Real estate investing can be creative and lucrative. But it can also be unpredictable.
Case in point: Not that long ago, Alberta real estate investors were sleeping soundly to the steady rhythm of rental income dripping into their bank account. Today, some Alberta investors are lying awake at night with a lot more question marks than cash flow.
Of course Alberta is not the only market with nail-biting uncertainty. In my years as an investor and as a real estate agent, I’ve kept my finger on the pulse of markets all across Canada and I’ve seen them rise and then fall… and then rise again (and then fall again).
Unfortunately, investors often wait until a market has dramatically changed before they enact an exit strategy. Worse yet, investors often only have one exit strategy – sell their investment. In this article, I want to expand your thinking about exit strategies and then give you some specific actions to take to proactively protect yourself from market fluctuations.
Move Beyond The Exit
Exit strategies are typically thought to be the plans you enact to get out of a property (i.e. usually to sell it). These are often triggered by some change – either in your own life or business or perhaps in the marketplace. For example, if you are managing your properties yourself and you want to retire, then that’s a trigger to exit your properties. Or if the market moves and it no longer makes sense for you to keep your properties, then that’s a trigger to exit.
But I don’t like the concept of the exit strategy. I think it’s laser focused on only one action, triggered by a multitude of possibilities. There are many reasons why you may not want to sell a property outright but you need to change what you’re doing.
Instead, I like to think of profit strategies instead of exit strategies. My goal as an investor isn’t necessarily to exit but it’s almost always to profit!
With an exit strategy mentality, you end up thinking of your deal as a hold-it-until-you-exit opportunity, which keeps your mind on a single track. You’re only thinking about making money the way you normally make money from that deal. But by thinking about profit strategies, it changes the game: as long as the deal is working for you then keep it as-is. But as soon as something changes, you can implement a different profit strategy – perhaps one that is not an exit but a new approach.
Profit Strategies Are The New Exit Strategies
There are many profit strategies and there’s no way that I can possibly list them all here. But consider these few to get your mind thinking along these new lines. Let’s say you own a single family residence that you have been renting and now you want to consider some different profit strategies:
- You can sell the property, of course. This traditional exit strategy is still a potential profit strategy. And as a real estate agent, I like this option!
- You can renovate the property and sell it (for example, forcing its value by elevating the condition of the property and selling to a retail buyer). As a real estate agent, I like this option event more!
- You might continue to rent but just rent to a different demographic (for example, maybe you no longer want to rent to students but you think your market might be great for empty nesters who are downsizing).
- You can do a rent-to-own deal (for example, converting your rental property into a rent-to-own property).
- You can switch your long-term rental into a vacation rental property or a furnished rental. Rent by the week or month.
- You can change the property from a single family residence to multiple apartments.
- You can change the property from a single family residence to an organizational residence (such as a group home or care home or urban artist’s retreat).
- You can change the property from a single family residence to an office (such as a doctor’s office or accountant).
- You can subdivide a larger property, keeping the house on one side and selling the land or building a structure on the other.
- You can acquire neighboring houses and then rezone and build a multifamily residence.
… And the list can go on and on.
Of course some of these aren’t going to be possible or practical in your situation. I can’t possibly write every conceivable profit strategy, nor will every profit strategy work for everyone. You’ve got laws and marketplace demand to consider; you also have to consider what you’re willing to do.
Ultimately you’re creating options for yourself so you don’t feel backed into a corner and forced to make a knee-jerk “exit-through-selling” reaction.
Step-By-Step: How To Build Profit Strategies For Your Properties
In my role both as an investor and agent, I’m always talking to other investors not only about their plans to do their deal but also what their profit strategies are down the road. When an investor buys a property from me, I ask them what they hope to get out of the property, as well as what their profit strategies are if the market changes. Here’s what I recommend as you think about your profit strategies:
- Start by thinking about your best case scenario. In most cases, you already know what that’s going to be. For a lot of REIN Members, it’s going to be rental property so the best case scenario is that they’ll find a good long-term renter for their property.
- Next, think about various situations that you might face: for example, what happens if the local, provincial, or national economy declines, or if a major employer (and a source of tenants for you) suddenly moves away? Don’t forget to think about situations(s) in your life – such as if your health declines and you can no longer look after the property or if you have an emergency and need an infusion of cash.
- Then consider how you might respond to each of these situations. Remember that selling the property may not always be your best choice. How can you changes things up?
- Perhaps a simple tweak in your marketing might change who your prospective tenants might be. If a major employer leaves town and you decide to switch to vacation rental property, then you might start by marketing on Craigslist or Airbnb.
- Perhaps you no longer want to manage tenants so you switch to a rent-to-own model.
Be sure to identify any changes you would need to make in your business (such as a change in the legal structure or in local permits you’d need to obtain).
- Write these profit strategy contingencies down and store them in a safe place. Revisit them regularly to make sure they are still relevant for you.
These profit strategies are ideally identified before you buy a property but there’s no reason not to sit down and think about them right now for each of your holdings.
Profit strategies give you unbeatable peace-of-mind. They assure you that you’re prepared for many of the circumstances that may come your way. And, they open up the possibilities beyond the “I-guess-I’ll-have-to-sell” approach of exit strategies. Profit strategies help you sleep at night and keep that drip of income much steadier.
In the uncertainty of today’s market, the first response is sometimes a knee-jerk reaction to sell. But there might be a better choice for you.
Brent Roberts started to invest in real estate and bought his first “door” at the age of 18. Brent owned 18 houses prior to becoming a realtor. He decided to take the real estate course in the late 1980’s to become a more educated buyer. He was then convinced to become an agent and has never looked back. Contact Brent at firstname.lastname@example.org.