Preparing a plan to unload your home before the actual purchase may seem counterintuitive, but savvy home buyers always put forethought into what the future options for the property may be. The intentions for your soon-to-be home, otherwise known as an exit strategy, vary from owner to owner, and the initial objectives could change— just ask any military homeowner.
Every home buyer has a wish list of what to look for in the physical building, the location of the house, and the desired price point of the property, but many don’t have a wish list of what they would like to happen during the years the home is no longer adequate for their stage of life.
Why Should I Have an Exit Strategy When Buying a Home?
The short answer is, to be prepared for both carefully calculated outcomes and unexpected circumstances.
Even if it’s your permanent residence, a home purchase is an investment, with the ultimate goal of a high return on that investment. These goals could include appreciation, availability of funds for a later purchase, or an inheritance for a family member, to name just a few.
Military life is riddled with unexpected events, even beyond retirement. An exit strategy prepares the active duty owner beyond service years for life changes that were previously unaccounted for such as a lucrative career, an unplanned role as a caretaker, or, simply because the neighborhood no longer reflects your lifestyle.
Anyone of these scenarios changes the way your property transforms from a permanent residence to a potential income rental or sale.
When Should I Build My Exit Strategy?
Contemplating investment goals well before contacting a real estate agent is advisable, but an experienced agent’s advice and guidance will prove to be invaluable. Communicating your future plans with the agent outright fosters smart buying decisions.
Depending on your desired outcome, various properties will have to be considered. For example, if the intention is to hold on to a home for several years but ultimately turn it over to be an investment rental, buying a turnkey home could be money wasted in your market.
Your agent will help determine if buying a home with the intent of a slow and steady path to home improvements would be a better tactic for reaching potential on the initial investment. On the other hand, if short-term ownership is desired, a turnkey property could bring in profitable home sale numbers.
Military members know a PCS is inevitable and decisions regarding the future of the house come into play well before the actual purchase. A real estate agent will formulate plans for the best way to purchase a home with the intent to rent. Some important factors to keep in mind include what amount of rental payment is needed each month to keep the investment property afloat, property taxes, management fees, and how to search for a low maintenance home.
Or, you may prefer to sell your property as soon as orders are in hand. Your agent needs to know this exit strategy as well, to make the most of your initial investment.
Consider the limits of your VA loan when deciding an exit strategy.
While a valuable resource, the VA loan is not restriction free. Review with a mortgage lender who has expertise working with a VA loan about the terms required for occupancy, the differences between primary and investment property purchases, and the point when your primary residence is also your investment property.
Applicants of the VA loan often face unusual factors due to a PCS, deployment, or retirement. There are many times when a VA loan requirement may be waived or adjusted to suit a servicemember’s needs.
Learn more about your VA home loan benefit: What is a VA Loan?
What are some examples of exit strategies?
Short and long term investment goals drive exit strategy decisions, but the condition of your home and local market trends also factor toward the optimal solution.
Rent to Tenants
Buying with the intention to rent is a common exit strategy for military members. Whether or not the owner will return at a later date, say post retirement, is another offshoot of this traditional exit strategy. Buyers should keep in mind what satisfies the needs of the owner’s temporary living situation might not translate into what renters will look for later. With a buy-to-rent strategy, market research and a real estate agent’s input is crucial for a purchase that will appeal to renters of the future.
Buyers must establish the ideal persona for their future renter and use these characteristics to educate their purchase: homes zoned for prized public schools attract families, while young professionals are drawn to public transportation and/or walkability as well as entertainment amenities. Successful market research also includes the number of competing rentals, incomes of those searching, and high demand features.
One of the best returns on a rental investment is the amount of appreciation the home earns while it remains a rental versus the amount of down payment made initially.
Here’s more information for finding the best tenants: Marketing Your Home for Rent to Military Families.
Also known as a lease option, this exit strategy allows the homeowner to rent to tenants for a disclosed time frame, with further payments going toward the purchase price of the property. Sellers tend to benefit from this situation more so than the renter/buyer. There are minimal strict standard to these contracts; most rent and buying options are up for negotiation before the contract is signed.
A lease purchase agreement (in contrast to a lease option) rent-to-own situation obligates the renter to buy the home, instead of having the option to buy after a designated amount of time.
Learn more: Considering Rent-to-Own? Here's What You Need to Know!
Sell the Home
Occurrences in life can lead to selling the home outright as the most cost effective exit strategy for some homeowners. If turning a primary residence into a rental property is a poor choice because your money could be earning more elsewhere, or the stresses and costs of homeownership have taxed your desire to continue, selling the house is a solid solution.
The key is to maximize this exit strategy through precise market timing and pursuing advantageous home improvements and staging, realizing that your best selling price point could occur before major updates are put in place.
You can start learning about home selling with 5 Things to Do Before Putting Your Home on the Market.
Each owner’s selling circumstances are unique and have different needs for a successful sale. For owners with more time to prepare and market their home, improvements should strongly be considered to meet buyer demands in your local area. Taking a pause to wait on a robust spring or summer market could also add value to the final purchase price.
A surprise PCS or change of active duty status often triggers an unforeseen quick sale for military members. Without a preconceived exit strategy, homeowners often find themselves paying hefty sums just to be rid of the house after only a few years. Closing costs, agent fees, and other concessions add up to cost the owner thousands without the benefit of time to improve equity or appreciation.
Buy a House to Flip
Although flipping homes remains popular, to be done well, real estate investors must have the time and education necessary to make this an exit strategy worth investing in. Intense research is necessary to find a home priced below market value in a high demand area. Flipping a home is both an art and science, and not for the faint of heart.
Owning a property with intentions to flip quickly also means investing time in finding trustworthy and affordable tradespeople and contractors, which is a challenge for those new to flipping. Cash in hand to buy a property helps make flipping for a profit more in reach, but the large sum of money paid upfront could hamper the future improvements needed if the budget is busted through fundamental repairs, such as structural deficiencies.
Here’s the inside scoop on renos: Home Renovation Reality: What Those "Fix Up" Shows Don't Tell You.
A variation of flipping exists, known as prehabbing. This occurs when the property purchased is quickly updated just to the next level, perhaps with new paint and flooring. It is then listed for sale again and an interested buyer is enticed by the initial improvements, yet envisions more upgrades to personalize the space. They feel their purchase price is a good deal, and the initial buyer becomes a for-profit seller simply by adding affordable cosmetic details.
Plan Your Exit Strategy
The typical home buying process is complicated at best. Adding in a thoughtful exit strategy to your real estate investment plan increases the need for a thorough understanding of how home buying works, the need for experienced real estate professionals, and working knowledge of the VA loan if considering it for financing.
By taking the time to craft a personalized exit strategy, you can avoid costly mistakes and potentially earn well through your real estate investment portfolio.
By Dawn M. Smith