Here is something I’ve learned over the years that I wish I had realized when I was starting out–that real estate is not so much an investment as it is a business. Once I realized this, I learned the following things about exit strategies I thought I’d share:
Businesses, like real estate, can be planned, built, finished, and sold for a profit. But what if you own a business that buys and sells real estate? It’s not the same. The best you can do is sell the real estate that you’ve bought, and that’s the end of it. No one will buy your business and pay you several times your current yearly profits, as they would other businesses. Stinks, doesn’t it? I’ll go into the details of why this is, but also offer this self-coined truism as a consolation prize:
“You’ll never sell your real estate business, so you might as well automate it.”
I. Other Businesses’ Options and Exit Strategies
Other industries have it good, or at least some of them. If you were to start a company that, for example, sells chairs, you would make your initial investment and get to work. You’d test ways to find people who buy your chairs, and you’d develop relationships with retailers who buy from you in bulk and resell your chairs to the public. Once you make enough money to survive, you grow the business by reinvesting profits, borrowing, or raising capital.
Then you get bigger, sell more, make more, and before you know it, you have a track record of several years. You could now sell your business to someone else. But, of course, the more profitable your company is, the more someone will pay for it. Each industry has its own rules of thumb, but for the most part a buyer will offer you a multiple of your company’s yearly earnings (hopefully several times).
Other things besides earnings can increase your company’s sales price, such as systemizing it. If you can show a buyer how your company runs itself without you (the owner) having to do anything, you can imagine how much more attractive it will appear to them. Who wouldn’t want to own business that spits out money year after year without much work? It’s worth paying more for.
People and companies who buy businesses also want to buy something that is scalable. This means that they should be able to grow it without having to hire a ton of people. Law firms can’t do this, because each attorney can only bill so many hours, and in order for the firm to make more money, they will have to hire more attorneys. Compare this to a software business where people can download the products from a website-you could potentially sell hundreds or thousands more copies per year before you have to hire someone new.
So, selling it gives you a lump sum of money that you can use to start a new business, invest somewhere and retire on, or whatever. Most businesses don’t sell because they wouldn’t sell for a substantial amount, but it’s still many entrepreneurs’ dream to build a business, sell it for a huge amount, and get the heck out of Dodge. I know a few people who have done this, and I am insanely jealous.
II. Why Real Estate Investment Companies Are Different
The reason I’m jealous is because not all business types are able to do this. Some businesses rely so much on the owner and their specialized expertise, that it would be hard for a new owner without that same expertise to jump in and make it work. Like a law firm. Or a doctor. Or, regrettably, a real estate investment company that flips and/or holds property.
The best that we can hope for is to sell whatever assets we’ve accumulated. For doctors and law firms, those assets are customer lists, supplies, and maybe the building they are in. For us investors, it’s our properties and that’s it. Our companies are only (perceived to be) worth whatever we can sell our properties for.
I think that an investment company is scalable. I can picture a company that buys and sells 100 houses per year and only has a tiny office of staff. But when is the last time you’ve heard of a real estate investor selling their business? I haven’t. It just doesn’t happen. Instead, we’re just looked upon as individuals with real assets that we could sell off, and I doubt any investor would pay market value for them.
III. But at Least You Can Automate It
You can even write systems for your real estate company and get it to the point where it practically runs itself without you. But no one cares. So, if you can’t sell your company, you might as well make life as easy as possible and systemize it for your own benefit. Map out who does what, write the systems, and hire the right people to run them for you and give you reports.
And, if it’s creating cash and equity profits year after year anyway, this may not be such a bad thing. You just need to know what you’re getting into. So while individual houses have multiple exit strategies, your investment business as a whole has two:
Sell off all of your properties and liquidate the company.
Own the business forever-keeping your properties, maybe buying more, maybe selling some.
I opt for #2, but encourage you to make your business as easy as possible to manage for your own sake.