What is the single most important decision in property? There are so many decisions to make when it comes to property investment. Area, price, building type, financing, strategy, market sector, etc. the list goes on. Now I realise this will be a controversial assumption, and everyone will have an opinion on this. But they’re wrong and I’m right, and you should all listen to me.
So the answer is……..
What’s the point?
In other words, what is your exit strategy and what is the desired outcome assuming everything goes well.
Why is this so important? Well if you don’t know where you’re trying to end up, how will you ever know if you get there?
There are a lot of decisions that must be made when investing in property, so let’s take a real world look at how your exit strategy can help guide you during those key moments.
A legacy provider and a traveller
Let’s assume we have two investors; Dave, with a young family, who wants to help his children get on the property ladder in future and provide them with the security he didn’t have, and Sabrina who wants to quit her job as soon as she can and spend her time chasing the sun.
Bearing in mind he has a long term plan that will span years if not decades, something slow and steady that will get him where he wants to be, while minimising risk where possible is likely to be ideal.
Most people start thinking about leaving a legacy when they first have children, so let’s assume he is working on a 20 year timeframe. That length of timeframe means that a lot of strategies that may not work for Sabrina, will work fine for Dave.
We would probably be suggesting to Dave to follow a strategy that encourages incremental gains over time that will snowball along the way. Depending on his personal circumstances, this is likely to revolve around a long-term capital growth strategy with rental income that at least covers the costs – Single Lets, Houses in Multiple Occupation, etc.
Knowing that Sabrina doesn’t actually want to be in the country, or any country, for all that much time will dictate what strategy it is best for her to follow.
There are two main strategy variations to consider for Sabrina. Either a short term one, build cash to fund a period of travel, then spend it all while abroad, then come back and repeat. Alternatively, build up a solid base of passive income that can fund her travelling lifestyle desires.
Given most people want to travel sooner rather than later, this would push us towards the short term profit model. However the choice will come down to the specifics of his circumstances, and most likely the capital that is available at the start.
That strategy could be based around offering services to other investors on a contract basis, or developing properties for a quick capital injection sufficient to fund more travelling.
It would make sense if possible for Dave to invest in a relatively confined geographical area, ideally close to places that he knows. As the plan would be to hold these properties for the long term, perhaps even gifting the properties to his children, then the ease of management comes into play to an extent. There is no right or wrong answer here, but there are benefits to holding a concentrated portfolio in order to build up a network and receive preferential rates for management.
Who cares where she invests? If Sabrina is without a fixed base back in the UK, then there is literally no restriction on her location, either for investing or living. Where ever the best opportunity arises, that is where she should be. The reality is likely to be that there is an area that still has family and friends, so that will be a partial anchor for her return trips.
Even so, the location itself is much less important for Sabrina, and if she is following the development strategy the location selected for investment will be based purely on the potential profit of the deal.
The target properties for Dave to look at are going to be fairly standard, always in demand, mass appeal type properties. So 1/2 bed apartments, 2/3 bed houses. These tend to appeal to the largest section of the rental populace, that being young professionals or new families.
Given the duration that the properties will be held for, standard construction is likely to be the best house type. This makes maintenance easier and all of the likely defects are already known quantities. For apartments it is less of a concern as the overall maintenance should be the responsibility of the freeholder.
The property Sabrina targets will be the one where value can be added the most easily and profitably. Whereas Dave has to concentrate on areas that have high tenant demand, Sabrina is likely to be more concerned with the owner occupier market. So anything from a rural bungalow to a studio apartment or a 12 bed mansion… provided there is a profit to be made, then that is the type of property to go for.
There is an argument for specialising in a particular property type so as to get more familiar with it, however that’s not necessary.
Massive amounts of debt is not much of a gift to give someone, so some kind of repayment vehicle is likely to be needed by Dave. There are many ways to achieve this, either via a capital repayment mortgage, an interest-only mortgage with regular annual overpayments, or by selling off some of the assets to clear the debt on the remaining properties.
This is a preferences and risk profile decision. On the one hand, you are reducing the cash received each month by going for a capital repayment mortgage. However you are guaranteed to have unencumbered assets at the end of the term. On the other hand you can use the additional cash flow to invest in more assets and use the power of leverage to increase the number of properties owned. Even after selling, provided the leverage has worked in your favour you are likely to be better off.
But only if leveraging works in your favour!
As the deals are likely to be shorter term for Sabrina, then cash, bridging finance or JV partners are more appropriate for her funding. With any long term, passive income assets that are acquired along the way, then an interest only mortgage is likely to be most appropriate as this maximises the money available to spend travelling!
So what is your exit strategy?
If you don’t know where you’re going, any road will get you there. Which thinking about it sounds quite nice! Means you can never be lost! But also means you might not end up where you want to be.
So spend some time thinking about your exit strategy and figure out exactly what you want out of property. Maybe property isn’t actually the best route for you to go down. Maybe Sabrina should be one of those people working from a laptop on a beach, constantly taking hot dogs or legs pictures on her Instagram account…
I would strongly encourage you to have a sit down and think about what you want out of all this first though, and then from that work backwards and come up with a strategy of how to achieve it.
Be realistic, and if you need help ask!