What’s your exit strategy?
Savvy investors know that they need to have an exit plan. The smartest and most successful have multiple exit strategies lined up before they go in. But there is still much confusion about what really qualifies an “exit”.
So what type of exits are available to mobile home park investors? Which is right for you?
Rethinking the Exit Strategy
It’s no secret that the real reward in any investment is the exit. This is why smart investors are determined to know their exit plan before investing. But that doesn’t have to mean selling and completely cashing out. After all; not all investors want to be hyper-active day traders, and mobile home park investing legends like Warren Buffett are famous for never planning to sell of holdings. So what does it mean to exit?
What is most important to investors is maximizing their capital. Maximizing how hard their money is working for them.
There are two ways to think about an exit; getting your money back, or at least achieving liquidity and the option of accessing and using your capital on-demand.
Here are six ways to achieve that…
Option 1. Get Your Money Back from Cash Flow
Investors don’t need an immediate resell exit if they are walking into a property with income and cash flow. That incoming cash will eventually return any initial cash investment, and then go on to produce an accumulating return on investment. During this time any debt will typically be paid down. The ultimate result is increasing cash flow, and a debt free property which may be tapped for equity in the future.
Option 2. Refinancing
Once a property has been taken over and performance is stabilized mobile home park investors can refinance, obtain better loan terms, and retrieve their initial capital. That capital is free to be invested in anything else. Meantime the mobile home park goes on delivering cash with cash on cash returns that are so high they are difficult to calculate. After all; you’ve got your money back, and are likely making money on at least two parks with the same initial capital.
Option 3. Use the Asset as Collateral for Additional Acquisitions
Even without refinancing or selling mobile home park investors can leverage initial investments and use them as collateral for additional acquisitions. This helps investors to reduce their skin in the game, avoids cramping liquidity, and can multiply cash on cash returns. This may take the form of implied collateral from the perception of increased financial stability and strength, or in the form of a bridge loan, or equity line.
Option 4. Leveraging a Portfolio Loan
The world’s largest private equity funds began changing the game a couple years ago by establishing new commercial lending conduits. Big names like Blackstone and Cerberus gave birth to a variety of new lenders which specialize in commercial financing, and in particular portfolio loans, blanket mortgages, and cross collateralized lines of credit. These are primarily asset based and income based lenders who put more weight on the property than strength of individual borrowers and their personal credit. They may even provide non-recourse loans which release investors from personal liability, while increasing their leverage capacity. This can be a strategy to simply simplify overall management, and increase efficiency and operational profitability across multiple mobile home parks, while reducing liability and increasing real returns, or to fuel significant expansion.
Option 5. Create a Business
Sophisticated mobile home park investors will already be using LLCs or other business entities to invest and hold their assets in. Yet, many completely miss out on all the value and wealth they could be building in that business. With a little thought put into creating an actual business and brand the entity itself can grow in value. That can also be cashed in on. With a great system and brand identity there is no reason the company can’t eventually go public with an IPO and achieve a hot exit.
Option 6. Sell a Stake
Investors don’t have to keep going it alone, completely cash out, or even go public, or borrow in order to exit. Another strategy is to simply sell a stake in your real estate. Warren Buffett recently took a big personal stake in 235 properties to the tune of around $100M, for 8% of a portfolio. If you’ve got good assets and yield, that’s something others will want a piece of. They may even bring knowledge, contacts, and expertise to the table in addition to cash.
There can be substantial sums to be made from acquiring, adding value, and reselling mobile home parks. However, there are also a variety of other exit strategies to choose from. Know in advance what these options are, and what your preferred exit is so you can start planning for it.
There isn’t one ideal exit for everyone, you need to do what’s best for you.