Developing an Effective Exit Strategy for Retailing Real Estate Investments

Retail real estate investments are meant to be long-term investments that you hold onto for at least five years. However, prepare to have an exit strategy in place that allows you to get out at the right time, so you can maximize your profits. In this guide, you’ll learn how to develop an effective exit strategy for your next retail real estate investment.

Identifying What Type of Investor You Are

To develop the right exit strategy, you first need to understand what type of investor you are. There are two primary categories of investors, which include finders and keepers. A finder is someone who makes short-term investments. In this scenario, your main goal would be to achieve a high net operating income, after which you would sell the property immediately.

You may need to search for investments that have the potential to rapidly appreciate in value, which include smaller retail centers in high-end locations. As a short-term investor, you might want to exit the property within one to five years, during which the property should be 100 percent occupied by businesses that pay relatively high rents. You’ll end up selling the property when it’s at the peak of its value, which allows you to earn a notable profit from your initial investment.

Retail real estate is mainly geared towards investors who consider themselves keepers. You may hold a single property for anywhere from 10-25 years. These investments give you passive income every month without requiring massive upkeep. While returns aren’t as high as they are for finders, they’re more consistent and stable. You’ll be hoping that the property appreciates in value with each passing year. Even though you likely won’t exit the investment for many years, you should still know when it would be a good time to sell.

Determine Why You’re Buying the Property

Before you make any retail real estate investment, ask yourself why you’re buying the property. Are you doing so for retirement or long-term wealth creation? Long-term retail investments allow you to accumulate wealth in a manner that builds a legacy and makes it simple to leave your children a sizable estate when you’re gone. Knowing why you want to buy a property should help you determine what the best exit strategy for you is.

Make sure that you know how long you want to hold the property as well. The loan terms should help you answer this question. If you’d like to hold the property for anywhere from 10-25 years, search for a loan option that gives you a lengthy repayment period. If you decide to sell this property before the loan maturity date, you may be tasked with paying a prepay penalty. While short-term loans can sometimes be converted into long-term ones, this option isn’t always available.

You should also ask yourself how selling your property will impact your taxable income. Some or all of the money you earn from selling your investment property could be taxed by the IRS and even local tax authorities. Planning for these taxes early on allows you to build a stronger exit strategy.

If you sell your property at a high price, you may be placed in a higher tax bracket if your profits are substantial. It’s possible to delay paying these taxes by investing in another property immediately after you sell your current one. This technique should be considered when you develop an exit strategy, though it’s wise to consult a tax expert if you take this route.

Consider the Various Types of Exit Strategies

The many types of exit strategies at your disposal include:

Hold the property on a long-term basis for consistent cash flow
Maximize your short-term gains by flipping the property for a sizable profit
Sell the property when exiting and pay any capital gains taxes you owe
Offload your property and perform a 1031 tax-deferred exchange
Obtain some money by refinancing your loan while also holding onto the property
Give the property to your children or other beneficiaries

Once you’ve created an effective exit strategy for your next retail real estate investment, you’re less likely to hold onto the investment for long. Knowing when to sell an investment is just as important as identifying which retail property you should buy. Find out why you’re investing in real estate to determine which exit strategy is best for you.