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Should You Buy More Rental Properties Or Pay Down the Ones You Have? [What is your exit strategy?]

Should You Buy More Rental Properties Or Pay Down the Ones You Have? [What is your exit strategy?] | New Zealand Property |
Should you buy more or pay down your rentals? Depends on your goals! Read on...

Via Richard W J Brown
Richard W J Brown's curator insight, March 20, 2014 11:10 AM

There are two key questions to ask here but first...


Curating news stories and adding personal insights as I do, to some extent makes things easier as I get to react and comment on what is 'out there' and topical but on the other hand it can also be restrictive at times, as it might not allow me to speak what is currently on my mind. Today's article allows for both :)


Yesterday, I responded to a post on a forum on The Property Hub, which posed the question: What is your exit strategy?


Here is an extract of my response:


[I like this topic as it really made me think!


I tend to put my property investing plans into 3 stages: growth / acquisition, consolidation & exit - guess which one I have focused on the most? Yes, it's growth and the reason for this is that there is no point in having an exit plan if you have nothing or not that much to exit...after all a single BTL property doesn't really need a lot of thinking about.some but not a lot. The other reason why I have not thought about it that much is that it is a long way off and things will no doubt change by the time I get there or near. 


So, here are my current thoughts on my exit plan:


I am still in the growth phase and am working on the basis that I will have multiple properties with a market value of around £N to £Nx2 (where N is my target value) and a net equity position of around 25% to 33% of these figures by the time I get to the 'consolidation phase', which will probably be in +/- 10 years. The consolidation phase may last for say another 5-10 years and very notionally lead to a doubling of value (or slightly less possibly if the shorter period).


During the consolidation phase I expect to have a big enough net yield to be able to live off the portfolio. But equally my partner and I have aspirations to work in areas where we can help people through coaching and lifestyle changes, which may not pay that well, hence the need for a high asset base and its income generation.


As for the exit phase - this is really all about retirement and inheritance planning and by retirement I don't mean pottering about in the garden but being able to have homes in a couple of different parts of the world for sun / ski as well as close to family & friends.  This may mean releasing equity either by selling or refinancing some of the portfolio.  At present I favour refinancing to avoid a capital gains tax liability. This in very broad terms covers the retirement part of the plan.


In terms of the inheritance plan / leaving a legacy, I intend to maintain life cover sufficient to only leave my portfolio leveraged at 50% LTV after I pop my clogs - this will allow my beneficiaries to easily refinance on reasonable terms and will also leave them with income generating assets as a pension / trust fund.  If I manage to live to 100 [lol] then life cover may get progressively more expensive in which case I will effectively 'self-insure' by merely allowing the portfolio to sit and grow in value over this time period; improving the net equity position and maybe paying down debt a little if enough income.  I intend to start transferring properties into a company ownership once at the start of this phase (unless my accountant advises me to do it sooner, although unlikely due to financing issues). I then really liked the idea of an employee share incentive scheme that was highlighted in Ian Wallis' recent post here: http://thepropertyhu...nheritance-tax/ which should allow a smooth transfer of the assets to the kids and grandkids by then, assuming the structure still works by the time I get there. If it doesn't then I will look at specific trusts to transfer ownership with minimal IHT liability.


I don't plan to reduce my debt to zero as some would and nor do I favour the idea of selling up and picking up CGT charges; so a modest level of leverage will be the order of the day, whilst still leaving a reasonable fund for the kids.]


Drawing the link back to today's article; as it so happens I appear to have answered the two key questions posed: What are my life goals and what is my tolerance to debt (risk). I think these two questions are a good way to begin to think about our 'exit plan' as it will give us greater clarity on what we need to achieve and how we will get there plus it will help to address the point about whether or not we should i.e. take on higher debt. The two points can be symbiotic really.


Once the answers to these are known, we will then be better placed to actually determine what our exit strategy should look like too.

Richard W J Brown's comment, April 1, 2014 11:52 AM
Stanley & Sinja - thx for the rescoops and shares :)
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