Property Portfolios and Exit Strategies - Should One Affect the Other?

To what extent will your investment decisions affect you when you come to divest yourself of some or all or your properties?

Fear not – this is definitely not a doom and gloom piece about landlords being forced out of the market due to whatever bee the media have in their bonnet. Rather we wanted to take a look at how your end game affects investments.

It’s also worth considering how well you can protect your position against the unknown or unexpected events which are simply a part of everyone’s life.

With many years of working in the property sector, we have helped clients through all sorts of ups and down, our experience can help you understand the link between property portfolios and exit strategies.

Starting at the end – exit strategies

We have written about exit strategies before, and will likely do so again, so we won’t spend much time on them in this piece. It’s sufficient to reiterate that having an exit strategy in place is sensible, even in the earliest days of your investment journey.

Your exit strategy is the method of realising your goal, what comes before is the means of attaining that goal.

For instance; if you are aiming to fund your retirement from the sale of your investment properties, the years spent renting them out while they appreciate in value is the attainment.

When you finally sell them and invest the profit in a pension fund or suchlike, you have realised your goal – hopefully!

When adding or removing properties from your portfolio, you need to ask yourself a series of questions; will this generate a worthwhile yield, is the price right, will it produce sufficient capital appreciation?

There are many others, but should you also be asking what might happen if you have to sell property before you planned to?

The vicissitudes of fate

As Burns observed in his poem “To a Mouse”, “The best-laid schemes o’ mice an’ men, Gang aft agley” a sentiment with which we are all too familiar.

We’ll try and avoid a slew of platitudes here, but no matter how focussed you are on your business and investments, how much you feel you’re on top of everything, life has a habit of pulling the rug out from under you.

More often than not it will be something other than your investment strategy; it could be a sudden shift in the economic outlook, an unexpected bereavement, illness or an unwelcome divorce, to name but a few.

Any of these can cause ripples which can affect your investment strategy, especially if they require you to draw some or all of your investment out. Selling in a rush is never ideal, but can your buying strategy ensure you get the best return, even here?

Future proof investments

Is it even possible to protect yourself against unknown events, at least where selling property is concerned? It’s not easy, but it might be possible – to an extent.

The charts below illustrate a couple of key factors which can come into play when selling; property type and location. Data comes from the Office for National Statistics.

There are a couple of clear takeaways from these charts, and they’ll be no surprise to anyone well-versed in the Scottish property market.

Detached and semi-detached properties have performed better than the alternatives over the last 12 months, and location is key to capital growth.

We’ll be the first to concede that choices regarding investment properties are driven by multiple factors; if everyone bought in Edinburgh the market would soar and grind to a halt simultaneously. However…

It’s clear that, in the event of needing to sell property, you will most likely do better if you are selling a semi in Edinburgh as opposed to a one-bed flat in Aberdeen. Frankly you’ll do better selling a one-bed flat in Edinburgh.

So to answer our own question, it is possible to bias your property-buying choices in favour of better capital returns in the short term, however it is going to cost more. No surprise there we’re sure.

A word about the ‘investment’ property

We’ve put ‘investment’ in parentheses quite deliberately, since we’re nearly always writing about investments of one kind or another. In this case, we’re referring to a special type of property, and one you might choose to avoid.

This odd beast is the property which is always sold from one investor to another, never breaking out into the residential market, but being endlessly recycled as a potentially valuable investment.

The problem is that, to be honest, it’s not. At least, not as far as capital appreciation is concerned. It may well deliver a good yield, but location amongst other factors militate against it gaining value in a meaningful way.

Consequently, when we’re talking about possibly selling properties, this gem isn’t going to help you. It won’t attract a good price, it won’t deliver worthwhile capital growth and the yield may only make it attractive to other investors.

If you’re considering investing in such a property, make sure you know what you’re getting.

It may well be that, taking all your investments into account, it is valuable over the long-term to have a solid income-generator in addition to other investments which offer both regular income and capital appreciation.

If you have focussed on capital appreciation, this type of property won’t be for you, but if you’ve done your sums comparing the value of income against minimal increase on likely market price, you may decide it’s worth it.

After all, if things do go a bit south, having a reliable income stream is not to be ignored.

Advice from the property pros

None of us want to think that our carefully acquired properties might have to be sold for any other reason than we choose to do so, but life is unpredictable, and none of us are in complete control of our choices.

Consequently, there is a potential benefit to be had from choosing where and in what you invest as you progress through your investment journey.

We’d suggest starting with your desired goal, and working backwards. Once you know what you want to achieve, you can make better decisions about how to get there.

While doing that, it is sensible to give consideration to what might happen should circumstances intrude to disrupt your plans. It may be that fewer, better located properties actually give you more options than many, smaller, cheaper properties.

In short, balancing your property portfolios and exit strategies can build a degree of resilience against unforeseen events, while still delivering the income and capital growth you seek.

In summary…

We’re not suggesting that the threat of the unknown should be the bedrock of your investment strategy, but we are suggesting that being aware of the possibility is sensible.

Asking yourself whether you could sell a property should you have to is a valuable test of that property’s value. There is a place for relatively inexpensive investments in less attractive areas but they should exist as part of a broader, more balanced whole.

Ultimately whether a property has both long and short-term potential is just one of many considerations, and if you’d like to talk through the pros and cons of this, or anything concerning buy-to-let investment, we’re ready and waiting to help.

Get in touch, make an appointment and let’s discuss how you can achieve your dreams while protecting your position against whatever fate may throw your way.

Thanks for reading!

Written by Chris Wood, MD & Founder of Portolio

Get in touch on 07812 164 842 or email [email protected]