In today’s market, many real estate exit strategies exist. Having a well-defined exit strategy to account for your financial goals, market conditions, or personal circumstances is as crucial as the initial purchase decision. 

Why Real Estate Investors Should Plan an Exit Strategy 

Even though a real estate investor might think that a property is the perfect investment, they should always have an exit strategy in place.  Firstly, it provides a clear plan ensuring that the investor can achieve their investment goals, whether it’s maximizing profit, minimizing losses, optimizing passive income, or achieving a specific rate of return. An exit strategy helps investors stay prepared for market fluctuations, enabling them to act quickly in favorable conditions or mitigate risks during downturns. 

It also allows for better financial planning, as understanding the exit path can influence initial property investment decisions, financing methods, and ongoing investment strategies. Moreover, the right strategy can significantly reduce stress and uncertainty by giving borrowers a backup plan. By planning the exit, investors can optimize tax implications, align the investment with their broader financial portfolio, and ensure liquidity is available when needed for other investment opportunities or personal needs.

Overall, an exit strategy is not just about when and how to sell; it’s an integral part of successful real estate investing that ensures the investment aligns with the investor’s changing needs, market conditions, and financial objectives.

 Here are some common bridge loan exit strategies that we deal with here at Montegra Capital.

4 Common Real Estate Exit Strategies 

The Borrower Refinances the Property

Hard money lenders typically deal with loans that traditional banks will not fund. In many cases this is because a property’s rent roll and cash flow are not stabilized. So, a hard money loan can be a great choice while making improvements and stabilizing rental income. After rents are stabilized, borrowers can refinance the property with a traditional lender at a lower interest rate.This is the second most common way in which borrowers pay off loans with Montegra.

The Borrower Sells the Property

This is probably the most common way in which Montegra’s borrowers pay off their loans with us. Selling the property offers investors a clear path to liquidate assets and realize potential gains. However, in order to make money, this approach hinges on timing of the real estate market to sell at a peak and requires a deep understanding of market trends, property values, and buyer demand. It also demands consideration of factors such as capital gains tax and transaction costs. By carefully planning and executing the sale, investors can effectively capitalize on their investment, turning tangible assets into liquid capital that can be reinvested or used to meet other financial goals.

The Borrower Pays-Off the Loan after Getting Additional Cash

Borrowers often get additional capital from selling other properties or from other business deals. In this event, these funds may be used to pay off a hard money loan. Alternatively, borrowers often pay down the principal on the hard money loan and talk to bank lenders about more favorable terms. Borrowers then return to their traditional banker who may be more receptive to financing the investment property when the amount needed is smaller than the original request.

The Borrower Receives a Principal Discount on a Loan

Another scenario, which is becoming more common in the current market, is for a borrower to ask their bank (which holds their commercial real estate loan) if the bank would discount the amount of principal due if the borrower pays off this loan ahead of its due date. Banks, which are under pressure from the Federal Reserve regulatory agencies (such as the FDIC and OCC) need to lower the amount of their capital that has been put into commercial real estate loans. It is always worth talking to them about this possibility. If this scenario works it is “found money” for the property owner. The catch in this strategy is that when a bank bites the bullet and offers a discount, they want to get the loan paid off in a very short time frame. This is an example of where setting up a relationship with a private lender in advance could produce real results when “time is of the essence”.

Choosing an Exit Strategy

Some types of exit strategies will be better suited to different types of borrowers. Choosing the best real estate investment exit strategy requires careful consideration of several factors tailored to your investment goals, market conditions, market value, and the specific characteristics of the property. You also need to evaluate the financial implications of different exit strategies and understand the different possible timeframes. We recommend consulting with professionals to discuss your specific situation. Significant due diligence, evaluation of your risk tolerance,  and a dose of cold hard realism are advisable as you plan to take out a private capital loan and then pay it off in a set time frame.

One practical way to think about exit scenarios and project schedules is to work backward. So, think about the final investment exit strategy, understand your current situation, and then fill in the gaps. This is a great way to keep projects on track and spot any obstacles that could throw a real estate investment off track early on. Another benefit of working backward is one can set a simple reminder in the calendar to begin talking to banks, buyers, etc.

Over the past 50 years, Montegra has funded over $600,000,000 of loans, helping Colorado investors finance their real estate purchases. If you are interested in taking out a Colorado hard money loan, contact us today.