Planning your exit before you buy
An investment is only as good as the way out of it, and the way out is decided at the beginning.
Investors spend most of their attention on the purchase, because that is where the negotiation and the excitement are. The exit is where the money is actually made or lost, and it is decided by choices made at the start: the property type, the tenure, the lease length, the condition and the price paid.
A property that only works if you hold it forever is not a good investment. It is a commitment with no way out, and the inability to exit is itself a risk, because circumstances change and forced sales are expensive.
The three exits
There are three realistic ways out of a rental property, and each has different requirements. Deciding which you are aiming for before you buy tells you what to check.
- Hold and draw income, which requires a property that lets easily and cheaply over a long period
- Refinance and recycle the equity, which requires a property that lenders will lend against and that has grown in value
- Sell to an owner-occupier, which requires a property that appeals to people who want to live in it, not just to investors
Why the owner-occupier exit is the most valuable
A property that appeals to owner-occupiers sells at a premium, because owner-occupiers generally pay more than investors. An investor values a property on its yield, which caps what they will pay; an owner-occupier values it on what it would be like to live there, which is not capped in the same way.
That means the most valuable exit is usually to sell to someone who wants to live in the property. Properties that are hard to sell that way — above a shop, in a block with high service charges, in a location with no owner-occupier demand — are worth less, and the price paid should reflect that.
The questions to answer before buying
If you cannot answer these, you do not yet have a strategy, and the property is being bought on the assumption that everything works out.
- If I had to sell in twelve months, who would buy this and at what price?
- Would a lender lend on this in its current state, or only after work?
- If I needed to refinance, would the valuation and the rent support the loan I need?
- If the market fell 15%, would this property still be worth more than the debt against it?
- What would make me want to sell, and would I be able to?
Common questions
- Should I buy a property I would never want to sell?
- Only if you can genuinely afford to be locked in. A property with no realistic exit is a commitment rather than an investment, and circumstances change — a rate rise, a void, a change in your own situation. Always establish who would buy the property and at what price before you commit, even if you intend to hold for decades.
- What makes a rental property easy to sell?
- The same things that make any property easy to sell, plus a few specific to rentals. Owner-occupier appeal is the most valuable, because owner-occupiers generally pay more than investors. Beyond that: a long lease, a reasonable service charge, a property type with broad demand, and a location where people want to live rather than only to rent.