A Tenant May be Your Best Exit Strategy - Real Estate Investing Notes
Today let's talk about real estate investing exit strategy ideas...it just may be that a tenant will be your best exit strategy! Of course your exit strategy could be any number of different ways, but having your tenant purchase the house is a great one. As every successful person will tell you, “it is important to give back” . Sometimes giving back for an investor is helping by sharing your knowledge.
During your real estate investing career, you continue to acquire a mass of knowledge on how to purchase and structure deals. Structuring deals is paramount to your investment growth and serves as a great tool to give back to those who do not know (or believe) they can purchase a property.
As a smart a real estate investor, you should always have your exit strategy in place at the time you buy the property. An exit strategy structured to be a win win may be a great fit for you. If you are an investor looking to acquire single family homes for capital growth consider doing a lease purchase.
Today there are many good people who need to rent and also would like to get back into home ownership as soon as they are able to. Knowing this is the general make up of your tenants, you can consider the big picture. “Begin as you plan to succeed”. You want a house that will give you cash flow today and capital growth over the coming years.
Your tenant wants a property that will give them the pride of having a home and the ability to purchase it. Remember this must remain a win win for both you and the purchaser.
Existing tenant's goals and their purchase win:
- In today’s real estate market the rents are often higher than the cost of the mortgage for the same home so their payments can easily remain the same or lower
- They will gain all the tax benefits of owning a home
- They save all expenses related to moving into a newly purchased home
- They have the convenience of not having to move
- They now have the pride of ownership
Landlord or real estate investor’s goals and their exit strategy win:
- You save money on liquidation costs
- You learned the process so you can duplicate it over and over
- You saved a lot of time in marketing and selling the property
- You maintained maximum control of the sale (and the timing of it) to help you in repositioning your assets to the next investment
- You helped someone accomplish the American dream of home ownership (some of this does nothing for the pocket book, but is very possibly the best benefit of them all!)
Lease purchase or lease to own:
The laws and guidelines of lease purchases can change state by state so consult with real estate agents and attorneys in your prospective real estate investing locations. What I have found is the safest way for the investor to structure it is to have two documents – a lease to rent the unit and a separate purchase contract to purchase the property. The reason to have these working parallel to each other is to protect you against a tenant that may become a bad apple. If the tenant proves to be non-reliable and you need to evict them for things like nonpayment, you want a separate lease that allows you to evict them. A joint contract (depending on state and rules) may not allow for such an eviction. If the purchase contract is part of the lease contract, you still want to be able to execute one part of the contract without breeching your obligations to the rest of the contract. For this reason two separate contracts working parallel may be your best bet. (check with your legal consultant for the best set up for you)
When the buyer does execute the purchase, per the contract you both win. They acquired a house and you cashed out and can re-position your assets to the next emerging market and make your money work harder. This nicely executed exit strategy will put cash flow in your pocket. Money in the bank when you sell and you will have helped a family realize their dream. A true win win.
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