A property exit strategy made simple
We often think that an investment is forever. Think Property. Think ETFs. Think retirement annuities. But things change. Property is no different. Property exit strategies are an important part of your investment plan.
And we need to be ready for it when things change.
As property tends to be less liquid than many other assets, you need to plan to quit. With many moving parts, I want to look at the reasons for selling, the rules of “quitting your property investment” and what you need to consider before you buy to make your exit strategy as safe as possible.
The three components I want to look at are your initial setup, the ruleset on exiting a property investment and possible exits that you can do:
- Buying property and property structures – should I buy my property in a company, trust or my own name?
- At what point will I exit my property investment? Do I have a ruleset to determine this?
- What is my exit strategy? Will I sell, remortgage, liquidate or transfer it through intergenerational wealth to my children?
Starting with the end in mind – the way of the property exit strategy
When you buy a property, you need to decide what the strategy is – whether it’s buy to rent, fix and flip or building a guesthouse/Airbnb. If you think this is only for investment property – well, no.
You need to have the end in mind with your primary residence as well. I don’t want to rewrite my article on trusts vs company vs own name, but want to show you, in short, the impact that this might have on your finances:
- Imagine having a wine farm in your own name. And you die. Imagine the estate duty payable! In this case, a trust might be a good option
- Consider selling your entire portfolio once off – a lot of tax will be payable! Have you considered having all your properties in a company and selling the company?
- What would happen if you want to upgrade your primary residence?
The lesson is this – make sure you have the legal structures in place early on to make your investment or primary residence as tax efficient as possible.
When will you sell?
I like to think about an exit strategy like a rule set – under what conditions would you sell your properties? What needs to happen? Here are some examples of things to consider:
- When your property is not tax-efficient anymore (Add number specifics here)
- If a sectional title property’s levies go above x % of property value.
- When properties in the area don’t grow by x % over a time of 5 years.
- As soon as the bond is paid off
- When the partnership falls apart
- When you want to upsize your property to make room for a bigger family
Have a plan for your capital
When your rules have been broken and you know it’s really time to sell, you need to have a plan in place of what you will be doing with your capital.
I know financial situations do change. I am also mindful of the fact that rebalancing and exposure change over time. Having said that, defining an allocation of your capital as part of your exit strategy will help you not to spend the money on a new car or only coffee.
I believe coffee is an excellent everyday investment, but just not all your profits. Maybe just have two coffees with the profits. But no more than that!
Getting rid of properties
Before we get into these strategies, let’s look at your options for “getting rid” of your properties. Your options are selling, auctions, or instalment sales.
We all know about selling via an agent or online and auctions, but instalment sales are something I want to mention here. This refers to a legal contract where you can let a tenant pay you back the property price monthly – very much like rental income. At the end of all the payments, the property can be registered in the new owner’s name.
Property exit strategy
Sell to pay off debt
Some people freak out when they have any debt – and with good reason. When looking at interest rates during the .com bubble 20 years ago it becomes evident – people don’t want an over-exposure to property debt. With this strategy, it might make sense to sell a property to fund another property. You might also want to pay off some or all of your debt.
Let’s take Mrs Latte as an example. Mrs Latte found that her rules of high levies and low rental income have been broken for 4 years. She decides to sell, settle the existing bond and invest the remaining money in one of her other active bonds.
Sell to live off capital
If you’re investing in Krugerrand properties, you will find that the property value tends to escalate quicker than the rent. Here’s another example:
Mr Capuccino has a ruleset that states the threshold for selling is an offer for R 2 million. It further states that he has to be a minimum of 5 years from retirement. He will sell and invest the money in cash or equivalents.
In this case, liquidity will go a long way for his risk appetite.
Make more debt
Though not a technical exit from property, one could also decide to leverage the value of the property to get another loan or buy a new property. Some people use the money gained to buy more property – or pay for bond and transfer costs. Here are some examples:
M. Espresso has a property that has increased from R 400k to R 800k. He is refinancing his property to get R400k in cash. He will be buying another property he found for R 800k by putting down a R 300k deposit and paying R 100k for bond and transfer costs.
Miss Doppio has a property that has increased from R 200k to R 600k. Her bond is at R 100k. She has found a property for R 1 million that she can buy with a better rental income. She will be selling her property and use the R 500k as a deposit for her new property.
Liquidate
Let’s say your property company needs cash urgently. In this case, you would sell the property to have cash available. Here are two examples:
Mrs Americano is getting divorced and is forcing her husband to sell their primary residence so she can have half of the money.
Mr Mocca is wanting to emigrate to the island of Java. They cannot own a property in SA, as the law states they get special tax breaks if they don’t own property anywhere in the world. In this case, they will sell to have the cash and use the cash for new investments in Java.
Conclusion
Property exit strategies, though not often talked about can help you take the emotional roller coaster out of the market. When you know under which conditions you will sell, it will help you to better navigate the property investment world.
Whether you’re selling at auction, via an agent or simply remortgaging your property to use the capital – you need to have a ruleset in place with conditions of when to sell.
Happy investing!