Buy-backs are 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 buy back option agreement in the contract for several reasons. The main reason is usually that a business or developer wants to regain control over their assets once they have leveraged the capital raised by the investor.
A buy-back 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. Buy backs are sometimes not optional in some property investment contracts and therefore will be exercised by the seller themselves when the agreed time comes.
The buy-back option can benefit long-term investments as well as the short-term. Depending on the length of your investment, you could make a 10-25% profit upon selling.
Here are the key benefits to a buy back option:
- Secure exit strategy investments are already determined at the start of your investment. This reduces the risk because your capital is protected from the beginning.
- The buy-back option allows you to gauge the return on investment without having to rely on predictions of the market and fluctuating property prices. Since no one can guarantee 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 for the buy-back option agreement.
- Buy back options allow you to exit an investment efficiently. If you are a busy investor that enjoys flipping property and short-term investments, an investment with a buy back option 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 option of up to 125% ensures a lucrative investment.
- First-time investors with little buying and selling experience can use a buy-back option for a hassle-free process.
In short, yes. But strategic investors that want to gain the highest return on investment should look towards different types of property investment if they want to leverage buy back option agreements.
For specialist property sectors that have a longer-term of investment such as care homes (which can have contracts as long as 20 to 25 years), there may be multiple opportunities to use the buyback. In this case, the longer you keep your investment, the higher the buy-back will be.
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 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.
Most people want a combination of capital growth and rental income from a buy-to-let property, but in a post-pandemic climate that may not be easy. Therefore, it is important that you consider the exit to make the most out of your investment.
Property can cost a significant amount to an investor, no matter their budget. Therefore, you have the right to know the investment strategy inside and out for peace of mind.
Fully-managed investments with a buy back 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.
Research conducted by the Financial Times on the impact of lockdown states that the current rental market is the most difficult to read in over a decade. It has never been more important to have a secure exit strategy investment with a buy back option to ride out the peaks and troughs in the property market.
Buy back options are a secure way to invest your money for 100% passive income while protecting increasing your capital over the short and long term.
In an economy and property market recovering from the coronavirus lockdown, buy back options have never been more important to ensure secure exit strategy investments for investors. It is advised to always pose the question to a developer or property investment company on whether offer buy back option agreements in their contracts.
At The Overseas Investor, 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 get in touch and we will call you back at the appropriate time.