Property Investment exit strategies

Before buying an investment property, assuming you have answered all the relevant questions, there is one final question you need to ask yourself, have you got an exit strategy?

You are putting money into a property, you need to have an understanding of how you will get it out. Investing in property without knowing your exit strategy can be risky, and you could end up losing more money than you put in originally.

There are a number of different exit strategies and different ways to implement these strategies.

It is good to have a provisional understanding of when and how you will consider an exit:

• Will it be after a certain number of years of owning the property?

• If purchasing as a pension, maybe your exit strategy is to sell after you retire

• Maybe you would consider selling your property if and when it reaches a particular value, or when your whole portfolio is worth a particular amount.

• Similar to stocks and shares, and setting a stop loss, maybe you will sell if your rents/yields drops below a certain point as well.

• For many who build a portfolio, they have planned to build a legacy for their children in order to pass it on when they die, after using the portfolio for their own benefit

Once you have decided the time frame before needing/wanting to exit the investment, there are also the means to carry out the exit, these include:

Selling - The most common exit strategy and enables you to liquidate your position completely. There are several approaches to selling an investment, you can either buy and sell quickly, flipping the property, possibly after doing some refurbishment work, adding value and then selling for a profit, or the long term, buy, rent it out and hold on to the property for a long term, waiting for the capital appreciation to grow over time. If you have a portfolio you can also sell your properties as a bulk sale and a going concern to another investor. You can also sell the property via auction, the risks involved with this are not knowing what the final price will be, though you can add a reserve price. Also it is important to understand fully the fees involved.

Refinance - This strategy is obviously not an exit from your investment, as you are not liquidating your position, but you are refreshing your initial investment by taking out a new loan, this gives you the ability to take advantage of any equity in the deal from capital appreciation, then use the money to potentially invest elsewhere, and keeping the original property. Many portfolio investors use this option to build their portfolios. Once your property has equity and has risen in value, renegotiate a new loan deal and pay off your initial mortgage, keeping the rest of the money for other investment, or a deposit on another property. You will see this in the BRRR strategy, buy, refurbish, rent, refinance - then repeat. This has risks from rising interest rates, which might increase between the initial mortgage and the refinance date. As with other strategies, property prices may fall, this can lead to negative equity.

Adding investors - A way to reduce risk is to add another investor to the deal. Basically this means selling the investor a portion of the investment, it will then become a joint venture, we have more on joint ventures in our comprehensive brochure on building a profitable property portfolio found here. This comes with associated risks such as falling out with your investment partner.

Inheritance, leaving the property/ies to loved ones/children/heirs - Your exit strategy could be to build a legacy for your children. Many investors will pass their 'estates' on to their children. You can write a will leaving the estate upon your passing. Other options include creating a living trust, entering into joint ownership with your children or creating a life estate deed. It is advisable to speak with a knowledgeable solicitor to draw your plans up legally, as the risks involved with gifting or leaving property to others include: Inheritance Tax (Inheritance tax is often seen as double taxation, because the asset has already been taxed when they were owned by the deceased) Depending on who you leave the property to there may be no inheritance tax, for example you can pass a home to your spouse or civil partner and there would be no Inheritance Tax to pay, however leaving the property to another person will count towards the value of the estate. Capital Gains Tax, Income Tax, amongst other concerns.

There are other potential exit strategies, such as donating to charity, or a 1031 Exchange, we will talk about these in a separate article.

Whatever your exit strategy and reasons for exiting are, you should have a basic plan laid out when you initially invest in a property. These initial plans may change due to circumstance, but at least with an exit strategy built in, it provides a better base for changes in the future.

For more information about property investing and exit strategies, please read our comprehensive guide to building a profitable property portfolio HERE.