By Paul Branton, Director of Investor Services
It’s always a great idea when investing in something to consider your exit strategy. How easy will it be for me to sell this investment? What will be the best way to sell this investment and maximize my return?
Investopedia defines the term exit strategy as: “An exit strategy is a contingency plan that is executed by an investor, trader, venture capitalist, or business owner to liquidate a position in a financial asset or dispose of tangible business assets once predetermined criteria for either has been met or exceeded.”
So what is the best exit strategy for rental investments?
The answer to that question is going to differ a bit for each investor based on their goals. There are a number of different “playbooks” that work. There isn’t a “hard and fast”, “right” or “wrong” but there are some strategies that are better than others.
With that said, I can tell you about one exit strategy that will likely reduce your potential return. That strategy is… Selling your investment real estate while it is still RENTER OCCUPIED.
While this may already make sense to a lot of you, I feel the need to write about this as we’ve recently had a client list and sell their renter occupied property.
Top 3 reasons you shouldn’t sell RENTER OCCUPIED investments:
1) Renters ARE NOT incentivized to help you sell for top dollar.
Simply put, the home may not show as well while it is renter occupied. If the tenants are not clean and tidy, the home may be perceived as being worth less money… and therefore sell for less money.
2) If a lease in place, you significantly reduce your pool of potential buyers.
When the tenants are still going to be living in the home, it is not going to be a house that a homeowner will purchase. In other words, you are excluding anyone that would consider buying the home as a primary residence. If you limit the buyer pool, there is less demand. With lessened demand, you will likely get a lower price.
3) If those first two aren’t enough to deter you… how about the potential added costs?
If the property has a tenant, you undoubtedly paid a fee to put them in the home. Also, does your management contract have any early termination penalties? Will you recoup those when you sell? It’s unlikely.
If you absolutely HAVE TO exit your rental investment while it is tenant occupied, we would suggest you try to facilitate one of these two options:
1) Ask your property management company if they have any interested buyer clients.
This could lessen the cost of selling as well as make for an easier transition on the tenant.
2) Ask the tenants if they would like to purchase the property.
If you are doing this, you should consider all of the costs associated with selling and work with the tenants to purchase “off-market” at a lower price. – This could be the best possible “Win-Win” scenario.
What’s your exit strategy?
I’ve heard it said of real estate that the best exit strategy is to keep holding.
Paul Branton, Director of Investor Services
Home Rental Services, Inc.