Most investors use property to reach one common goal – to create financial freedom. While financial freedom may mean different things to different people - travel the world, generate a $100,000 passive income for life or retire early - whatever the end goal, you'll want to have a clear exit strategy in place.
There are three common exit strategies that are popular among professional property investors.
1. Sell your Portfolio to Pay Down Debt
This strategy works if you buy well-chosen property, in good locations close to the city. In the past, well-chosen property doubles in value every 7-10 years. All you would need to have done was to buy and hold a few properties for one growth cycle, and then sell them. You can use the proceeds to pay off the family home or to fund your retirement.
The cons to this approach is that you’re up for capital gains growth (CGT) when you sell. Property can also go sideways in value, and there’s no guarantee that it will continue to double in the next 7-10 years.
2. Pay off one Property after the Other
If you don’t plan to hedge your bets on the "sell-and-pay-down-debt-strategy", what other options do you have?
One other possible exit strategy that requires you to pay down debt is to change one of your investment property from interest-only into a principle and interest loan. You than focus on trying to pay off as much of the principle as you possibly can. You may also want to attach an offset account and lump any additional rent into an offset account.
As the principal owing decreases, the interest on the property will decrease and thus create a domino effect. Once you pay off one property, you move on to pay down the next property in your portfolio, and the one after that, until you’re debt free.
3. Live off Rent and Equity
If paying down debt isn’t an option, you may want to review your portfolio and see if you can live on rent.
This strategy requires a buy and hold strategy and is suitable for mature couples, low income earners or if you started building your portfolio in your 40’s - see our article about investing while having a family or at a later stage in life. With a young family and other financial commitments, you will probably have less money and experience even fewer boom cycles.
The idea is to buy property that is neutral to cash flow positive, with the aim of increasing your future rental yields to 7-8 per cent.
This strategy will allow you to keep on adding more and more property to your portfolio. The additional rent should cover the interest on your mortgage as well as provide additional equity to keep on investing. Over the years, rent should continue to rise in keeping with inflation and give you an additional source of income for you to live off.
With this strategy, you don’t have to pay off your mortgage if you're able to live off the passive income and pay off your home loan. You can even combine this strategy and refinance your home loan to access the additional equity gains in your investment property if there is a shortfall. You would only do this if your portfolio value increases faster than your yearly living expenses.