Successfully Planning a Property Loan Exit Strategy

March 2, 2018 by Brandi Jackson
real estate loan exit strategy

With the right opportunities, a property investor can establish their financial freedom, creating a powerful source of income in an area that’s never likely to lose interest – real estate. While financial freedom means different things to different people, it’s important for any borrower or investor to have a reliable exit strategy in place for when they want to slow down and stop selling.

While there are plenty of exit strategy options available depending on what kind of real estate financing an individual has, the following are the three most common solutions for property professionals.

Sell the Portfolio to Pay Down Debts

If an investor chooses carefully-selected properties in great locations, they should be able to put their buildings on the market quickly to get rid of their investments. They might even choose to sell several properties in their portfolio and use a real estate bridge loan to buy one final “nest egg” property that they’ll keep for the foreseeable future.

How an investor chooses to use the money obtained from selling their portfolio will depend on their personal goals. Some may choose to pay off the family home or fund retirement, while others will want to diversify their investment strategy. The biggest issue with selling the portfolio is that investors will be subject to capital gains tax on the homes sold.

The Buy and Hold Strategy

If selling the portfolio and paying off the debts accrued from real estate financing isn’t an option, some investors may choose to review their portfolio and see if they can transform the way they use the houses in their repertoire. Some real-estate tycoons simply buy property to fix them up and sell them on at a higher rate. However, it’s also possible to make long-term money on property by renting it out to people looking for an affordable new home.

The buy and hold strategy is often suitable for mature couples who want an ongoing solution for income. However, it’s important for investors who want to rent out their properties to make sure that they charge renters enough so that they can pay off both the interest and principle of the mortgage, while earning an income.

The idea is to purchase property that is either neutral or cash flow positive, with the aim of increasing yields over time. This exit strategy allows investors to add more property to their portfolio, while rent income covers the interest on the mortgage and provides additional equity for future investments. Over the years, the rent prices should rise to keep pace with inflation – providing a source of consistent cash.

Restructuring the Investment Portfolio

The best exit strategy for any property investor will always depend on their risk tolerance, income retirement and other personal factors. Some people will prefer to sell a couple of properties so that they can put some cash into bonds and stocks for diversification. Others will want to sell properties to reduce their loan-to-value ratio.

Those reliant on income from their property portfolio to support their retirement will often need to look at their assets and think about restructuring over time. When an exit strategy becomes necessary, it’s important to stop focusing entirely on capital growth and start looking for sources of rock-solid income. Investors holding properties that don’t yield particularly well may need to do some refurbishment and recycle their funds or offload leasehold properties in favor of freehold to reduce service charges.

 

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