When you get a hard money, private money loan to purchase an investment property, a lender may ask you, “what is your exit strategy?” An exit strategy is simply, your plan for paying the loan back, or your “exit” for that loan. Here are a few examples.
Let’s say that you use a hard money loan to purchase a property to fix and flip. In this case, your exit strategy would be to renovate the property and resell the property as your exit strategy for paying the loan back.
What about a rental property? Let’s say you use a hard money loan to purchase a rental property. What’s your exit strategy? Typically, your exit strategy is to get a long-term, permanent mortgage on that property to pay off the hard money loan.
If you use a hard money loan to buy an investment property, another example of an exit strategy is that you may have other assets that you could liquidate and then take that money from the liquidation of those assets and pay off the hard money loan.
When you take out a hard money, private money loan that tends to be a really short-term loan with a high interest rate, you need to have at least two plans for paying that loan back. If your first plan fails, then you have a secondary exit strategy for paying that loan back.
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