What’s a Commercial Real Estate Exit Strategy
Exit strategies for commercial real estate are the ways in which investors intend to dispose of or sell their properties to make a profit and exit their investment. Investors should consider exit strategies as they can help them to achieve their investment goals and extract the maximum value from their properties.
Exit Strategies for Commercial Real Estate
There are many exit strategies for real estate , including:
Listing of the property
- This is the most popular exit strategy. An investor sells the property. This can be done either through an auction or a traditional sale.
Refinancing
- This is when a loan is obtained to repay the property’s existing loan. This is a way to reduce the interest rate, prolong the loan term, and extract cash from your property.
Lease options
- This strategy allows tenants to buy the property at a fixed price after a specified period.
Wraparound finance
- This is done by obtaining a loan to pay off the existing mortgage on the property, and adding the new loan amount onto the property’s purchase price.
Joint Venture (JV)
- This strategy involves purchasing a property with another investor. These partners share in the losses and profits of the property.
Which exit strategies are best for certain property types
The most effective exit strategy for a property depends on its type, investor goals and current market conditions. Here are some examples:
Value-add properties
- Some properties might need to be renovated or improved in order to generate more income. An investor might consider selling the property or refinance as an exit strategy. An investor might purchase a property that needs renovations. This could include updating common areas, adding amenities, or increasing occupancy rates. The investor can sell the property for a higher price after the renovations have been completed or refinance the loan in order to get cash out of the property.
Stabilized income-producing assets
- These properties already generate income and the investor wants to keep the property for longer periods to continue receiving steady cash flow. A long-term strategy of holding the property or selling it may be the best choice. An investor might buy an apartment building that generates a steady income. An investor could then keep the property for several more years, collecting rents and possibly increasing its value through minor renovations and property management. The investor can then decide to sell the property at an increased price once they are ready to leave.
Development properties
- These properties can be raw land, or properties that require development or rezoneing. The investor may want to keep the property until it is developed or rezoned, then sell it at an increased price. An investor might acquire land that is currently zoned as agricultural but believes it could be rezoned for residential or commercial purposes. Investors can then keep the property until it’s rezoned and then sell it to developers at a lower price.
How to Create an Exit Strategy
Investors should do a thorough analysis of the property and the market conditions to determine if they can develop an exit strategy. To help them navigate the process, they should consult an attorney, accountant, or real estate agent to ensure that they are following the correct steps to reach their goals.
An investor should take into account factors like the property’s income-producing potential, potential capital appreciation, as well as the investor’s exit timeline. They should also consider tax implications and legal requirements as these can impact the success or failure of their exit strategy.
After taking all these factors into consideration, an investor can create a plan which outlines the steps that they will take in order to reach their exit goals. The plan should contain specific milestones, timelines and contingencies for unforeseen events.
Every investor should have an exit strategy
An exit strategy is essential for every investor to be able to get the most out of their investments and meet their goals. An investor who does not have an exit strategy may be unable or forced to sell their property.
Investors can also be proactive about managing their properties and making decisions to increase their property’s value over time by having an exit strategy. An exit strategy also allows investors to reduce their risk by having a plan for when the market conditions change or the property doesn’t perform as expected.
A commercial real estate exit strategy is a crucial part of the investment process. This strategy allows investors to get the most value out of their properties and maximize their return on investment. Investors can be successful in commercial real estate by carefully considering the different exit strategies and creating a plan that suits their goals and property type.
Continue reading: Real Estate: Building a Clear Investment Strategy
Deeper dive into each type of exit strategy
Property sale
The most straightforward and common exit strategy is to sell commercial real estate properties. This strategy involves finding a buyer to make a profit from the investment. A broker, real estate agent or direct buyer can all help you sell your property.
A property investor bought a strip mall at a discount and made improvements to it. This is an example of a successful exit strategy. The investor was able sell the property for a substantial profit after increasing its income-producing potential and improving its curb appeal.
Another example is the investor who purchases a property and makes improvements to it. Then, he sells the property at an increased price when the market is hot.
A property sale can be complicated and time-consuming. Investors should be ready to put in the effort to find the right buyer and negotiate the sale. Investors should also be aware of the possibility that a property sale could be subject to taxes or other legal requirements.
Refinancing
Commercial real estate investors often use refinance to get cash out of their properties without having to sell them. The strategy involves getting a loan to repay the existing property loan. The investor can use the new loan to repay the old loan and also to provide cash.
Investors might buy a property and refinance it later with lower interest rates if the market improves. This could help the investor lower their overall costs as well as increase their cash flow.
An investor may also purchase a property using a short-term loan such as a hard-money loan and then refinance the property using a longer-term loan once the property has appreciated in price.
Refinancing is a complicated process. Investors should be ready to spend time and effort finding the right lender and negotiating loan terms. Refinances may also be subject to tax and other legal requirements.
Read More: Commercial Real Estate: Financing Your Investment
Lease Options
The lease option allows tenants to rent out property and have the possibility of purchasing the property later. This strategy allows investors to generate cash flow while the tenant can purchase the property in future.
An investor might choose to lease the property to tenants with an option to buy if he or she purchases a property in dire need of repairs. After making repairs to the property and increasing its value, the tenant may be able to buy the property.
An investor might also buy a property, lease it to tenants for a period of time and then sell the property to the tenant at a predetermined cost at the end.
It can be difficult to negotiate lease options. Investors should be ready to spend time and effort finding the right tenant as well as negotiating the terms of the lease. Investors should also be aware of the possibility that lease options could be subject to taxes or other legal requirements.
Wraparound Financing
Wraparound financing allows investors to buy a property by taking over an existing mortgage and adding a second mortgage. Investors can purchase property with this exit strategy without needing to be approved for a traditional mortgage.
An investor could purchase a property with wraparound mortgage and make a down payment. Then, he or she would assume the mortgage payments. Investors can rent the property out and make a profit by charging rent that is higher than the mortgage payment.
An investor might also buy a property in foreclosure and use a wraparound loan to cover the mortgage and keep the property from being foreclosed.
Wraparound financing is a complicated process. Investors should be ready to spend time and effort finding the right lender and negotiating loan terms. Wraparound financing can also be subject to tax and other legal requirements.
Joint Venture (JV)
A joint venture is a partnership in which two or more investors work together to buy and manage a property. This exit strategy allows investors pool their expertise and resources to buy and manage property they might not otherwise be able to.
An investor may have the financial resources, but not the experience to buy a property. They can buy and manage a property they might not have been financially able to do so individually.
An investor can also team up with a property manager if they have the resources and experience to buy a property. They can buy the property together and then manage it with the expertise of the property management company.
Joint ventures are often a complicated process. Investors should be ready to spend time and effort in finding the right partner and negotiating terms. Investors should also be aware of the possibility that joint ventures could be subject to taxes or other legal requirements.
Any investor who is interested in purchasing or managing commercial real estate properties should consider commercial real estate exit strategies. Each exit strategy comes with its own benefits and drawbacks. The best strategy for you depends on your goals, expertise, and resources. Investors can make better decisions and maximize their returns by understanding the various exit strategies available and how they can be applied for different property types. To ensure a successful investment, investors should have an exit strategy that is well-thought out. This can be used for refinancing, leasing options, wraparound financing, sale of property, or joint ventures. You should consult professionals like accountants, real estate lawyers, and financial advisors to help you navigate the process and determine the best strategy for you.
Frequently Asked Question
A commercial real estate exit strategy is the plan to sell or dispose of property in order achieve a financial goal or realize a profit.
There are many exit strategies available for commercial real property. These include selling, refinancing, renting the property to generate rental income and using the property as collateral in other investments.
The property’s unique characteristics such as location, condition and potential income generation or appreciation will determine the best exit strategy. A property in good location and in good condition might be a good choice for a sale. However, a property in dire need of major repairs or refinance may be better suited to be rented.
Investors should take into account their financial goals, the properties and current market conditions when planning an exit strategy. To better understand the various exit options, investors should consult a financial advisor.
There are many reasons why having an exit strategy is important. Investors can extract the maximum value from their properties and achieve their investment goals. They also minimize their risk. An exit strategy also allows investors to take control of their properties and make decisions that will increase their property’s value over time.
An exit strategy can be modified and changed according to market conditions or investor’s personal circumstances. To ensure that the exit strategy is in line with investor’s goals and objectives, it is important to regularly review and update it.
