to sell that property many, many times. But that was my first investment property — the first property in my life that I owned by myself which I still own today — so it has sentimental value to it. I bought it all by myself. That’s my property. So maybe it’s an ego thing, maybe it’s a confidence thing, or maybe it’s the fact that the property cash flows very well. Either way, he can’t get me to sell it. I’m keeping it.
Ultimately, my exit strategy for that property, and for almost all properties I buy, is a long-term hold. You see, in my business, I’m not offered a 401K account and I don’t have any type of retirement program or pension with my company, so I have to create my own retirement. I know how much I want to make each month when I’m retired, what monthly salary I need to make, and my properties need to make that amount.
Knowing what year I would like to retire, factoring in that the cost of living might be higher due to inflation, and knowing what kind of lifestyle my husband and I would like to live, I can come up with a figure I need to reach by the time I want to retire. So, my process to get there involves buying the properties and paying them off as soon as possible. The quicker I do that – along with reserving money for repairs and life expectancy issues – the quicker I can start paying down another property, and another, and another. Then by the time I retire, all of my properties will be paid for free and clear, with no mortgage or debt against them – the only costs at that time will be taxes, insurance, and maintenance. I can then keep the properties and have them cash flow my salary when retired, or I can sell them and have a nice chunk of change in the bank to live off of for a while or take a nice trip!
So, when you buy an investment property know why you are buying it and when you can let it go.