Know Your Exit Strategy

When a deal changes, you need to know the best way out.

Today, we’re going to be looking at a deal where we used a different exit strategy from what we normally do. If you’ve read any of my online material or watched our YouTube channel, you know that my business focuses on rent-to-own deals.

About 95% of the time, that’s our exit strategy—to get our tenant-buyer to purchase the property—but in some cases, it makes sense to do things differently. And for anyone getting into the world of rent-to-own deals, it’s important to understand what alternative exit strategies are available and when you should use them.

The lead that came back

We always tell our associates that time changes everything—and this property is a perfect example of what we’re talking about.

In this deal, we were working with a cool house that was around 3,000 square feet. It sat at the end of a cul de sac, it had a tennis court, and the property owner was having a hard time selling it.

He had been trying to sell it for months and months—first with a realtor, then by himself, and then with another realtor. I reached out to him, in the beginning to see if he was interested in a rent-to-own deal, but his lawyer and his wife were very against it. They told him he should sell it outright.

But the reality was that he wanted to make a deal! It was mainly his lawyer and wife that was preventing this from happening. So, like I do with all my prospects, I followed up every four to six months.

About a year and a half later, he came back to me. He was ready to strike a deal. He had even fired his lawyer and gotten a new one who would help him set this up.

Like I said in the beginning, time changes everything! Even someone who doesn’t seem remotely interested in making a deal will eventually change their mind with enough time. In this case, it took about a year and a half of following up, but it happened.

The exit strategy

So, as mentioned above, this house was a FSBO. The purchase price was $431,700 and the term was 48 months.

Now, the monthly payment was $1,540—but the key is that all of that is going to the principal paydown! So when you multiply that out over the course of the term, it’s a total of $73,920 just in principal paydown.

Normally, this is where I’d start going into Paydays One, Two, and Three. But this time, we used an alternative exit strategy, remember? So the “Paydays” are a bit different.

Here’s what we did.

This house was in a college town in Connecticut. Instead of going for a rent-to-own deal, we ended up leasing the house to some college students.

We have a thorough process for this because, as you can imagine, college students aren’t necessarily the greatest tenants. But if you structure your lease documents correctly, it takes all the risk out. With parents cosigning, we had very little risk and we were guaranteed a check each month.

So we put six students in this house at $600 per person. That’s $3,600 coming in each month.

If you remember, our monthly payment was $1,540. But we also had about $200 in costs for insurance, so that number really looks like $1,740. That comes out to $1,860 in profit for us each month. With a 48-month term, you’re looking at just under $90,000 in total profit from the monthly rent alone.

But we were also getting $73,920 from the principal paydown! Add that to the $90k, and the total comes out to $163,200.

Now… what happens next? Well, if the market does nothing and we sell it for $431,700, we’ve still made that $163k. If we keep it for longer, we’ll still get that monthly profit until we sell. And, of course, if we sell for higher than $431k, we’ll make another Payday there.

The moral of the story? This alternate exit strategy ended up giving us a great Payday—probably even better than if we were to do one of our normal deals. But the only way we were able to make this work is because we understood all the different types of exit strategies.

If you understand the different types of exit strategies—like rent-to-own versus Airbnb versus renting to college students—you can start to use them to your advantage. The key is understanding when each situation makes sense. You’ve got to get educated on this stuff, because there are a million factors that can affect which strategy will give you the maximum return on a property.

So, now that we’ve covered that, what is your go-to exit strategy? Do you have alternatives? Are you going to educate yourself?

Remember, we are not attorneys or accountants—you should seek out proper professionals in your area.