What is an ‘exit strategy’? Investment terms explained

When purchasing an investment property, or even a home, it’s unlikely for many to consider what they’re going to do on the selling end. However, considering your future re-sale prospects and what you may need to do if your property plans go toe up is a worthwhile exercise.

It is this type of future planning that is what is known as your ‘exit strategy’. By thinking about what you will do if you lose your job, or the property doesn’t perform, you are not only preparing yourself for the worst case scenario but also providing yourself some significant forethought that may see you re-think your property purchase.

This term is often used to explain your “end game” – that is, where you hope to end up with property. For some, this may be selling down a whole portfolio and living off of the capital gains in retirement. However, an ‘exit strategy’ is more your emergency plan for when things are not going according to how you’d imagined.

Even if your mantra is “never sell” or you are purchasing the property to hand down to your children, an exit strategy is prudent.

Types of ‘exit strategy’

Selling up is likely the most common, although not the only, exit strategy available. There are some other far less likely outcomes that may be worth a consideration. For instance, for those who are renting and looking to buy an investment property nearby, moving into the property could be considered a form of exit strategy. You may also want to develop the block if this is a possibility.

There is also the possibility, particularly if you have a portfolio of properties, that you can restructure your loans, or that you can organise to sell specific properties but not others. It’s worth discussing the CGT implications with your accountant and to get your broker on board early on to discuss your loans. For example, you may be able to pay interest only for a period if you are finding it unaffordable.

For the purposes of this article, we will assume that your exit strategy is to sell.

You must consider the following:

• How much of a loss can I stomach on this property?
  
  
• In what situation would I sell up? (Falling market, loss of job, long-term vacancy, other opportunity becomes available) Knowing the signals can help you sell before it’s too late, and you can ensure that you have adequate protection that may stop you, or your family, needing to sell up. This could be life insurance, landlord’s insurance or even income protection.)
  
  
• What are the costs associated with selling?
  
  
• When am I likely to need to sell?
  
  
• Are there many prospective buyers (and will there be in the future)?
  
  
• How long is it likely to take to sell the home (days on market, current trends)?

While you don’t want to employ your exit strategy until you very much have to, remember, this is your last-resort option, if you haven’t adequately planned upfront or the unexpected occurs, then you may need to sell fast.

To protect yourself from rushing through a sale process, ensure you have built in the correct insurances and buffers to have a financial barrier that allows you to hold the property for a full selling campaign that is typical of the area. You will want to speak to an accountant, and potentially a financial planner, to help prepare yourself in case of a downturn. Some areas will take longer to sell than others, and if you’re falling in a downward spiralling market then you need to be prepared. 

Some investors even go so far as to consider “market indicators” that will dictate when it’s time to bring in the exit strategy. Perhaps it’s when the market gets too hot, or when a notable decrease in rent is noted. Each investor will differ in when they think the indicators suggest it’s time to sell, and some are happy to weather out a downturn in the cycle, confident that the future will bring an upturn. It’s up to you to determine your own comfort level.

The aim is to never be forced to put the exit strategy into place – hopefully by purchasing well and planning in advance – but if you forget this crucial stage then you may find yourself in a less than comfortable position.