It is important to think about your future prospects and what you might need to do if your property plans don't go as you had anticipated. This type of future planning is called an 'exit strategy'.
By creating an exit strategy and thinking about what you would do if you lost your job or if the property does not perform to your expectations, you are preparing yourself for the worst possible situation and it will help save a lot of grief and stress during that time. Also, this type of thinking may even influence the type of property you will end up buying.
An exit strategy is more of an emergency plan in case things don't go the way you hoped. Even if your goal is to never sell the property or hand it down to your kids, it is still important to have an exit strategy.
The most common strategy investors use is selling the property. Before purchasing you will need to think about what type of situation would cause you to choose selling up. For example, it may be a falling market, loss of job, long term vacancy or there is another investment opportunity available. Being aware of these signs can help you to sell before the situation becomes dire and it can also give you time to secure some protection such as landlord insurance, life insurance or income insurance, which may stop you from having to sell altogether.
Another option is to restructure your home loan. For example, if you find that you are in a temporary situation where you cannot afford the home loan repayments, you may be able to switch to an interest only loan for a short period of time. This way, you are only paying the interest owing on the home loan and your repayments will be significantly lower. However, you will need to speak with your lender to see if you are eligible for this option.
Tips to avoid panic selling
Panic selling can often occur when a property investor does not plan an exit strategy ahead of time and finds themselves in a situation where they need to get out quickly. In order to avoid panic selling and end up in a situation where you cannot afford the property any more, here are a few tips:
Create a sufficient buffer: It is important to create a safety net of money so that if the market turns bad or you have a problem with your own finances, you will not have to sell. Think about your current investment costs such as mortgage repayments, maintenance costs as well as any property management costs and create a buffer that could last you a while. Some investors like to be extremely prepared and have a buffer that could last 5 years, but it is up to you on how big of a buffer you want.
Be ready for the worst case scenario: Preparing for the worst case scenario well in advance can help you avoid selling your property for a loss. Have a plan for every type of situation that could occur. For example, what would you do if the property was vacant for 2 months or 6 months? Would you have enough money to meet repayments if you lost your job? The worst case scenario usually occurs at the worst possible time, so planning well in advance is key for property investors.
Insurance: Landlord insurance and income insurance are just a couple of safety nets all investors should consider. It may just seem like an extra expense at the time, however it is well worth the expense. If your tenants significantly damaged your property or up and left without paying the rent, you will not be out of pocket.
You may not be thinking about the end game if you have only just started investing in property, but it is never to early to start preparing for the worst.