Exit strategy for buy and hold investors

[Chris Yeung]

This has sparked my curiousity as I have not done this before. What would be the exit strategy for a buy and hold investor?

For example, I buy an investment property for 100K(20k down at 4.5% interest) and rent it out for decent cashflow after expenses.

Let's say 10 years down the road, the home price increases (lets say to 250K, plus the equity increase of 16K by paying the principal), and I would want to "cash out" for one reason or another.

Would this property be marketed to a regular buyer looking to buy a home since this is too pricey to for an investor looking for good cashflow? Would the process then be to stop renting to the renter, clean the place up, and then sell?

I hear mostly the buying part from a lot or sources, but I would like to see what other exit strategies are out there for someone looking to exit from their buy and hold.

[David Faulkner]

Selling is an exit strategy ... I try to build some forced appreciation into all my investments so that hold is plan A, but sell for profit is plan B if I want or need to get rid of it. Other spins on selling would be sell with owner financing and carry the note on the house to generate income that way and spread out your tax bill. Or you could lease with a separate sales option to the tenant (for an extra option fee, of course). Or you could live there 2+ years, rent it for less than 3, and sell tax free (for capital gains up to $250k for singles, or $500k for married couples) under the primary residence exclusion. Or you could 1031 exchange, usually to a multi property or trade up to a newer property in a nicer neighborhood or both. Selling real estate, even without the tax hit, is very expensive, which is why many prefer to hold. 

Another is cash out refinance. While technically you are not "exiting" the property, you could pull your original investment (plus more) if you have the extra equity AND (this is key) the rental would still cash flow after the cash out refinance AND the money is used to invest in something that produces a higher return than the interest rate you'd be paying. Refinancing is relatively cheap and proceeds are tax free since it is a loan and not considered capital gains, plus the interest paid is deductible as a business expense. Leverage can work against you risk wise if you over extend, which is why staying cash flow positive is key. 

Not to sound too morbid, but death is another exit strategy ... if you have kids they could inherit the property with a stepped up tax basis as mentioned. This works well in conjunction with a series of 1031 exchanges, because with each exchange you defer the tax bill until finally the deferred tax bill gets eliminated entirely with the stepped up tax basis of the inherited property.