It may sound a little bizarre talking about an exit strategy before you have even bought the real estate in question but it is a lot more important than you might think. Each and every asset that you acquire should have been thoroughly researched and acquired for its short, medium or long-term potential with a fair value in mind. There is no hard and fast rule about sticking to your original exit strategy because times change, markets move and the perceived fair value of your assets will certainly fluctuate.
Rather than acquiring a property because it looks good value you should have an action plan in place covering your research, initial purchase, rental income (where applicable) and a possible sale price in the future. There will be some assets which become the backbone of your property portfolio but it is also vital that you do not get emotionally attached to any of your investments and simply think of them as “boxes which you buy and sell”. That way when the time comes to jettison one of the assets in your portfolio there will be no emotional reluctance.
Stop loss limits
Stop loss limits are extremely popular when investing in stocks and shares and other very liquid assets although not as applicable to property which can take some time to buy and sell and generally fluctuates less rapidly than stocks and shares. However, that does not mean that you should not have a stop loss limit on your property assets which effectively flags a sale in order to effectively cut your losses and look to the next one.
One of the main problems both experienced and relatively new property investors will face is a reluctance to sell property assets at a loss, whether this is because of ego or an unwillingness to admit defeat, while often being a little quick to bank profits. Don’t get us wrong, there is nothing wrong in banking a profit but sometimes it can be easier to take a profit too early than to take a loss at the right time.
Short, medium and long-term exit strategies
There should be a whole host of different exit strategies for the short, medium and longer term. The longer term situation will include changes in your life such as retirement while the potential sale of assets covers the short, medium and long-term timescale. It is also worth remembering that while retaining your original exit strategy in your mind there is nothing wrong in updating this strategy every six months or a year.
You may increase your perceived “fair value” figure or the worldwide economy may be moving against you and you have to lower your expectations. As noted above, while you should have an action plan and an exit strategy for all of your investments and your portfolio as a whole, remember that these are not set in stone.
When acquiring any property you should have a perceived “fair value” in your mind based upon the local economy, demand for property and, as we have seen of late, the worldwide economy. Giving yourself an exit strategy gives you a target in the short, medium and longer term and helps to focus the mind going forward. While there is nothing wrong in buying property and holding it in long term, indeed many properties will form the backbone of investor portfolios, you should banish all emotional attachment to any of your assets. In the world of investment every asset has a price…