As you know, it’s actually pretty easy to flip a house without investing any money of your own…if you know where to find the funds. You should also know that you should always have at least one exit strategy (if not more) for any house flip. But have you thought about how your exit strategy and your funding method sync up? Believe it or not, they’re more closely related than you might think.
How are Funding and Exit Strategies Related?
To help you understand, let’s take a look at a common exit strategy: renting. Renting a property that’s been sitting stale on the market is a good way to start recouping your investment. The income from a rental won’t put all of your investment capital back in your hands immediately, but it will provide a consistent source of passive income.
Also, you can avoid all of the time and energy involved with being a landlord by hiring a property management company that can take care of finding tenants, maintaining the property, and everything else that you would have to do if you were managing the property yourself. That said, if you go this route, you’ll have to plan for the property management company’s fees, too, which will cut into your monthly cash flow and profits from the property.
If you funded this flip with your own savings, this shouldn’t be a problem. You can shop around for a good property management company, and you can start bringing in regular passive income through this property while you work on new deals. However, what happens if you borrowed money for this flip or used an investor’s capital?
If you got a hard money loan for the property, you’re going to have to start paying it back very soon, along with a pretty high interest rate. The whole attraction of a hard money loan is that you’ll be able to pay it off fast when you sell the property, not that you’ll be paying all of that interest throughout the full timeframe of the loan.
And what if you used an investor’s capital? In most cases, this means you agreed to pay them back all that they put in up front and then split the profits down the middle. Where does that leave you now? Depending on your agreement with your investor, you may have to pay them back in full immediately or you may have to work out a repayment plan.
Consider All Outcomes When You Plan an Exit Strategy
From looking at these instances, you can understand how renting might not be the best exit strategy if you’ve used investor money or gotten a hard money loan. That said, there’s really nothing worse than having no exit strategy at all. If you don’t have any plan for recouping any of your losses, you could end up stuck with a high-interest loan or an unhappy investor with no help at all.
That’s why, whenever we flip a house, Christina and I sit down and go over all of the possible outcomes. We look at the comps in the area, market trends, how much work the house needs, and/or what we can do if we buy the house but find out that the rehab is going to cost way more than we budgeted for. We go over all of our exit strategies for every house flip we take on, and we take into account how we’re going to pay back borrowed money and how our funding and exit strategy can (or can’t) work together. Do this, and you won’t find yourself in any sticky situations like I talked about here.