1205: Planning your Exit Strategy
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00:01
Welcome to Episode 5 of Season 12 of the Growing Empire Show. Today we're going to talk about planning your exit strategy. So stay tuned.
00:10
Welcome to Growing Empires. Hosted by real estate entrepreneur and trusted investment advisor, Jennifer de Jesus. Growing Empires provides insight to building wealth through passive income producing real estate investments for those who want to build and manage a more profitable real estate portfolio.
00:30
So it's time to plan your exit strategy. And there could be a couple of reasons why you've come to this conclusion. One could be that you are retiring, and you just want to get out, and I mean all the way out, of your real estate investments. Another reason could be you want to trade up. Or you want to use the equity in your property and facilitate the acquisitions of additional properties to scale your portfolio. So you could be exiting from one with the intention to buy into another. You can be exiting different types of assets to diversify your portfolio. Maybe you currently have all your eggs in one basket, and you've decided that it's time to take a little bit more of a safe approach by diversifying those assets. So maybe you're selling some real estate, and going to invest some of those assets in stocks or hedge funds or syndications or something of that nature. Whatever your reason is, though, planning for your exit strategy is one of the most critical components of being successful in that endeavor. There's a couple of reasons why you're going to want to plan. Number one, you got to consider tax minimization strategies. You got to consider your taxable income, and how that impacts your long term strategies for investing or retirement. One of the best ways to do this is to consult your attorney or your accountant, and discuss with your advisory group, how to prepare you and your family, or your business, or your real estate investments for that exit strategy. There are plenty of different types of opportunities to defer capital gains, and other taxable events. And only your accountant, or your CPA, would be appropriate to discuss these strategies with you.
02:28
Another thing you need to consider if you're going down the road to financial freedom, whether that be your retirement or just getting out of your nine to five job, you're going to want to make sure that your cash flow strategy is appropriate for your long term goals. Certain things that you need to consider; paycheck replacement. You want to make sure that you can create cash flow regardless of the market economic or interest rate cycles. And you want to make sure that that cash flow is protected in a manner that will allow you and your family to live a life that is consistent with the financial freedom that you experience today. You're going to want to consider private investments, and industries that are likely to grow exponentially when planning for your retirement. So maybe you are not currently invested in those types of industries or those types of strategies. But you're going to want to consider all things regarding your ability to grow your cash flow exponentially beyond retirement. You're gonna want to consider diversification. One of the most key ingredients to portfolio success and long term health is your diversification. Your portfolio, whatever it may be, is key to creating an income stream that sustains financial independence. And you want to make sure that your investments are sound, and can weather any storm. So you want to make sure that you're planning for your business exit, or your real estate exit, and that it aligns with your personal financial goals. Not only for today, but for tomorrow and long into the future.
04:04
So let's talk a little bit about real estate exit strategies, or mistakes that you want to avoid. We all know that real estate investing is a very sound opportunity that allows you to make significant amounts of money and achieve the lifestyle that you desire. But there are risks that every investor has to take into consideration. Specifically, you want to consider the factors that impede or even ruin your projected real estate exit strategy. So let's talk about what some of those are. As you're thinking about exiting your real estate investments, which means you're likely attempting to sell them, you want to consider the variety of options that you have. Number one, you want to make sure that you're not doing anything that's going to create a taxable event. That's going to be less than favorable for your financial goals. And to make sure that you prevent yourself from doing that, please work with your accountant, or your CPA, to discuss that plan. Prior to you making the decision. You're going to want to consider whether you're going to utilize the benefits of a 1031 exchange, or a Delaware Statutory Trust. One of the things that I recommend to investors to do is, if you are looking to exit real estate because you no longer want to manage the properties yourself, you no longer want to be bothered by the day in and day out headaches of owning investment properties, there's two really distinctly different strategies that you could consider. One is to hire a very effective property management company. Therefore, you're releasing your ability to have to manage the property, post retirement. It will allow you to sleep at night, not be disturbed by those, you know, midnight phone calls tenant complaints, or deal with things like non payment of rent and maintenance issues. And if you find the right management company, you literally won't have to do anything. As long as you set the boundaries and the guidelines straight from the very beginning. Their job will be to facilitate what you have asked for, and provide updates to you on a regular basis to allow you to understand and watch your investments continue to grow. There is no secret that when you own the investments yourself, that you have far more control over your future cash flow than if you invest your money in a syndication, hedge fund, or other type of trust. However, if you really just don't even want the phone calls, and you don't want to be bothered by a management company calling you for approvals for things, the other thing that you could do, and this is definitely something that I discussed with people that are looking far into long term retirement is, I suggest that they utilize what's called a Delaware Statutory Trust. Essentially, you are taking your money, and you are investing it in shares of this trust. So similar to stocks, your money is held up anywhere from you know, three years or more in many cases. But there's a huge difference between putting your money in a Delaware Statutory Trust, where you literally are not going to ever have to think about it again and owning the assets yourself. One can provide you monthly income, which would be continuing to own those assets, yourself just releasing control of the management of the properties. And again, monthly cash flow is something that's very relative to that situation. However, when you put your money in a trust, like a DST or other type of syndication, or hedge fund, it is very possible that you get only quarterly distributions and sometimes only annual distributions. So your money is tied up much longer, it's not going to provide the steady paycheck that you may be accustomed to. And unless you have other investment strategies that provide that monthly cash flow. A Delaware Statutory Trust might not be the right thing for you. So definitely consider both options and talk to your counsel regarding both to see which one is best for you.
08:11
The episode will continue in just a moment.
08:14
As an investor, we know it's important to stay on top of market trends and real estate opportunities that add value to your portfolio. We also know that having a trusted source of reliable information to help you stay a step ahead of other investors is critical to your success. If you're interested in having these types of resources, as well as access to me and my team, I invite you to join the Empire Investment Club. A free service that gives you an easier way to make sense of today's and tomorrow's real estate opportunities. As a member of the Empire Investment Club, you'll get access to relevant resources and investment focused experiences such as live interactive webinars, market trend presentations, and investor socials designed to equip you with what you need to succeed. So whether you're an active investor, passive investor, a combination of both or just starting out, the club is where you'll get what you need to build a portfolio you love. To join, just head over to JenniferdeJesus.com, sign up, and we'll see you in the club, where everyone's on a journey to becoming a better investor.
09:13
If you do intend to move forward with selling your assets, there's some very specific things that you want to consider. Are you currently having tenant issues that are resulting in a loss of rent? There is no secret that the value of your property is primarily based on the cash flow that is currently happening on your property. And although there's many people out there that like to sell properties based on the projected cash flow, the reality is is most investors are not stupid enough to buy properties like that. They buy based on what it actually is because that's the true valuation of the property. And they utilize a strategy to consider the value add component to see if it's worth it long term for them. As they build that stabilization of the property, will the cashflow get to a point where they can maximize it for their own future financial gains? But if you're having tenants that are creating issues or you have loss of rents, from units because of non payment or other reasons, you're going to want to solve those problems before you consider selling your property. And just to be clear, we're really talking about any strategy of selling the property. So whether we're talking, you're going to sell your property off market, whether you're going to hand over your investment to like a fund where they take on assets of properties, whether you're going to put it on the open market, or any other nature, all of these factors will impact your bottom line value of your property and should be, not only considered, but dealt with, long before you sell that asset. Too many people are in a position where they're struggling with a building for one reason or another maybe failed management, maybe lack of knowing how to stabilize a property, and they choose to sell the property because of the frustration. The problem with that is that you are losing significant equity. Because when you sell a property that is currently in distress, no matter what the reason for the distress is, it's always worth less to the person buying it.
11:24
Is your property one in which a lender may be preventing that property from being financed? Is it a unique property? Does it appeal to only a specific type of investor? If so, you're gonna want to consider that and how you sell the property before you actually get ready to do so. Because if your property is one that needs to have financing, and it's not a financeable type of asset, there's going to be far more challenges for you to successfully sell that property than if it had been just a kind of a cookie cutter investment property that is really high in demand. If your property is in fact, a tough sell, you're gonna want to use the resources of your professionals, your real estate broker, potentially your accountant, your lender that you have a business relationship with, and discuss the exit strategy of this property. And what's the best way to package this for sale for a future investor. Unexpected maintenance cost can cancel out profits. And sometimes those maintenance costs are not necessarily things that you've chosen not to do. They could just be conditions of the property that are unacceptable to a future buyer. So while you may make your property as good as you feel it needs to be for sale, during the due diligence process of the future investor that's purchasing your property, they could come back with significant amounts of credits or repairs that they require. In addition to that, you have to consider how the city is going to view your property. As far as compliance with today's codes. My best advice is always to do the improvements prior to selling. If you do the improvements, there is a much higher chance of you being able to recoup that investment that you put into the property. I have found from experience that every investor perceives the work that needs to go into a building to always be worse than it actually is in reality. So for the investor that owns the property today, it by far will be far less costly for you to do the upgrades, or the maintenance of the property requires and likely going to result in you getting a much higher number for your building than if you left the property go and left those concerns to somebody else. Now, of course, before you make that decision, you do need to talk to your real estate professional because you need to make sure that the market is also going to allow for a successful sale at the time that you're anticipating doing so. And you're going to want to discuss your strategies for improving the property prior to listing the property or selling the property. But the general rule of thumb is always make the improvements because the perception of those improvements will always be far worse to the buyer than they actually are in cost factor to the seller.
14:24
Poor management of the property can diminish value as well and hurt your potential cash flow. So if you're having challenges with the management of your property, you're going to want to make a move to deal with that prior to the actual sale of the property. You're going to want to take a really close look at your income. Take a really close look at your expenses. Is there anything that you can cut out or diminish for the next investor? If you're increasing any of the income and you're decreasing the expenses you're essentially affecting in a positive manner, the net cash flow of the building. The higher the net cash, the higher your return on investment. You also want to consider depreciation of the building, and how that's going to affect you from a financial perspective. And because depreciation is really captured at the time of tax returns, and the potential sale of the property, you're going to want to talk to your CPA long before you actually sell the property to make sure that the timing of the sale allows you to capture the most appreciation in a positive manner, and sets you up for financial success.
15:33
So in summary, what I want to leave you with is just this; exit strategies are definitely not something to consider lightly. If done correctly, they will be an exceptional source of potential cash flow in the future for you, as well as a significant capitalization of your equity that was in the property from all the years that you've owned those assets. This is not a decision that you want to go out alone. You do need to have all of your advisors to consult with to make sure that your strategy and the timing of your strategy, as well as the planning factors that impact your actual return on investment, are considered prior to you actually making the move. And if you take the time to do these things, I have zero doubt that you will be successful in planning your exit strategy. I hope you enjoyed today's episode and until next time, take care.
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For more information about how Jennifer can help you plan, develop and manage a strong real estate investment portfolio visit growingempires.com