What is a Buyback Option?
Buybacks are put in place when the seller of the property wants to repurchase the asset from the investor at a later date for a predetermined price. Sellers will have a buyback in the contract for several reasons. The main reason is usually that they are a business or developer who wants to regain control over their assets once they have leveraged the capital paid by the investor.
A buyback option gives you the opportunity to ask the seller to buy the property back from you if you wish to exit your investment. In this case, if you exercise the option, the seller must agree and buy the property back. Some buybacks are not optional and therefore will be exercised by the seller themselves when the agreed time comes.
Property Geek gives his own advice about exit strategies but using a different angle. In this article, he talks about the “exit” in the context of turning your thoughts to retirement instead of being an active investor. He doesn’t mention buybacks, but if you are also thinking about selling a property to focus on retirement, you may find it useful.
Why is the Buyback Beneficial?
The buyback can benefit long-term investments as well as the short-term. Depending on the length of your investment, you may make a 10-25% profit upon selling. Here are the key benefits to a buyback:
- The exit strategy is already determined at the start of your investment. This reduces the risk because your capital is protected from the beginning.
- The buyback allows you to gauge the return on investment without having to rely on predictions of the market and fluctuating property prices. Since no one knows what will happen in 5 years, the buyback guarantees you receive a profit when selling the property.
- The income is completely passive. You don’t need to hire agents to sell it on the open market or speak with potential buyers and negotiate prices. It is all laid out in the contract.
- Buybacks allow you to exit an investment efficiently. If you are an investor that enjoys flipping property and short-term investments, but you have a busy portfolio, an investment with a buyback can put your mind at ease.
- Long-term investors can also benefit because they can make the maximum return. Years of assured rental income coupled with the buy back of up to 125% ensures a lucrative investment.
- First-time investors with little buying and selling experience can use a buy back for a hassle-free process.
When Can You Use a Buyback?
The buyback can be used at the end of the investment contract. Short-term fully-managed investments usually finish on the 3rd or the 5th year. At the end of the investment, you can either opt to use the buyback or in some cases, you are required to use the buyback.
For specialist property sectors that have a longer term of investment such as investing in care homes (which can have contracts as long as 20 years), there may be multiple opportunities to use the buyback. In this case, the longer you keep your investment, the higher the buyback will be.
For example, there may be a buyback on the 3rd year for 110% of the purchase price. In the 5th year, there could be a buyback of 115%. And in the 10th year, there could be a buyback of 125%.
So, with a purchase price of £100,000 and a buyback of 115% used in the 5th year, you could sell the property for £115,000 which gives you a 15% profit. Combined with the assured rental income accumulated over the 5 years, you have a defined and secure investment.
An article published in The Telegraph highlighted that “Most people want a combination of capital growth and rental income from a buy-to-let property, but in today’s climate that may not be easy.” Therefore, it is important that you consider the exit to make the most out of your investment.
The Importance of a Defined Exit Strategy
As property is such a big investment you should know the investment strategy inside and out for peace of mind. Fully-managed investments with a buyback option are known to be the safest way of investing in property because you are assured a NET yield each year and you are given a defined exit strategy.
This allows you to calculate exact risks and expenses unlike traditional methods of property investment where factors such as void periods and the current market can jeopardise the return.
Ultimately, it is a secure way to invest your money for 100% passive income while protecting, and in fact increasing your capital over the short and long term.
At Sterling Woodrow, we pride ourselves on helping new property investors get a solid start in the market and are happy to speak to you about your long-term goals and ambitions in property investment.
We also work with experienced investors to help them increase the value and profitability of their property portfolios.
To book your complimentary property investment consultation with one of our senior portfolio managers simply click the button below and complete the short form and we will call you back at the appropriate time.