Q: What is an Exit Strategy?

Capital Appreciation

Research suggests that most people evaluate potential investments primarily on the capital appreciation that they offer. In fact many people specify that they are more interested in capital appreciation than rental income. On the basis of the points made earlier, this means that the majority of 'investors' are in fact 'specuI81tors'.

For small or new investors, the pursuit of pure capital appreciation is a dangerous strategy. This is primarily because property ownership incurs expenses and if the property isn't generating cash then you have to fund the expenses from elsewhere. It sounds obvious, but it is always worth remembering that you can pay for things in cash. It doesn't matter if your property has increase in value by £30,000; if you do not have the cash to pay the mortgage you will lose the property. Therefore, a good property investment should generate sufficient cash to cover expenses, and cash can only be generated through rental income. For those who want to build a portfolio, every investment should generate enough cash to cover expenses and leave a profit which you can use towards further investments in your portfolio.

Having said all this, capital appreciation is important and is often the single biggest contributor to your overall profit from the property. The ideal investment is therefore one which pays for itself through rental yield whist appreciating at a health rate. The two objectives of yield and growth are not mutually exclusive both objectives can be met in one investment.

Many investors' demands for capital appreciation are unrealistic and it is worth nothing that a property which appreciates in value by only 7% per year will almost double in value over 10 years. This is growth which, compared to other asset classes, is both generous and sustainable.

Exit Strategy

In order to realise the capital appreciation from your property investment you need to sell and liquidate it. Whether you are a speculator buying short-term gain or an investor buying for the long term you should always consider how easy it will be to liquidate your assets.

Often people are (and we have both been ourselves) blinded by the attractiveness of a new-build resort that is offered for sale and do not think about how attractive the property will be in a few years' time. This is especially important in areas of fast touristic and economic growth. Yu must consider what competition there is (or is likely to be) in the area and how likely it is that you will be able to sell either another investor or an end-user of the property.