Back in the fall of 2022, I had the opportunity to have dinner with George Ross.
George spent decades as EVP and senior counsel at the Trump Organization, helping close billions in real estate deals. You might also remember him from the boardroom scenes in The Apprentice. So as someone who watched the show religiously in the 2000s, I was pretty excited to meet him.
But I didn’t want to talk to George about manufactured TV drama. Instead, I hoped to absorb just the tiniest bit of real estate wisdom from his decades of experience.
And let me tell you, George did not disappoint, casually dropping knowledge bomb after knowledge bomb.
But there was one simple-yet-profound statement he made that really stuck with me:
"Real estate goes in cycles," he said matter-of-factly. "As long as you can survive the 8-12 year cycle, you will do well."
This statement was rattling around in my brain recently (again), and it got me thinking about something I see constantly in deal evaluation: the often-overlooked importance of exit strategy in real estate investing.
Think about it this way:
An exit strategy isn't just about getting out – it's a plan to survive the cycle.
The Exit Paradox
Here's a truth that might seem counterintuitive: in most real estate investments, especially value-add deals, about half (or more) of your total returns come from the exit.
Not the quarterly cash flow. Not the tax benefits. The exit.
And whether that's a sale or a refinance, the exit strategy isn't just about returns – it's about preserving your capital too, since it’s often the event that provides a return of your initial investment.
The Three Scenarios Every Deal Should Have
I like to say that at Big Spring Capital, we're buyers of real estate.
We love to buy and hold for the long term. But for every deal we do, we run three scenarios:
The Base Case: What happens if everything goes according to plan. This includes:
Conservative rent growth projections
Realistic interest and cap rate assumptions
Clear identification of future buyers or lenders
The Accelerated Case: An opportunity if the market hands us a gift. Think:
Significant cap rate compression
Unexpected rent growth spikes
Perfect selling conditions
The Extended Hold: The survival plan if things go sideways. Consider:
Market downturns
Lending environment changes
Operational cash flow crunches
Red Flags to Watch For
I've reviewed hundreds of deals, and it’s surprising how few sponsors model these various scenarios.
Worse, the only scenario considered is often full of dubious assumptions:
Projecting perpetual 10% annual rent growth (I'm looking at you, 2021-2022 deals)
Ignoring future capital needs beyond the initial value-add plan
Assuming significant cap rate compression
Having only one viable exit strategy
That last one is particularly dangerous. If there's only one path to getting your capital back, you're starting to venture out of investing and into speculating.
A Better Approach
So what’s a passive investor to do?
When you’re evaluating a deal, look for:
Conservative assumptions, especially on the uncontrollables like cap rates and rent growth
Modeling of multiple business plan scenarios
Multiple (realistic) exit strategies
Does this guarantee that you’ll never have a deal that goes south? Of course not – all investing carries risk, and the future can’t be predicted.
But it can be prepared for, and investing in a deal that has a plan in place to survive the cycle certainly reduces risk.
The Bottom Line
When you're evaluating your next real estate investment, don't just focus on the entry price and projected cash flows.
Dig into the exit assumptions. Ask about multiple scenarios. Look for flexibility in the business plan.
Because how you get out of a deal is often more important than how you get in.