Takeoffs Are Optional, Landings Are Mandatory!

The sky was clear and it was a nice warm summer afternoon. My flight instructor had just stepped out of the small trainer airplane and left me alone for the first time. I was just about to taxi the plane out and to do my first solo flight as an aviation student. I was terrified and exhilarated at the same time. Just before my instructor closed the door behind him he leaned back in and gave me one last lesson that I will never forget. “Remember kid, takeoffs are optional but landings are mandatory.”

This was a great aviation lesson and an equally valuable business lesson. When flying a plane we need to make sure everything is ready before takeoff. Do we have enough fuel? How is the weather between here and where we are going? Do we know where we are going? Once you leave the ground there are no timeouts. You don’t get to pull over and walk home once you are in the air. You will land that plane in one piece or in many but either way you will land. Years later I realized that doing a real estate deal is no different. You can chose to close or not to close but once you do buy the deal you are in it for the long haul.

The point I am making here is, that like safely landing an airplane, our exit strategy for our deal is just as important. Some people say “you make money when you buy”. I wholly disagree with this statement. You may create value when you buy but you don’t make money until you exit the deal profitably. Saying that you make money on the purchase is a cliché that I find to be dangerous. This is like saying as long as I get my plane into the air everything else will take care of itself. I hope you would not get on a commercial flight after hearing the captain saying that. Trust me, your investors and partners will not want to hear you say anything like that either.

Have a plan. When you first analyze a deal the exit strategy should be one of the key items you take into consideration when deciding if your deal is good or not. You need to have multiple exit strategies in the future of your deal.

Here are a few items to keep in mind when analyzing a deal and planning an exit strategy.

Price – Are you paying a low enough price that you will be able to tolerate some fluctuation in the markets if the prices decline slightly in the time you have the deal?

Debt – Are you over leveraging the deal just to get a deal done? Don’t borrow too much even though that may make the numbers attractive up front. You may need some of that equity in the deal if you want to refinance.

Loan Term – Is your loan going to be long enough to allow you to be in a good market cycle when it comes due? Try your best to get a 10 year non-recourse mortgage if you can. This will allow you to go through one full market cycle before the loan expires. This will allow you time to complete your exit without the pressure of the bank forcing you to sell.

Market Cycle – What market cycle are you in when you buy? Knowing this will help you predict where the values will be when you get ready to exit.

Interest Rate – How long do you plan to hold your property and where are interest rates going? I can help you with the second one… they’re going up! Remember that when you go to sell in a few years the rates will likely be higher than they are today. This means that the price of money will be higher and that will make your property less valuable. Buy it right today and you will still bring in a big check when you get ready to sell in the next few years.

Exit strategy is all important. If you don’t have a good one then you are taking off without knowing where you are going to land and no one wants to be on that flight!

Good Luck,

Bill Ham