What is a property exit strategy and why should you have one?
As an outsider you may often look at seasoned property investors with 5 or 10 properties and think, they are crazy to put themselves in this position in the current market. You may think, what are they going to do? Why would they be doing this now when the news reports the market is flat lining?
The fact is that these seasoned investors have one thing in common. They have an exit strategy. While investors will have their ultimate investment end-goals, life can sometimes be unpredictable, so it is important as an investor to know when and how to bow out if the time comes. This is the way of minimising the ‘risk’ of their investments through rational thought.
Much like the long distance runner in an Olympics marathon, these investors have an end goal in sight and a game plan to achieve this. Along the way it might seem like they are falling behind or their tactics are coming undone, but just like the runner, the true success of their game plan cannot be measured by snippets of time, but in the results they achieve at the end.
No matter how finely you plan the details, just like a solo yacht trip around the world who hits a storm and has to make an unplanned shore stop; there are going to be factors beyond your control.
What is an exit strategy?
An exit strategy is simply a plan of when and what you will do if times get hard, in order to reach your ultimate investment goal. This is not a ‘drop everything and run’ strategy, it is a strategy to implement if times get tough or circumstances change. It is set up to avoid knee-jerk decisions, mistakes and a whole lot of additional stress.
Why should you have an exit strategy?
Your exit strategy will help you continue on the path to your ultimate investment goal. It may be a broad exit strategy, for how long you want to hold an investment portfolio, or it might be per investment, as to how long you want to hold one property to provide you a stepping stone to your next level.
Like any exit strategy, there are many options, and you need to choose the one that sits closest to moving you towards your ultimate investment goals. Think of your property exit strategy like your exit strategy of evacuating a building if it were on fire. The safest way to avoid any long term injuries is to go down the fire stairs. However, jumping out the window is also an option, but if you’re on the 5th floor it will cause you a lot of pain and permanent injuries. The risk is a lot higher for the window, so for what you want to achieve, which is leaving the building uninjured, the stairs are the safest exit.
Identifying your ultimate goal
Exit strategies are not one size fits all. For example in the building scenario above, if that person was on the ground floor, the risk of going out the window is a lot less. In fact it may be the quickest and easiest way out. For your investment then, there are several questions you need to ask yourself to discover which exit strategy really suits your situation.
In a nutshell what is your ultimate goal:
- Do you want to be financially free?
- Do you want to be extremely wealthy?
- Do you just want to accumulate a large pot of money?
- Do you want to have a large portion of equity or a large value kept in the properties you own?
In the end your ultimate goal will determine which exit strategies you should take into account in minimising the concern for risk in your investment.