When it comes to property development, it’s no surprise that most investors’ main priority is building a valuable portfolio. However, almost as important as building your portfolio is having a strategy in place for when you want to exit from your investments.
Exiting may not have crossed your mind yet, but the possibility that you want to divorce yourself from your portfolio can come around quickly, and if you don’t have a plan in place, you may be left losing money while you come up with one.
So, trust us when we say having a way out will pay dividends. If you’re still not sure, ask any experienced investor and we’re sure they’ll agree.
Keeping your options open with your investments is a great way to stay ahead of the game, so understanding the importance of exit strategies will help you when it’s time to cash in on your property or when it’s time to cut your losses.
But to fully understand how paramount a property investment exit strategy is to your success, we first need to explain what one actually is.
In short, a property investment exit strategy is the plan of action you will take if it no longer makes sense to keep the properties you’ve invested in (we’ll go more into why this may be a little later on).
Most commonly, investors choose to move away from an investment for the same reason people leave a job: because they want to retire. We all know how much time and effort selling property can take, so the last thing you want to do is come to your retirement and not have a plan.
That’s why we highly recommend coming up with an exit strategy before you make any investments. You can act immediately when the time comes and it could be the difference between capitalising on a great opportunity or letting one slip by.
While having one property investment exit strategy is good, you should definitely consider coming up with a second exit strategy, too.
Your first exit strategy can plan for what to do if everything goes right, and your second can plan for what to do if everything goes wrong.
Planning ahead is a smart move, which is why having at least one to start off with is key, but having a back-up will give you that extra peace of mind just in case plan A falls through.
If you’re holding on to your property for the rental yield it brings in, you may find the percentage you’re earning is only just covering your costs, meaning your profit margin is either slim or non-existent.
However, selling the property could bring in a much tidier profit.
In many cases, investors buy property with a view to benefiting from capital gains in the future. That means a property may be bought knowing it doesn’t deliver the best rental yield.
However, while your plan may have been to sell the property on, bringing yourself to do so can be easier said than done. If you like your tenants, you may be hesitant to sell because of the disruption it will cause them and keep putting the sale off.
Having a plan for what checkpoints you need to hit before you sell is going to make preparing for sale much easier for everyone.
The old adage of ‘you’ve got to spend money to make money’ is very fitting in the property world, and this is doubly true if you spot a prime investment opportunity that no one else has seen yet. But what would you do if your capital was tied up in another property?
Well, you could always implement your property investment exit strategy to free up your funds.
Knowing when to take capital from one investment and put it into another is crucial in making the most money out of property. You can’t just hold on to a building or a piece of land because you like it if it doesn’t make good business sense.
Every property comes with a host of different responsibilities, from keeping track of finances to managing tenants. So, while having a whole host of properties to your name might sound like a dream, many investors reach a point where they want to consolidate their portfolio.
If you’re managing your own properties, selling three low-value properties, for example, to buy a higher value one can reduce the demands on your time. If you use an agent to manage your properties, then restructuring your portfolio can reduce this cost.
Planning an exit strategy early can help decide what properties you plan to trade up on. For example, you may target low-value properties with high potential capital growth with the plan to sell them and invest in a higher-value property with a strong rental yield.
Take a look at the financial aspect of each property you own and consider selling any that are struggling to cover their costs via rent or appear to have reached their ceiling price on the open market.
There’s no point in continuing to invest in a property that has given you all it has to give, after all. By the time you’re done selling, you should have a portfolio that’s significantly easier to manage and a good amount of capital to reinvest or simply enjoy.
Investing in property is a risk, so there’s no guarantee you’ll make money on all your investments. Even though this is a subject people would rather not think about, it will pay off in the long-run if you learn when to cut your losses on a bad investment.
Putting your exit strategy in place will limit your losses, which gives you the best chance of taking more funds forward with you for your next investment.
It’ll also save you a considerable amount of time. Think about how many hours people spend on their projects, even though they’re sinking fast with no signs of help.
If you want to enjoy the rest of your life without ever having to think about property investment again, your best option may be to sell your entire portfolio.
This may be the most obvious exit strategy, but that does not make it the best one. For a start, selling all your properties in one go means that you’re going to be hit with a fairly sizeable capital gains tax. Secondly, you may be left wishing you’d kept one or two properties if the market grows after you sell.
Still, there’s more to life than tax and profits, so if you want your properties off your mind, selling everything is a straightforward way of doing this.
If you’re considering your property investment exit strategy because retirement is on the horizon, then one of your best options may be to sell only part of your portfolio.
Selling, let’s say, half of your properties can give you enough capital to pay off the mortgages on your remaining properties. That means that the rent generated by your reduced portfolio is pure income.
The end result is that you get to retire and still benefit from a healthy monthly wage. Since your portfolio is much smaller, the demands of managing your properties will also be significantly reduced.
Finally, you’ll still have a few properties that you can cash in on as and when you need to. That gives you plenty of security and the knowledge that you can release capital as you get older.
So far we’ve looked at strategies for selling property, but it’s also important to recognise when not to sell. If you appreciate the security of knowing you have capital invested in property, there is nothing to say you have to sell.
If you own a property outright this is easy, but even if you have a mortgage you can keep a property until death.
To decide whether holding property is a good strategy or a bad strategy, you need to think about what your family wants, as they’re most likely going to be the ones that will handle your investment after you die.
If they are prepared to take on the mantle of property investor, then great. However, if inheriting property is going to cause them a huge amount of stress, you may want to think about selling.
In some cases, your property exit strategy may be integral to your overall investment strategy. A common example of this is where you buy properties with the intention to renovate and sell them quickly.
This method is great for anyone who prefers to invest in the short-term, but it does demand a very strong understanding of the property market and how to find a deal.
If you intend to fix and flip properties, it can be important to plan for the opposite of an exit strategy. If the market turns and you can’t release the value you want to from the property, what do you do? Taking the time to purchase in areas with strong rental yields means you can hold onto the property until the time is right for you to sell.
Whether your exit strategy includes selling all your property or restructuring your portfolio to make it more manageable, the important part is planning early.
As we mentioned, you need to think about your plans before you make an investment. This is because the type of property you choose and the paperwork that comes with it could play a significant role in how you exit.
For example, if you invest in a leasehold property, you need to consider any restrictions that could have an impact when you come to sell.
So, before you invest in another property, consider what your investment goals are in the short and long-term.
If you’re unsure how to translate your goals into a successful property portfolio, speak to our team. Our extensive knowledge of property investments areas in the North West can help you when it comes to planning your property investment exit strategy.