Published: 22nd February 2018
When you embark on investing in property you are likely to put a lot a time and effort into researching the market, your property and your borrowing options. One thing that tends to get overlooked in this process is your exit strategy, but this arguably one of the most important things you need to consider.
An exit strategy is your plan on how you intend to get the biggest profits from your portfolio. Planning this in advance can help you with some of the big decisions along the way.
Many investors end up owning more than one property and building up a portfolio for themselves. Some will decide not to take the obvious exit strategy of simply selling everything, but instead aim to restructure their portfolio as time goes on by selling some properties in order to invest in others. Deciding to do this early on may affect how you approach your investments and what you buy, so setting yourself some early targets can make your path to profits easier.
A number of investors now intend to use their portfolios either as their entire pension, or to support one. If this is the case, you need to make investments that will allow you to clear the mortgages before you retire in order to reap the rewards of the rental payments, or sell your property when you feel it has reached its peak in value in order to walk away with a healthy profit.
Your exit strategy may affect which mortgage you choose to take. Whether this changes the length of time you wish to borrow money for, the rates involved or any other details, you need to keep in mind what you intend to get out of your investment before you put anything in.
Many investors believe that there is no such thing as a mortgage for the over 60s, but this is not entirely true. With residential mortgages you are unlikely to live long enough to pay it off, but when it comes to buy-to-let, there are mortgages available that can still be repaid after you have reached 100. However, if this is your plan, your heirs may be left to refinance or sell your properties when they inherit if you have not already transferred ownership or purchased the property through a limited company which has another director with the income to guarantee any outstanding finance.
The risk of continuing to pay a mortgage through your retirement comes from the unpredictability of circumstances. Should anything unexpected happen, you may be left hoping that interest rates keep your income healthy.
When you begin to sell property, you will have to consider the implications of Capital Gains Tax. One way to minimise this is by selling your property in phases over the space of several years instead of all in one go.
If you decide to leave your property to loved ones in your will, you need to consider how they will be affected by Inheritance Tax. Whilst heirs will have to consider Inheritance Tax, they will also need to pay income tax on profits earned, and Capital Gains Tax from the sale of property. The Inheritance Tax should be paid by the estate, or will be paid by their heirs if it is not possible for the estate to pay it. If the portfolio is gifted to a loved one in the seven years before you die, they will still need to pay Inheritance Tax.
To make an exit strategy work, you need to stay emotionally detached from your investments to ensure that you make decisions with your head and not your heart.