When investing in real estate, it is essential that you have an exit strategy
to ensure your investment is as successful as possible. By failing to plan, you are essentially planning to fail.
People invest in real estate for numerous reasons and can either hold property for the longer term, which is the preferred and advisable option or sell it quickly after buying, with the intention of making a quick profit or to use the profit to pay off any other debts.
However, whichever option you are thinking about, you need to decide on your exit strategy. Factors that should be included are how long you want to hold the property for, how much money you’d like to make and what happens if things take a tumble for the worse and you are forced to sell?
Some exit strategies for an investment property include:
Sell the property
Change your loan structure
Hold the property and live off the equity gains and rental income
Pass it on to your children
What is an exit strategy?
An exit strategy is essentially a plan to get you out of a situation which is likely to become difficult. For an investment this means selling off your property, to ideally make a substantial profit rather than a loss. However, if there is a loss to be made, you want this to be as minimal as possible. Having a clear exit strategy in place will keep your losses to a minimum.
When should you create an exit strategy?
The best time to create your exit strategy is when you are looking to purchase a property. It is at this time you should at least have an idea of how long you want to keep the property for and know whether you want this to be a long term investment. Typically, a property doubles in value every 10 years or so, so it makes more sense to hold on to a property for the long term if you are able to.
Why should you have an exit strategy?
The main reason of having an exit strategy is that things take time. Selling a property will not happen overnight. It could in fact take many months to sell your property, time that you might not have. Therefore you want an exit strategy in place to know at what point you need to sell.
4 Reasons to have an exit strategy
There are a variety of reasons as to why you should have an exit strategy. These reasons include:
Economic shift – Interest rates might increase to a level that is out of your budget. You therefore need to have a figure in mind which is the highest point at which you can afford to repay your mortgage at. If there is not much leeway, then you might want to purchase a slightly cheaper property.
Personal issues – Personal issues might turn up unexpectedly such as a sudden illness or a family crisis. You might have been made redundant at work which will put pressure on you financially forcing you to sell.
Age – You might be at an age where you are nearing retirement so you want to have a plan in place where you can capture the greatest value out of your investment property and know at what age you want to retire.
Buying with someone else – If you are purchasing a property with someone else then it is even more important to have a clear exit strategy from the start so you both have clear intentions and know your goals, which will hopefully avoid panic selling.
6 factors to remember when creating your exit strategy
Like anything in life it pays to do your research, and it is essential that you know all the facts about the local area and property first before purchasing a property to ensure it will be a good investment. Doing thorough research means you are less likely to purchase a bad investment and therefore are less likely to have to panic sell to get out of trouble.
2) Create a plan – know your goals
Do you know what you want and the type of property you want to buy? What are your goals you want to achieve by buying a property? In order to achieve your goals you need to have a strict plan in place that you are able to keep to and you should also determine how long you want to hold the property for.
3) Avoid overpaying for your property
It can be tempting if you are at an auction for example to get sucked into a bidding war. However, it is essential that you do not overpay for your property as this can backfire on you, especially if property prices fall in value.
The same applies when purchasing a property off the plan. Generally apartments bought off the plan are cheaper than once they are completed so it makes sense to get in as early as possible. However, remember to do your research to ensure this is a good price for the location.
4) Have emergency cash easily available
Problems are always likely to arise and you should therefore always have some level of savings that are separate that act as emergency cash for when times get tough. If the property that you are thinking about buying will only leave you with $20 to your name at the end of each month, then you need to rethink about buying this property.
5) Plan for the worst case scenario
You might find that the first property you buy benefits from high capital growth and makes you a lot of money quickly, allowing you to use the equity in this property to buy your next property. However, things aren’t always peachy and you should prepare yourself for the worst case scenario. This could be a steep interest rate rise or your apartment remains untenanted for a lengthy period of time, leaving you struggling to cover all the costs involved. You could have maintenance issues or bad tenants. You should therefore ensure you have insurance in place to cover you and have a cash buffer.
6) Think ahead
When creating your exit strategy you should ideally be looking into the future and have a rough idea of where you will be in say 5 or 10 years from now. Will you be married and have kids? Will you be retired? This will help determine unexpected costs and factors that might crop up affecting your investment property and how long you might hold it for.
Review your exit plan annually
Whilst creating an exit strategy is all well and good, you should also review it at least once every year to check that your goals are still the same and you are headed in the right direction. If you already own a property, then it’s not too late to create an exit strategy, just remember, you should always have the end goal in mind.
Get in Touch
To learn more about why property investors need an exit strategy, it’s worthwhile speaking to one of iBuyNew’s Property Consultants. Call 1300 123 463
to book a meeting today.