Being relatively young in terms of years (but definitely old at heart), I don't give as much attention to exit strategies as I probably should.
Because all being well, you’ll approach the Werther’s Originals phase of your life as the owner of a collection of properties that have given you great financial success – but then what?
By “exit” in this context, I mean exiting the stage of being an active investor and turning your thoughts towards retirement. I’m going to assume that you’ve been buying properties with interest-only mortgages, because if you own your properties outright there’s really nothing to think about – you can just hold everything for the income until you shuffle off, then pass them on to a lucky relative/cattery. When there are mortgage balances involved though, the matter requires a bit more thought.
There will be tax consequences for each approach too, but I won’t get into this in detail: it depends far too much on your personal circumstances and how you’ve structured your portfolio for me to say anything useful. And in any case, the rules might all have changed by the time you get to this point in your life. I’ll just remind you to get professional advice at the appropriate time before taking any drastic action, and leave it at that.
So, what are your options?
There’s a popular misconception that you can’t get mortgages beyond the age of 60ish. This is true for residential mortgages because the assumption is that you need to be earning a wage to pay it off each month, but isn’t the case for buy-to-let. You can take out loans that don’t need to be repaid until you’re more than 100 years old – which means you could conceivably just keep on going until you drop, with no need to exit at all.
(Your heirs would then be left scrambling to refinance or sell the properties to pay the inheritance tax bill, but it’s for you to decide how much you like your heirs and how bothered you’ll be about their inconvenience once you’re dead.)
If you own properties within a company (which is becoming increasingly common), age isn't an issue as long as there's another director (likely one of your children) with enough income to personally guarantee the loans.
The risk to this approach is circumstances changing once you’re already retired and relying on the income that your properties produce. I don’t personally want concerns about interest rates to put me off my bingo game, but for some people this strategy will be a totally valid option.
OK, not necessarily half, but a common exit strategy is to sell enough properties to pay off the debt on the rest – so that you hold your remaining portfolio free and clear. Then, as long as you’ve made appropriate allowances for expenses, you’ve got a pretty much bulletproof source of income in retirement.
Whatever happens to capital values isn’t of any concern (because you’re never going to sell them), and your income should theoretically be inflation-proof because rents tend to rise in line with incomes (and incomes rise with inflation over the long term).
The thing to remember is that for all the years you’ve held your properties, their value should have increased while your debt remains static. If you haven’t been refinancing too aggressively, what was originally a 75% loan-to-value portfolio could have fallen to well below 50% by the time you’re ready to retire. You might even find that you could sell just one property to clear the balances on the rest.
There’s capital gains tax to factor in if your properties have made strong gains over a large number of years, but that doesn’t mean there’s necessarily anything wrong with this strategy. It’s just something to take into account, and to attempt to minimise by selling gradually over a number of years and making use of personal allowances.
The only real cause for concern with this strategy is that you might end up without appropriate diversification after selling whatever is necessary to shift the mortgage balances. Being left with just one or two properties that cover your expenses is nice and simple from a management point of view, but also risky: non-paying tenants in one of your properties would cut your “pension” in half until the situation is resolved.
Sell the lot
It could be that in your old age, you want nothing to do with property at all. In that case, there’s nothing to stop you from selling the lot and investing the proceeds in another asset class. No, it’s not particularly tax-efficient because of capital gains tax, but there’s more to life than paying as little tax as possible.
In terms of diversification, this isn’t a terrible idea. If you could make roughly the same net return from a couple of unencumbered properties or a globally diversified portfolio of stocks and bonds, the latter might give you better peace of mind.
Restructure your portfolio
The options above are all totally valid strategies, but the best option of all is likely to be a mix-and-match of all of them, depending on your risk tolerance and income requirements. For example, you could:
- Sell a couple of properties to raise cash to put into stocks and bonds for diversification.
- Sell another to reduce your loan-to-value.
- Keep the rest for income, with very low mortgages so you’re not overly worried about changes to interest rates.
If you’re relying on income from your portfolio in retirement, there’s a strong argument for restructuring in some way. The game has changed: your focus may previously have been on capital growth, but now what matters is rock-solid income. You might be holding properties that don’t yield particularly well, or even properties that you bought just because there was an opportunity to do a refurb and recycle your funds. Maybe you even want to offload your leasehold properties in favour of freehold, so you don’t have the uncertainty of service charges and dwindling leases to worry about.
This is why the advice to “buy and hold forever” makes sense in some respects, but is incomplete: if a property was bought for a particular purpose and it’s no longer doing that job, selling might make sense. As investors, we shouldn’t be emotionally attached to any property.
This article was adapted from my book, The Complete Guide To Property Investment: How To Survive And Thrive In The New Era Of Buy-To-Let. It's had over 300 five-star reviews. You should probably read it.