Last time, we discussed why it was important to have exit strategies before we had even considered buying a property and hopefully you will now begin to realise just how it was very important to know this information because it was not only of immense practical necessity, but also because it would help you to avoid the worst pitfalls ot buying property which has plagued so many investors over the last few years and especially today’s property market.
We will now discuss each of these strategies and how it works towards that all important goal for every property investor i.e. wealth creation.
1) Buy Investment Property and Hold
The first step and priority towards your goal of wealth creation is to have your tenant pay off your mortgage. The property should continue
producing positive cash flow until the mortgage is paid off. Remember to ensure that the rent you charge your tenant also covers for expenses such as agents letting fees, service charges, repairs and tax, otherwise all you are doing is paying for this out of your own pocket and not really building any wealth at all! Positive cash flow is the key here for sustaining this strategy so that, in the long term, the capital appreciation of the property increases in value, so you can then re-mortgage and enjoy the equity tax free or if desired, sell a few such properties from your overall portfolio and realise the profit less capital tax.
2) Buy Investment Property, Refurbish and Sell for Cash.
The first step towards this kind of wealth creation and priority is to renovate the property quickly to reduce holding costs and re-sell for cash profit. It would be an extremely prudent idea to research and check out your building contractors’ costs by getting at least three quotes ahead of purchase, and work out your estimated calculations beforehand to see how much cash you have available to sustain the project while it is being renovated, as you will have to pay the mortgage for a few months, service charges, lighting , heating and water bills, leave alone paying for renovating and legal costs before and after sale of property. If you borrowed this cash, you will also need to take into account interest charges for the period of time it takes to do- up the distressed property. You can see why the sooner you finish the project, the more profit and more wealth you can realise. This strategy, by the way, is still a very viable option in today’s markets, as it is not dependent on the rising and falling nature of property prices, as there is real value in equity being created in the value of the property by renovating and improving it.
3) Buy Investment Property and Sell on a Lease Option.
The first step again towards this kind of wealth creation and priority is to receive a healthy positive monthly cash flow. Lease options is the best strategy, in my opinion, in maintaining this amazingly positive cashflow, with a lot less resistance and difficulty than the other strategies mentioned above. This will be expanded in more details in my next article, but suffice it to say that the payment of an option fee by the tenant-buyer at the beginning of the contract, as well as the slightly higher rent for the privilege of having the option to buy the property at an agreed time later, are very positive cashflow for the landlord-seller/investor. (Of course, to be fair to the tenant-buyer, this option fee as well as the extra increased difference in the market rent all go as credits towards the purchase of the property by the tenant-buyer, but the key thing here is to remember this is ready cashflow for use by the landlord-seller at the beginning of the lease option deal and can be used to create even more wealth!)
The second priority is to receive back-end profit, when your tenant-buyer exercises their option to buy. As the price of purchase has been mutually agreed before the lease option deal was signed by the tenant-buyer and landlord-seller, it offers an advantage to both parties i.e.which offers a fair price to the former in a fluctuating market and at a time convenient to when he/she is able to save up and afford to purchase the property, as well as offering to the latter a decent back-end profit as a result of agreeing a purchase price that takes into account the increased appreciation of capital value and equity in the property at the later time when the tenant buyer exercises his/her right to use the option to purchase the property. So in effect, you the property investor, or in this case, the landlord-seller, can continue to enjoy cashflow thoughout the deal, from beginning to the end of this period of the option, in both small and large amounts due to the option fee, rent and back-end profit -not bad at all for generating your wealth creation!
Next time, we will look more closely as to what exit strategies we should be considering within the exit strategyof lease options itself, which is itself a fascinating topic all of its own, and one which anyone thinking of using the lease options strategy would be wise to learn and apply!
Till next time then…
Sudeshna Choudhury