September 9, 2024 | 4 Minute Read
When buying an investment property, it’s crucial to ensure you have at least two exit strategies in place. What if your flip doesn’t hit your profit target, or the property sits unsold on the market? Having a backup plan is essential to protecting your investment and avoiding financial setbacks.
Initially, the numbers may look great—renovation costs, holding time, capital usage, projected sales price, and your minimum profit target. But things don’t always go as planned.
After more than 2,200 projects since 2002, I’ve learned that no two projects are alike. Each one presents unique challenges, and there are always unexpected turns. Because of this, I’ve become very conservative in my approach. I pass on projects that less experienced investors might pursue aggressively. However, experience has taught me that caution can save me from trouble down the road.
Not every project is worth pursuing, and those of us who went through the 2008 crash understand that better than most. Some of my best decisions have been walking away from deals after identifying that one critical variable that made the project too risky. While I sometimes see other investors take on those projects and turn a profit, I’m comfortable with the decisions I’ve made because I prioritize long-term success and risk management.
This brings us to two critical questions:
What is your primary exit strategy before you submit an offer on the property?
What is your backup exit strategy if the primary plan doesn’t work out?
If you’re not asking yourself these questions before every purchase, you’re exposing yourself to unnecessary risk. One bad deal can lead to financial ruin or even bankruptcy. There’s no shortage of investors throwing “stupid money” at bad deals—don’t be one of them.
So, what should you do if your property is on the market but not generating interest? Take a step back and ask if additional upgrades could make the property more appealing. Is there an opportunity to add value by creating another bedroom or bathroom? What about finishing a basement to increase living space? Even small changes can significantly impact the marketability and sale price of the property.
If investing in additional upgrades don’t sell the property, enter the “slow flip” strategy.
What is a Slow Flip?
A “slow flip” is an alternative exit strategy that should be considered when your property doesn’t sell as quickly as expected. Whether due to market conditions, pricing, or other factors, you may find yourself holding onto the property longer than anticipated. Rather than letting holding costs eat into your profit, you can shift your approach to cover those costs and potentially generate income. Here are some common strategies to implement during a slow flip.
1. Rental Property
If selling isn’t working, turning the property into a rental can generate cash flow while you wait for a more favorable selling environment. But which rental strategy is better: long-term or short-term?
If you plan on holding it for more than a year or have a high interest hard money loan you need to pay off, consider refinancing with a DSCR loan. Contact our sponsor REI Brokers to further discuss.
Long-term rentals provide steady, guaranteed income with less hands-on management. However, they often come with smaller profit margins.
Short-term rentals (Airbnb or VRBO) have the potential to significantly boost income—sometimes 5-10 times more than long-term rentals—but they require more active management and come with greater risks. If you opt for short-term rentals, the location must be desirable for this type of rental. Negative reviews from unhappy guests can harm future bookings and reduce profitability.
2. Turnkey Sale
The future sales price of the property should also factor into your decision. If you convert to a long-term rental, many investors will apply the 1% rule, meaning they’ll only want to pay a price where the monthly rent is at least 1% of the purchase price. For example, if you’re charging $1,200 in rent, a buyer may not want to pay more than $120,000 for the property.
Long Term Rental Sale: What happens if the after-repair value (ARV) is $150,000 on this $1,200 per month rental? Are you prepared to leave $30,000 of equity on the table?
Short Term Rental Sale: If the property is generating $2,500 per month as a short-term rental, you will be able to justify a higher sales price, even $150,000 or more, as long as the property appraises at your asking price.
Accurately determining the future sales price based on your rental income will be critical to maximizing your profits.
3. Seller Financing or Rent-to-Own
Creative financing can be another excellent slow flip strategy. Offering seller financing or rent-to-own agreements can attract buyers who may not qualify for traditional loans, while allowing you to earn a higher sales price and monthly cash flow.
Contract for deed: You agree to transfer ownership once the buyer completes the payment terms.
Lease option: The buyer rents the property for a set period, with an option to purchase at the end of the lease term.
Both options typically allow for higher sales prices and monthly income, but be sure to work with a legal professional to ensure everything is done correctly.
The “slow flip” strategy is a valuable tool for investors when their original plan doesn’t go as expected. By being flexible and adapting to market conditions, you can mitigate losses and even improve your profits over time. Always have more than one exit strategy, and make sure you’re prepared to pivot when necessary to protect your investment and secure long-term success.