A “closing” and an “exit” refer to two distinct phases of a real estate investment, and every investor should be familiar with them so as to not confuse them. Let’s look at comprehensive definitions of each term, and break down precisely how they guide the investing process.
Understanding both closings and exits in real estate investing will also help you understand the timing of your EquityMultiple investments and potential cash flows.
What is a Closing?
A “closing” is the consummation of an investment, and may mean different things to different parties. For example, when EquityMultiple “closes” an investment, it means that we complete funding the investment on the EquityMultiple platform and remove it. Investors are given a “heads up” as investments near closing so that they may have time to participate if they are interested. In some cases—e.g. a fund, or an investment with multiple tranches/phases of financing—EquityMultiple may conduct multiple closings for a given asset or investment opportunity. In certain cases, we conduct multiple closings so that investors may begin earning interest as soon as possible.
In the case of single-asset investments, closing precedes a consolidation of investor capital, which is usually held in escrow before being made available to the Sponsor or borrower. This is similar to when a house “closes” in the single family market, or when a lender “closes” on a loan. The escrow step adds an additional layer of security to your investment.
A closing typically comes before an exit.
Real Estate Closing Definition
A closing is the final step in an initial investment transaction, marking the point when all parties fulfill their obligations and the hold period commences.
What is an Exit?
A “exit” in real estate investing refers to the final stage of an investment project, in which the investor realizes their returns and ends their involvement with the investment. This typically involves selling the property, partially selling it, or refinancing.
Relatedly, an exit strategy is a crucial component of an exit, and every investor should be aware of their own exit strategy when initially making an investment. An exit strategy determines how investors can recoup their initial investment and realize profits from an exit. It also helps investors manage the illiquidity inherent to so many real estate investments. (More on exit strategies later.)
Real Estate Exit Definition
A real estate exit refers to the strategy or method an investor uses to end their involvement in a real estate investment and realize their returns. It is essentially the plan for how and when an investor intends to “exit” or sell their investment property.
What are the Phases of a Real Estate Investment?
The phases of a real estate investment can differ based on the type of investment, but broadly, they tend to resemble the following:
- Planning: Researching markets, setting goals
- Acquisition: Finding the property, performing due diligence
- Financing: Investors are invited to contribute capital
- Closing: Funding is officially secured
- Operation: Managing the property, handling tenants
- Improvement: Renovate or develop (if applicable)
- Exit: Sell property or refinance
Before making a real estate transaction, try to understand what the scope of your involvement will be and what the Sponsor or borrower’s business plan looks like.
Throughout the rest of this article, we’ll provide a few examples of different exit strategies and explain how both closings and exits work at EquityMultiple.
Understanding the Concept of an Exit in Real Estate
As stated earlier, an exit—also known as a “reversion” or “reversion event”—refers to the final stage of a real estate investment project. This is the point at which an investor or Sponsor plans to conclude their involvement with a property or portfolio of properties. The exit strategy typically involves one of three main options:
- Sale of the property
- Partial sale
- Refinancing
The specifics of the projected exit can significantly impact the overall profitability of the investment. As such, investors pay close attention to factors like projected capitalization rates (cap rates) at the time of exit, often referred to as “terminal cap rates.” Terminal cap rates are calculated by dividing the projected net operating income (NOI) of the last year (exit year) by the sale price. Conceptually, a terminal cap rate shows the rate of return that a real estate investor expects to earn on a property on the exit date, and is expressed as a percentage.
You can read more about cap rates here.
Curious about the implications of going-in or going-out cap rates listed in offering materials? EquityMultiple’s Investor Relations Team is standing by to answer your questions.
Why Exit Strategies Matter in Real Estate Investing
While real estate investments can offer numerous benefits, including portfolio diversification, they often come with a degree of illiquidity. This means that investment capital may be tied up for an extended period, especially in longer-term equity investments. Investors accept this lack of liquidity in exchange for potentially higher returns compared to other asset classes.
However, no rational real estate investor would put up their capital without a clear endgame in mind. Exit strategies offer investors a plan for when and how they can expect to recoup their initial investment and realize profits.
Common Exit Strategies in Real Estate Investing
Several exit strategies are commonly used in real estate investing. Let’s explore some of the most popular ones:
Acquisition and Long-Term Hold
This strategy involves:
- Acquiring a property
- Making value-add upgrades
- Improving cash flow through better management and marketing
- Selling the property at a profit after rents have stabilized and/or the market has improved
Long-term periods can sometimes last up to three years, but the eventual returns from this exit strategy may make the wait well worth it. This is the most common exit strategy used in equity investments, including those on EquityMultiple’s platform.
Acquisition and Short-Term Hold (“Flipping”)
This approach focuses on:
- Acquiring a property
- Quickly increasing its value through improvements or market changes
- Selling the property for a higher amount over a relatively short time horizon
Cash-Out Refinance Followed by a Hold
In this strategy, investors:
- Secure a new mortgage of a greater amount than the existing one
- Use the proceeds to make further improvements or pay down a portion of equity
- Continue to hold the property for additional appreciation
Ground-Up Development
This high-risk, high-reward strategy involves:
- Acquiring land
- Building a property from scratch
- Selling or renting the completed development
Exit Strategy Considerations for Passive Real Estate Investors
If you’re considering passive real estate investments on a real estate crowdfunding platform like EquityMultiple, it’s crucial to understand the proposed exit strategy for any project you’re evaluating. Here are some considerations to keep top-of-mind:
- Read about the exit strategy, as clearly stated by the Sponsor in the investment’s offering documents.
- Verify that the Sponsor has a track record of successfully executing similar plans.
- Understand all risk factors that could impact the exit strategy.
- Consider how the projected exit timeline aligns with your personal investment goals and liquidity needs.
If you carefully evaluate these factors and perform your own due diligence, you can make more informed decisions about which real estate investments are the most suitable for you.
Additionally, passive real estate investing can provide relief from some of the stress associated with exits. By investing passively through EquityMultiple, for example, investors can be entirely hands-off during the exit process. They benefit from the efforts of two parties: the Asset Management team keeping tabs on the exit and working to effectuate an exit scenario that maximizes investor returns, and the Sponsor (a.k.a. the “managing party” or “GP”) taking on the burden of bringing the property to market, which may require legal help, negotiating, and handling various administrative tasks.
How Closings Work at EquityMultiple
At EquityMultiple, we strive to communicate closing timelines clearly and allow investors to proceed at their own pace. However, for high-demand offerings with tight deadlines, we may need to quickly cycle through a waitlist to ensure that enthusiastic investors can participate and to ensure that we will meet our target allocation. We are always available to clarify timelines and investment status, and our Investor Relations team stands by to provide answers to any questions you may have.
Moreover, some offerings may reopen for investment after initial closing. In some cases, this is due to considerations related to our Alpine Note Series. Our Alpine Note product allows us to provide the difference between our total commitment to our sponsors and the capital we have raised from our investor base. As our Notes mature, new allocations become available in the offering, and we reopen the investment to allow new investors the opportunity to invest. Their capital will take the place of the Alpine Notes in the offering, and these new investors will receive shares in the offering just as if they had participated in the first closing. This structure allows us to resurface investments that may be closer to their exit. There may also be multiple closings between EquityMultiple and a sponsor for reasons unrelated to Alpine Notes. For example, a sponsor may require capital at different moments to execute on their business plan.
Reopened investments do not indicate issues with the investment’s performance—to the contrary, in fact. By pre-funding offerings early, we can secure targeted opportunities quickly, provide certainty of execution to sponsors, and provide diversified offerings to our investor community. The pre-funding process plays a critical role in ensuring that things go smoothly.
How Alpine Notes Work
If you’re drawn to the return potential of individual property investments, but don’t quite feel ready for their lengthy hold periods and higher risk profiles, an Alpine Note is a great way to get your feet wet.
The Alpine Note is a yield-focused, fee-free cash management tool with three short options for hold periods—3, 6, and 9 months—for maximum liquidity. We give you the option of either staying with the original hold period you’ve selected, or reusing the Alpine Note as a funding source for other investments on our platform after 30 days.
With this “rollover” feature, you can assess your own comfort level and easily transition into longer-term property investments, if you choose. The decision is always up to you.
| Alpine Note | Private REIT |
| Can be rolled over into other investments after 30 days | Typically cannot be repurposed as a funding source for other investments unless it is liquidated |
| Flexible term options of 3, 6, and 9 months | Generally less customization of terms |
| Contractual fixed APYs of 6.10%, 7.15% and 7.5% | Annualized return of ~6%* |
*RealtyMogul Income REIT, Fundrise Income eREIT
The Bottom Line
Understanding the distinct concepts of “closings” and “exits” is crucial for any real estate investor, whether active or passive.
Investing is all about harnessing your capital for what’s most important to you. Whether it’s funding your child’s education, purchasing a new home, or saving for retirement, you’ll always want to have the best possible control over your return potential. To that end, be sure to consider how exit strategies align with your investment goals, and always keep a close eye on your investments’ closing and exit dates.
