Christian Osgood explains why every real estate investment needs an exit plan before you buy. You need two sets of math: day-one numbers on cash flow and loan terms, plus exit math projecting the property value and cap rate. Without this, you won't know if you can refinance, restructure, or hold the property long-term.
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Having to sell everything makes you either a broker, a wholesaler, or a flipper. If the goal is to be a real estate investor, this is one of the most critical things that you have to do. This is one of the most important pieces of building your portfolio. Every property must have an exit plan. Yes, you need to buy them so you can buy them and never lose them. Yes, you should have the ability to hold them forever. Why does every property need an exit plan? Explain in this video right now. Welcome back to the channel. My name's Christian Osgood. This is Multifamily Strategy. If you haven't yet, like, subscribe, hit that notify button because here we go. When you are buying property, it is so important to know when the exit needs to be, what your strategy is, and how to write that in a way where you can hold the property forever. Now, what does exit mean? That means exit from either the deal or the existing capital stack. So before we go into this, we need to explain one thing: what makes up a deal? So you have your deal, which is what is the property, the price, the terms, but it's going to be made out of either debt, equity, or you can buy it in cash. Essentially, if we have an exit from the existing capital stack, it means we are changing something in the cash we have in the deal, the equity partners we have, or the debt we have on the property. For example, you have a property that has a 10-year note. So you have at year 10 a balloon payment so that all the money that you have in the property needs to be either— you have to sell, refinance, or pay off your note. Those are your 3 options at the end of a balloon. Whatever you still owe on the property needs to be restructured. In addition, if you raised equity, if you have a fixed buyout for a partner and a fixed period of time, you have to have a way to actually hit that buyout at that time. That is an exit from your existing deal into a new deal. You still keep the property, but you have a way to restructure or recollateralize or Otherwise, bring in money, pay down money, whatever it's going to be. The math on this is super easy and really important to know. Do not do your deal without doing this math. You need day one math and you need exit math. So day one, you're calculating your cash flows, your DSCR, your loan factor rate. You're making sure that you're buying a deal in long-term fixed rate cash flowing debt. That is what we're going to do on the initial. At the same time, we're going to do the exact same math for our projections. So for example, we have a 5-year balloon. And in year 5, we're going to need to either pay off the property, sell the property, or refinance the property. We're going to have to change our capital stack. I'm going to do the math for on year 5 conservatively. Where do I think I'm going to be? Let's assume market rents, even though they always go up over time, let's assume market rents are going to be the same. Let's assume depending on our market, we have 90 to 95% occupancy. So we're not going to assume we're 100% occupied because the banks sure not. We're going to make sure even if we're self-managing, we've included management fees, because again, a bank or other lenders are going to factor for that. And we're going to do the math for what is the property worth at this time. Now, that's done with a cap rate, and that's covered in Multifamily Strategy Course or on a million other YouTube channels, including this one, on how to actually value a property. But what we're going to do is come up with a conservative value of what we think it's going to be worth and what type of debt we think we're going to be able to get get on it. Now, you don't have a crystal ball to know where the market is, which is why we're going to be very conservative on every number. When we do that, that will tell you, okay, do I need to bring more money to the table there? Is this deal going to have enough upside on it where I can actually pull all of the borrowed money out and we can get a new loan? Or if we raise this with equity, can I pull enough money out of the cash-out refi to pay off my investor for me to own my deal myself? All of these are exits from your original deal, and you're entering into a new deal with the same property. Now, it's worth mentioning, it is okay to sell properties. I've sold some of our properties to Cody. I've bought some properties from other people. I've traded equity to other people. You can move your pieces around. However, when you enter a deal, you need to have an option for if I can't sell it or I don't want to sell it, I don't have to sell it. The goal here is to build a portfolio. Does every piece that you buy need to stay in the portfolio forever? Absolutely not., but you want to keep building and building and building. Having to sell everything makes you either a broker, a wholesaler, or a flipper. If the goal is to be a real estate investor, this is one of the most critical things that you have to do. How do you pay off your debts? With money. Where does the money come from? Earned income, a sale of a property, cash flow from a property, new debt. Those are your basic methods of bringing in new capital. In that, you're going to structure a new deal where the capital is typically going to be backed by the property and you roll forward. You do this again and again for every single deal. And this is all you have to do. Day 1 math, exit math, same sheet of paper, just different numbers. Be conservative on what you think you can do on every single number. Expenses will go up a little bit, tax will go up a little bit. You're going to get to maybe 90%, 95% of market rent and rents aren't going to magically increase even though they usually do. You're going to assume that they don't magically increase over the time of the deal. If you look at all those pieces and the deal still works and you have an answer for where is the money going to come from to exit this, I now have my exit strategy. I now know that I have the ability to hold the property as long as I want, and you can go ahead and proceed with the purchase. Hopefully this was helpful. A lot of people go into these deals with no long-term plan. They just go, hey, the math works day one. Let's go ahead and knock it out. Now you have more time with longer terms, so negotiate the longest loan term you can. But at the end of the day, the same math has to be done for every single deal. If you found this helpful, like, subscribe, follow for more real estate tips. This is Multifamily Strategy. We'll see you on the next episode.
