When you decide to invest in property, you are likely to have a rough idea what you want to get out of it, but do you actually have an exit strategy in place?
An exit strategy refers to the point at which you are no longer an active investor and start to look towards retirement. For those who have bought property outright the strategy of holding on to everything for the income until you need it or pass it on to loved ones works well. However, a mortgage based investment is a little more complicated.
There will also be tax consequences depending on your individual circumstances that will need careful consideration. Professional advice on these matters is essential to maximise what you can make.
Hold Your Property
Whilst many believe mortgages are unobtainable once you pass the age of 60, this is not strictly true. Residential mortgages can be tricky as lenders worry about you not having an income to pay it off. However, buy to let mortgages are viewed in a different way and it is possible to take out a loan that will last until you are 100 and an exit strategy may not even be needed. It is worth remembering that the heirs to your estate will be left to refinance or sell the property in order to pay the inheritance tax this is likely to incur.
Thanks to recent changes in tax laws, it is becoming increasingly common to own property through a company, which is not an issue as long as there is another director to this business with enough income to personally guarantee to the loan.
The main risk to this strategy is that the situation may change once you have retired. If you are relying on the income produced by the property, changes in taxation or interest rates could make a serious impact on your retirement funds.
Split Your Portfolio
One way to leave yourself in a comfortable position is to sell off enough of your portfolio to pay off the debts accrued on the rest. This leaves you with property that is owned outright with a safe source of income for as long as you need. If you have not refinanced, the value of the property should have increased while the debt has remained static. By the time you reach retirement, you may find that you only need to sell one property to pay off the remaining debt on the others.
If you do not intend to sell the remaining property then you will not be affected by changes in house prices and as rental prices rise in line with wages, a drop in capital value should not be a problem. If you have seen a rise in the value of the property then you will have to factor capital gains tax into your equations and this can be minimised by the way you sell your properties or the personal allowances you have available.
This strategy is a sensible one but by selling some property, you may find that your portfolio does not have appropriate diversification which leaves you at risk from non-paying tenants.
Selling Your Portfolio
If you retirement means no longer looking after property of any sort then you may want to consider selling the entire portfolio. This leaves you free to invest the cash in a different sort of asset, but it will leave you subject to capital gains tax.
Restructuring
When you consider your exit strategy, you may find that the best approach is a mixture of all of these ideas. You may want to raise cash for other investments by selling a small amount of your portfolio, reduce your loans by selling a further property and keep the low mortgage properties for income, for example.
If it is a regular income that you are looking for, then you need to focus on holding on to properties that produce a strong yield, or you may want to rid yourself of uncertainty by shedding any leasehold properties.
Whatever you decide to do, look at the portfolio you hold and how you want it to work for you throughout your retirement. Take an emotion out of your decision and look at what type of income will suit you best.
Author Bio
Hopwood House are experts in property investment, offering a full circle service of buying and selling investment properties for a large number of landlords and property investors.
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Daniel Peacock