Exit strategies for your investment property

When you’re just getting started in buy-to-let as an investor it might seem a little farfetched to consider exit strategies for your investment property, but it is absolutely worth thinking ahead.

If you’re in property, you’ll know that it’s not just about making smart moves at the beginning of the investment. You also need to have a strong exit strategy in place to give yourself the best chance of success. Let’s find out why and how you can create a winning exit strategy for your investment property.

What is an exit strategy in property?

An exit strategy is a plan detailing how and when you’ll sell or step away from a property investment. Think of it as a roadmap that navigates the journey from purchase to eventual sale.

The primary goal is to ensure you pocket the highest return on your investment. But it’s not only about the money, as an effective exit strategy considers the ever-fluctuating market conditions that can influence property values and demand.

It’s also a personal decision. Whether financial needs, life changes or long-term goals, your individual circumstances play a role in shaping your exit approach and maximising the lifespan of your property investment.

And last but not least, there’s the taxman to consider. Capital gains tax and other potential levies can significantly impact your profits, so the exit strategy should mitigate these additional costs as much as possible.

What is a capital value exit strategy?

A capital value-based exit strategy focuses on the property’s worth, so you can move on your investment once it reaches a specific value, be it £200,000, £300,000 or £400,000. This strategy isn’t tied to time but to price fluctuations.

For instance, you might sell a £400,000 property to invest in multiple others in a more affordable region. The key here is to keep a close eye on price trends and expert forecasts to determine the best moment to exit one investment and perhaps re-enter the market with another so it aligns with your financial goals and real-time market conditions.

What about a yield exit strategy?

A yield-based exit strategy, on the other hand, revolves around the return on investment, specifically the yield. You set a minimum yield level that you’re comfortable with, and if the property’s yield falls below this threshold, it triggers a sale.

This approach isn’t tied to a specific time frame either, and it could be applicable over two years or 20. Regular monitoring of yield performance is necessary for executing this strategy effectively. While property often outperforms savings accounts in terms of yield, it’s worth remembering that this hasn’t always been the case, and market conditions can change.

Exit strategies to consider for your investment property

Selling investment property as a company or shares

How you hold your assets makes a world of difference. One approach is holding property within a company structure, and it’s easy to see why. This method comes packed with a host of benefits, such as potential tax perks if you’re in the higher tax bracket.

By holding property in a company, investors often find themselves in a more favourable tax position compared to personal ownership. But the advantages don’t stop there.

When the time comes to cash in on your investment, you might not need to sell the property outright. Instead, selling shares in the company that holds the property can be an enticing alternative.

It’s often faster, less complicated, and in some cases, it can lead to higher profits. However, going down this route isn’t without its challenges. The legal and financial details required can be more complex than selling via the more traditional methods.

Off-plan property – right to reassign

An off-plan property often appeals to investors. It sees you purchasing a property that hasn’t yet been built. In other words, you’re getting a brand new property before a brick has even been laid, and it comes with the right to reassign.

What does that mean? Instead of twiddling your thumbs and waiting for bricks to be laid, you have the option to transfer your purchase contract to another eager buyer. Think of it as selling your coveted spot in a queue. Using your right to reassign can be particularly beneficial if the market has seen an uptick. If timed right, selling a property this way gives you a quick exit at a profit.

Don’t sell at all

Who says you need to sell the property at all? If you’re free from mortgages, you can retain the investment for as long as you like and benefit from its income before eventually passing it on to loved ones.

For those with mortgages, it’s possible to continue acquiring mortgages much later in life than in previous years. And remember, if the properties are held within a company, they can be maintained as long as there’s another director to oversee the mortgages.

This approach sustains the income stream and provides a continuous asset. There are, however, potential concerns of fluctuating interest rates with mortgages, which might be off-putting as it can decrease profit margins.

Sell some

Another strategy that can be both practical and profitable is the partial sale of your portfolio. If you’ve accumulated several properties, some with outstanding mortgages and others perhaps fully paid off, over time and with a favourable market, it’s possible that you’ll have seen substantial growth in property values.

You could find yourself in a position where selling just one or a few of these properties could generate enough capital to pay off the mortgage balances on the remaining ones. This strategy will help free you from debt while also helping you continue enjoying the income from the properties you still hold.

When to exit

Timing is everything, as they say. But knowing when to exit a property investment isn’t a straightforward decision. You need to keep an eye on market conditions. For instance, are house prices on the rise, or are they heading for a dip? Think about your own financial goals, too.

Maybe you’re nearing retirement and fancy a change, or perhaps other investments are looking more appealing. And don’t forget about life’s unpredictabilities – sometimes personal circumstances dictate our decisions. Whatever the case, regular portfolio reviews and a chat with a property expert can go a long way.