"Always start at the end before you begin. Professional investors always have an exit strategy before they invest. Knowing your exit strategy is an important investment fundamental." - Rich Dad (Robert Kiyosaki)
Successful investors know that there are always two sides to an investment. They know that the future is unpredictable so they prepare in advance for it. Average investors try to predict the future of their investments; they count their chickens before they are hatched. Average investors focus all on the returns and may neglect the risk.
Successful investors do the opposite; they prepare for the best while still preparing for the worst. But ofcourse, developing a concrete Exit Strategy requires experience and knowledge.
WHAT IS AN EXIT STRATEGY?
An exit strategy is a contingency plan that is executed by an investor liquidate a position in a property (financial asset) once certain predetermined criteria for either has been met or exceeded. An exit strategy may be executed for the purpose of exiting an investment that is not performing. In this case, the purpose of the exit strategy is to limit losses.
An exit strategy may also be executed when a property has met its profit objective. For the purpose of growing the investor's wealth further through a reassessment of the property portfolio.
Other reasons for executing an exit strategy may include a significant change in market conditions due to a catastrophic event; legal reasons, such as estate planning, liability lawsuits or a divorce; or for the simple reason that a business owner/investor is retiring and wants to cash out.
An effective exit strategy should be planned for every positive and negative contingency . This planning should be an integral part of determining the risk associated with the property.
MAKING YOUR EXIT STRATEGY
Generally when you’re investing in property you’re going to want to have an exit strategy before you even start investing. This exit strategy may change over time as your investments change but if you go into the market knowing how you are going to come out (whether it’ll be in a couple of years or in 10 to 20 years) then it can really help you decide what investment is best for you.
There are countless number of investors, books, podcasts sharing about how you can go about making your exit strategy. And practically, it cant be written in just one article.....
.....But they essentially can be simplified to TWO questions:
1. When do you want to exit?
Most average property investors would aspire to hold their property for life, and expect a same rate of growth forever. This is often NOT viable! As a property ages, its value starts to drop due to various factors such as, rising maintenance costs, old fashioned renovations, facilities are outdated...etc (Read more about old properties in my previous post here)
Even Freehold properties are NO exception, they might even suffer apoorer performance compared to leasehold properties. (See my previous post explaining this here)
Every investor has different investment time-frames, some want to cash out in 5, 10 or 20 years, but there are also some that have dangerously no end goal in mind!
During our meet up with our clients, we often discuss their investment time-frame or help those that don't have to make one. A simple way to start off is by setting a profit goal. For example, once your property has earned $200,000 in paper value, cash out to realise your gains. And on towards growing your wealth with other well planned purchases.
2. How do you want to exit?
Usually during our meet ups with our clients, we will do a property portfolio assessment for them. Most of the time, we would advise our clients to liquidate certain properties in their portfolio that are non-performing. This is to optimize their current assets and also to help them to create opportunities to grow their wealth.
Other ways would be to include financing strategies to leverage on one property to boost the overall portfolio.
We have different strategies which we have successfully implemented to help our clients optimize their portfolio. But it all starts with a clear understanding.
So as not to bore you with too many words and jargon, here's a quick summary on the basics of an exit strategy:
Determining an appropriate real estate exit strategy not only will provide property investors with a plan of action, but it will also minimize risks. When property investors evaluate potential exit strategies before purchasing investment properties, they realize the risks associated with the investment and know how to avoid them.
Having a specific exit strategy is crucial to success, as the correct approach will result in maximized profits. It’s never wise to enter a real estate investing deal without having a clear understanding of how you will profit from the real estate property when exiting from the investing deal. Therefore, having a financial goal and an exit strategy can save you thousands – if not millions – of dollars.
Having exit strategies are also essential for property investors who are considering to expand their portfolio and have bigger investments. This is probably one of the most common reasons to implement an exit strategy as it’ll give property investors an understanding of how to manage these different investment properties and how to act if one of them is not giving return in terms of rental income or appreciation.
A good exit strategy is the ultimate reason why successful investors make money when the market goes up and even make more money when it comes down. Do you want to be a successful investor? Then plan your exit before you enter any investment.
If you are reading this, and you are still unsure about formulating your own exit strategy, we have the solution for you. Today you have the opportunity to learn more and reach out to us at TeoDuoProperty. Using our knowledge and expertise, we have carefully and systematically planned exit strategies for our clients to optimize their property portfolio!