House #18: Exit Strategy

September 16, 2010 · 2 comments

If you’ve been reading the past week, you know that we have another house under renovation (The Haggle House) and have been trying to determine the appropriate exit strategy for it — Hold As Rental or Rehab & Resell. If you’ve looked at the financial analysis I’ve done for each of these options, you know that either exit strategy is reasonable and should generate a good return on my investment…

After doing a bit more number crunching, I’ve found what I consider to be the optimal exit strategy for this property (barring any surprises). And that is to hold the property as a rental for the next 3-5 years, and then resell.

For those interested in the financial analysis, here is the IRR I can expect if I were to refinance (based on the numbers I provided in the Rental Analysis), hold as a 3 year rental, do a more complete rehab in 3 years (on the order of $15K), and then resell for an anticipated net sale of about $110K (which I believe is reasonable):

Return Analysis

That’s greater than a 50% compounded return over 3 years! While a quick fix-and-flip would generate a higher IRR, the total profit would be much lower, and in this case, I’m happy to trade lower return for much higher profit over a relatively short period of time…

2 responses to “House #18: Exit Strategy”

  1. Mike says:

    Looks good, but why sell in 3-5 years. Why not hold for 10? Thanks!

  2. J Scott says:

    Hey Mike –

    I may consider holding the property longer than 3-5 years, depending on the market conditions, the rental rates, etc. I have a feeling that I’ll see more appreciation in the next 3-5 years than will be typical after that time, so it’s likely that my rate of return will drop the longer I hold the property. Additionally, if I hold for much longer than 3-5 years, I’ll start to face a number of capital expenditures, like new roof, new HVAC, new water heater, etc.

    All that said, I’ll re-evaluate as we go along, and certainly won’t lock myself into anything at this point…

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