Investing in real estate is great, but no one does it because it’s a fun hobby. Rather, it’s a means to an end. It’s merely a way to create wealth over time.
What most people don’t realise is that working out the best exit strategy for your investment portfolio is just as important as choosing the right home to buy. Here are some things to consider when creating your investment plan.
Begin with the End in Mind
“By failing to plan, you are planning to fail – Benjamin Franklin”
It surprises many people to hear that any good investment strategy begins with the end in mind. In order to choose the right type of property to add to your investment portfolio, it’s important to know exactly what your goals are and your intentions are for that home as part of your wealth creation plans.
For example, if your end goal is to generate enough passive income from rental income to live well in retirement, you’re more likely to look for good homes in popular areas with strong rental demand. However, if your end goal is to sell off the properties in your portfolio to fund your retirement, you’re more likely to look for homes in highly-sought after locations with plenty of future capital growth.
Some people prefer to work on the strategy of buying cheap, renovating, and selling for a profit. In that case, you’ll be hunting for bargain properties that can be fixed up relatively cheaply in areas where you can sell for a higher price than you originally paid for it.
When it comes to creating your investment strategy, only you can determine what will work for your future. You may even decide to choose a combination of different strategies to diversify your portfolio and spread your risk a bit.
Choosing Your Strategy
Some people’s entire investment strategy relies on buying a run-down property with the sole intention of completing some renovations and then selling it at a profit. In some markets, this strategy is also known as flipping.
You have the benefit of getting your cash back out of the investment sooner. You also get to see your profits in your hand to spend on other things right now without waiting for years or even decades.
However, each time you sell a property you risk getting rid of the goose that laid the golden egg. Once it’s sold there is no more capital growth and no rental income. You’ve also spent some of that profit paying for selling costs and agent’s fees. As the home was an investment property, you’re likely to get stung with a capital gain’s tax bill too.
By comparison, there are some instances when a well-renovated property may be worth keeping as a rental property. Tenants are often happier to pay a bit more rent for a nicely-maintained property, especially if you’ve added a few mod-cons to the property. Things like dishwashers, upgraded cooktops and ovens, updated bathrooms and energy-efficient heating and cooling can be big attractions for potential tenants.
There’s also the consideration of leveraging the equity you’ve built up in the property. You may have bought the home at a bargain price and spent a bit more completing your renovations. However, once the project is complete you could find that you’ve added far more value to the home than you spent on it.
That additional value is extra equity you can use as leverage to keep growing your real estate portfolio. Besides, if you choose to keep the property in your investment portfolio, you’ve saved money on selling costs, agent’s fees, and capital gains tax.
Before you make a decision about any individual property, discuss your plans at length with your accountant to see how it may affect you at tax time. It’s also a good idea to discuss your plans for the property with a professional real estate agent who understands the local area. Most experts will happily offer market value appraisals on properties to help you work out your strategy.
When Is The Right Time To Sell?
There are times when it makes more sense to sell a property rather than hold it in your portfolio. For example, a property developer may approach you with an irresistible offer that is way above market value, or your neighbor wants to pay a healthy sum of money to purchase your property for a son or daughter to live in.
If you think this would be a great deal, then grab the opportunity and sell it. Prepare the needed documents to complete the sale such as a grant deed form to transfer your property rights to the new owner that is if the buyer is not concerned with limited warranty of title.
Unfortunately, many property investors are forced to sell when conditions aren’t good. Job redundancies or poor health can change your entire investment strategy. Rising interest rates could also affect how profitable a rental property is, which could trigger a decision to sell.
Regardless of what your own personal investment strategy is, always remember to create a strong exit plan. You have a much better chance of achieving your real estate goals if you have a plan to stick to.