Exit Strategies: Why They Matter?

Exit strategies play a significant role in property investment to achieve financial objectives and secure lasting wealth.

Written by
Ravi Sharma
Published on
June 24, 2024
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Before you start your property investment journey, picture this: 

A roadmap to financial freedom move you make leads you closer to your dream lifestyle.

But have you ever wondered: How can exit strategies transform your property portfolio from a mere collection of assets into a powerhouse of wealth generation? 

Exit strategies…

Why do we need them? Who does it apply to? And what is the best exit strategy?

In this article, I'm going to cover off exactly what they look like.  I'm going to share with you exactly what my plan looks like when it comes to an exit strategy and why it's important you think about this before you go and build out a property portfolio.

Why Do We Need Exit Strategies?

It is important that we build our asset base and property portfolio (or the machine as I like to refer to it.)

However, it is also important that you know why you have “this” machine. Yes, we can go out there and say: “Well, I built this machine because I wanted to go out there and get financial freedom and retire early."

But now, you find yourself with a couple of properties and a lot of debt. So you are like: “Hmm. Now what happens?”

Worry no more as I am here to break down a few scenarios and explain:

  • What you could do;
  • How you can achieve financial freedom; and
  • How you can gain passive income and retire early now.

With that, let's continue. 

Three Methods of Exit Strategies

There are three methods that you can take to effectively apply exit strategies:

Number 1. Sell EVERYTHING

Number 2. Sell some and keep some debt 

Number 3. Don’t ever sell 

Upon reading these methods, you may be asking yourself now:

What are these methods?

“Which one is better than the other?”

Well, I'd urge you to keep an open mind until we get to the end because there are a couple of things here that may challenge the way you think about this and it could often mean a better result long term.

Method One: Selling Everything

The option one is selling everything. In this example, 

  • We are using a property portfolio worth $3 million; and
  • Your debt is probably $1 million.

You have probably built your wealth in your: 20s, 30s, or 40s. Now, you are looking at your portfolio in your: 40s, 50s, or 60s.

Depending on when you started. Now, you started with a million worth of debt and your properties were probably worth about $1.5 million. You go ahead, and sell for $3 million. Depending on your tax bracket, you're also going to have to pay:

  • Taxes; and
  • Other costs.

Which would mean:

  • $500,000 are for the costs and taxes; and
  • A million dollars because you still have some debt on the properties.

So now, you're left with:

  •  $1.5 million cash 

If you actually think about it, it is quite impressive to get to that point! Why? Because, if you were simply saving your money, I don't think you would get close to that number. So in this case:

  • If you put the $1.5 million into a bank account 
  • And you earned say 4% 
  • You’d make $60,000 per year 

But your principal remains the same. So it is still worth $1.5 million in say 10 years time. Yes, the argument there is: “Inflation is eroding the dollar.”

So it's probably buying you a lot less. However, in this case, what we're focusing on:

  • The principal not growing; and
  • You are earning an income of $60,000.

Now that $60,000 would also be taxed—-that's something to keep in mind. Alternatively, what some people might do is use the $1.5 million that you got from your Investment Portfolio and buy your dream house debt free. 

You may also go on to argue that:$1.5 million is not enough for my dream house.”

This is why it is important you start with the end in mind.  It is also very difficult to know what your dream house is going to cost you because you are likely not going to buy your dream house anytime soon. 

So when you're thinking about a dream house always account for:

  • Inflation;
  • Knowing that property prices will increase; and 
  • Have a rounded figure at that point.

Now, if I think:

  • I'm going to buy a place for $2 million; and
  • I'm probably going to think it's worth $3 to $4 million.

That way I could have either: 

  • A nice surprise by actually overshooting and then having some leftover; or
  • I'm actually managing my expectations and will be in line to actually purchase what I want to purchase and not be disappointed. 

So in this case, if you're looking at this right now—-$1.5 million, especially in Sydney? It doesn't buy you much. These are effectively what your options look like if you go with that.

Method Two: Selling Some Properties and Keeping Some Debt

Selling a portion of properties while retaining some debt allows for continued asset growth and positive cash flow.  How does that work? Allow me to explain. 

Let’s use the same example: 

  • $3 million worth of assets; and
  • Your debt is $1 million.

Let’s say you have 3 million worth of assets and your debt is $1 million. Then you decide that instead of selling everything---"I'm going to sell 50% of this.”

You go ahead, and then you sell some of the properties worth $1.5 million in value. The debt that is associated with it is about $500,000.

Now, let’s say you get $1.5 million from the sale. After costs, you will have to minus your taxes, which would maybe come to about $250,000, and then minus the debt that you have. This leaves you with 750,000.

It makes sense because in the first example: You sold 100% which gives you:

  • $1.5 million.

In this case, you sell 50% and it gives you:

  • $750,000

If you go and put this money in the bank, you will earn half of it, which is:

  • $30,000 per year before taxes 

And, if you go ahead and say:

  • Buy the $1.5 million house,

You will go in and:

  • Put $750,000 towards it 

Then, you would finance the rest of it. Now, let’s went ahead and bought a property for $3 million as your dream house. You would then have sufficient money to pay for your stamp duty and your 20% deposit. This at least gets you into the property.

But it is NOT debt free so you'll still carry some debt over there. WHY?

The reason is because this could be a viable option as the $1.5 million that you still have in assets keeps growing. So if you assume:

  • 5% annual growth rate 

That would mean that the machine is still growing by:

  • $75,000 every single year 

And it compounds so it could be $75,000 this year, $77,000 the year after, $80,000 the year after, and it keeps going higher. 

In this case, you might find that right now, if you bought it, you might be getting negative cash flow slightly if not neutral in the next year or two.

But, if you fast forward that purchase into year 15, you will now be earning positive cash flow from that property! 

What you could also earn is not only the equity that's going up (which is tax free). But you also have the cash flow that comes from these properties. So in this case, to hold the $1.5 million worth of debt, actually doesn't cost you anything.

IN FACT, it gives you money. Why? Let me explain…

In the first example: If you went and simply used all of the money you made, you put it in a bank account and you earned some interest. You would say: “Okay great, I'm earning interest on it, that's my income. I get taxed that's it.” 

But the principal remains the same. So, if I sell half and I've got the other half there, that $1.5 Million worth of house value continues to increase (which is tax free at $75,000).

Plus!  I get the cash flow!

And that cash flow can either:

  • Go towards my lifestyle; or 
  • Go towards my principal place of residence where I still hold some debt. 

This could help me supercharge me by paying down my mortgage. So far if you're with me, you're looking at option two and you will say: “That seems like the better option.” 

But again, everyone's situation is different. You might just go: 

Well, I want peace of mind.”

“I don't want to have debt at all.”

“I'm okay taking 4% from the bank and my house is already paid off because I bought it earlier.”

Okay, no problem!  But you can see how there are different situations and different risk appetites that would dictate which option is better.

Method Three: Buying Properties That I’m Never Going to Sell  

Now, we come to option three which is: 

“I bought all these properties but I'm never going to sell them.”

In this case:

  • The value of the machine is $3 million 
  • The debt is still $1 million 
  • So at 5% you're making $150,000 per year in equity growth.

Assuming that the property portfolio is going to grow at 5%: You are making $150,000! 

Now, for the cash flow element, you are probably making about $30,000 a year just from positive cash flow. So, you look at this scenario and say:

“Okay, if in scenario one, I have no debt and I make $60,000, my principal remains the same."

“If I get rid of all of that debt, that's all I'm left with.”

“But, if I don't do anything, and I’m okay keeping that debt--the debt services itself, the rental income is more than sufficient to pay for all my costs. Then, I'm making on top of that $30,000!”

So it tells me that: “I'm okay with having that debt because it produces income for me.”

That’s a positive cash flow property. In this case, my principal is growing at $150,000 which is more than I could probably save at this point.  I'm also getting the cash flow, which means:

  • I can enjoy my lifestyle; and 
  • It doesn't matter that I open up my bank account and it says: “oh minus $1 million because that $1 million is taken care of somewhere else.”

You see? That’s that passive income coming through to pay for a debt that you have. But in this scenario, it leaves you that question:

What about my principal place of residence?”

“If I want to purchase that, how am I supposed to do it when all my money is tied up in these properties?"

The other question you have is: “What about other Investments, do you have anything else that you're investing into?”

To answer: You may have a super. Depending on your age, you might be able to use your super to pay off your principal place of residence. More options also open up depending on:

  • How much choice; 
  • How early you started; and 
  • When you're looking at this.

But above all, it is peace of mind. Now, we've been challenged largely around:

  • Not having debt 
  • Not carrying debt for a long time
  • It is really bad for you 

But if you actually think about this logically, you have a machine that keeps growing at $150,000 per year in this example. You also have the cash flow to attend to all of your holding costs. It would also be like you are running a business.  You are running a business that grows in equity and then you go:

Okay but the cash flow is not literally there but it works by itself.”

So it's like owning a cafe. The Cafe's brand is growing because it might be featured in newspapers

It might be on Instagram and influencers are coming through. And you're like:

Okay, if I decided to sell this business at some point, it would be worth so much more.”

Also, I'm holding some debt. However, that's taken care of. Yes, I've got to pay salaries. I've got to pay rent. But, all of that money is still coming through because the business is generating cash.

Now….when you think about it, you're like: “That’s a fantastic business!”

It is the exact same thing when it comes to this.

To highlight: When it comes to the property portfolio you have to think of it like a business.

What My Plan Looks Like  

So what does my plan look like?  Well, my plan has a bit of method two and method three.  Now, ideally, I would like to be earning:

  • $300,000 a year after my expenses 

Now, that may be before taxes. So, I'm left with about half of that. But if my LVR position and all my investments is less than 50%, I'm very very comfortable holding that debt for a really long time.

As I understand, when the assets appreciate, the debt depreciates in technical value. (Given that inflation is eroding the value of that dollar.)

In addition to that, I would like to have a debt-free home so I might find myself in a position where in the next 10 to 15 years I decide: "Okay, this is the plan. This is how it's going to work.”

If all things stay equal, I'm going to have to go and sell some of my properties to then fund my principal place of residence. Again, who knows how much that's going to cost?  I want to be able to do that without any debt! Now, I could go down that path if I've given up on: 

  • Creating a bigger machine; and
  • Creating a bigger moat for my kids and you know future generations. 

But, I could also be in the camp where I say:

 “Okay, well I'm okay with this debt because everything's being taken care of by the passive investments. I'm still working. I love what I do."

That's why you see me on YouTube. I also run a full-time buyers agency and we have more than 20 full-time staff now, which is really exciting! In fact, we've just opened up our brand new office in Macquarie park in Sydney.  What’s my secret? Simple!

The key is: You need to build a machine!

In my case, I could go in and say:

Okay, each property is renting for $450 per week.”

“I would need 15 of those to get to my $300,000 goal from rental income.”

Now that's on today's terms—obviously, there are considerations such as:

  • Rental increases
  • If you bought in the right locations 

And $450 per week means: You probably bought a house that's maybe worth $350 to $400,000.

You could equally just double up and and say: “Well, I want to make $900 per week from each property.”

That means: I need seven of those.

Again, borrowing capacities are going to be the biggest hurdle for most people including yourself. If you're reading this, you're questioning: “How do I even get that much?”

Really, it's two things! 

  1. You need to be able to take on debt 
  2. You need to have a machine that provides you the equity or at least have the cash on hand available 

You could also go “well okay that's Ravi's goal but what's my goal?---Maybe it's $100,000?”

So you go: “Okay, I can adjust the numbers.”

Or say: “I want to achieve $150,000.”

But really, I only need $100,000. So when you do that, you can go in and:

  • Buy 20.
  • Sell five later.
  • Then you still got the 15.

This allows you to retire with the income that you wanted. You overshoot and you can go and sell some of those investments then keep the ones that give you the highest cash flow. I hope this has made a lot of sense to you guys! 

AGAIN! Exit strategies are very important.

It is almost like: “Why would you enter something without having a plan of how to get out?”

That’s why you need the strategy! And that's why it's important you get the right team as well. 

Thanks guys! 

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