When entering any property purchase, it is important to plan your exit strategies, both short-term and long-term. This all ties in with your due diligence process and is vital to take into consideration.
First of all, you may be wondering what I mean by the term 'exit strategy'. Well, in the short-term, it would be for the reason of selling the property as a 'flip' deal to create capital profit, or to refinance a deal onto a Buy-to-Let mortgage if your intention is to hold it. Although (and perhaps more importantly), it is also the ability to 'dispose' of the property in a way you had not originally intended if your circumstances were to change or the unexpected happened; AKA the 'what if...' scenario. When making any property investment decision, the most important question to ask yourself is 'how could I get out of it...?', either soon (if you needed to), or in the long term, as you may plan to.
Short-term exit strategies which are 'on purpose' would include the ability to 'force' the appreciation of a property by making improvements (such as refurbishment and/or reconfiguration or extension of the existing space), the ability to buy 'below market value' in the first instance due to the seller’s situation (i.e. probate sale, asset management/repossession sale, divorce or other extenuating circumstance), to name but a few. In these cases, you may either be able to sell the property on for a profit, or refinance the project in order to restructure the original finance you have on it.
It is, however, crucial to ensure that you have at least two
different exit strategies in place in case the market or your personal situation changes and you needed to 'get out of the deal' quickly and in a different way. The most common short-term exit strategies you need to have in place are the option to sell the property (for at or above the price you paid for it) and the ability to rent it out as an alternative.
For example, if you'd used bridging finance to complete a purchase and the refurbishment to then sell on, but the sales market turned out to be much slower than you had anticipated, you’ll need to have another option to overcome the high interest charges associated with the bridging finance. This could be remortgaging using a BTL mortgage and turning the property into a 'hold' project for a few years.
Equally, if you had intended to hold a property, but then found your financial or personal circumstances were forcing you to sell, you may need to dispose of the property quickly.
There are usually more options and future possibilities to consider when deciding to hold properties for the longer term. The capital growth will need to be considered in respect of capital gains tax as well as any further development/town planning in the close vicinity of the property.
When you hold property for the longer term, there might be opportunities in the future to consider putting on an extension, reconfiguring the internal space, doing a loft conversion, splitting the title to add another property, changing the use to an HMO or the option of splitting into flats. This is just to show that property is a versatile, dynamic and definitely not static investment.
It is good to take into consideration (from the outset) that which you intend to do with the property overall. See it as a tool, a vehicle if you like, with which you can create many different outcomes. Knowing what your intentions are from the outset gives you flexibility and will help you to make the best decisions as you go along.
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Here's to 'Happy Property Endings'. :-)
Hazel de Kloe
Property Investor | Property Coach and Mentor | Speaker | Author