It is generally accepted, especially in the current property market conditions, that it is crucial to know your exit strategy before you buy a Property. “How will I make money with property?” This is the first thing many have in mind when they show their first interest in property investing. Rather than that, the first thing you need to start with is to determine, before you buy any investment property, how you plan to exit or sell the property.
A good question to ask oneself then is : -”What are possible exit strategies?” Well, these listed below are the tested and tried strategies most property investors have used so far:
1. Buy Investment Property and Hold
2. Buy investment property and have your tenant pay off the mortgage.
3. Buy Investment Property, Refurbish and Sell for Cash. You refurbish the property making cosmetic, mechanical and/or structural changes and sell for cash. Sometimes it’s called ‘Buy-To-Sell’, or a ‘flip,’ if you hold it for a short length of time while making changes and then resell.
4. Buy Investment Property and Sell on a Lease Option. You then sell the property to your tenant/buyer using a lease option; they choose to exercise their option to purchase sometime in the future.
Of these, as the previous article in this blog demonstrated, Buy-to-Let options 1 or 2 were the favourites, and did appear to do so well, not so long ago! So why does this most common of exit strategies not work so well as before?
Well, think abut it this way…In recent years, the Buy-to-Let market in the UK has grown enormously, with the buy-and-hold strategy being the most popular. However, such has been the saturation level of Buy-To-Let in some areas resulting in an over-supply of investment properties and exposing investors with highly-geared portfolios to the inevitable fate of negative cashflow. Indeed, in the good times, capital growth was skyrocketing, rents were increasing for each tenancy renewal, and tenants were not always well treated. The landlord was definitely the king and property investing was so easy.
However, what happened when the market turned the other way? This is where every Buy-To-Let investor must ask himself/herself some very relevant questions such as:
Did you pay retail price when you bought your property?
What happens if your property is empty for a couple of months?
And your mortgage interest rates start rising again?
And you are forced to accept a lower rent in order to tenant your property?
Remember, whatever the reason, you still have to come up with the money to maintain the mortgage payment each month! And worst still, what will you do if you have multiple properties where the above happens? Despite how easy it all seemed in good times, do you know how to handle things when the market turns the other way? You could be forced to sell due to negative cashflow. In many instances you will lose money instead of breaking even or making a profit, as everyone bails out at the same time as you. You should never live or believe in negative cashflow. It will give you stress, sleepless nights and fights with your partner. Such times will affect your health and that of your family’s too. This is why Positive Cash Flow Is a Must!
Therefore , exit strategy 3 and 4 are the best ones in the current market. Exit Option 4 using lease options is by far the most viable strategy for 2010 as we are all still very much in a period of negative growth in the property market. It is interesting to see just how many so called ” traditional BTL or BMV” investors and poperty seminars are all turning to lease options as the saviour of the day! Therefore, it is imperative that every self-respecting property investor today owes it to himself to find out exactly what lease options is, and how to use it as an exit strategy. In the next article, you will learn more on this subject, but in the meantime, please check out the link below if you want to know more on lease options:
http://www.ukpropertyladder.com/assured-positive-cashflow.
All for now.
Sudeshna Choudhury