How can one produce a $254,000 increase in net asset value in just five years without forking out any of one’s own cash to either purchase the assets or to cover the annual cost of holding the assets?
You would be forgiven for thinking the only way to achieve that was through the very short odds of buying a winning lottery ticket or being the beneficiary of a sizeable inheritance.
Leigh and Hayley are a lovely couple who started working with Propertyology in early 2015. Over the subsequent five (5) years, with the use of our national property market research and award-winning buyer’s agency, they purchased five (5) investment properties, all in completely different cities, across three separate states.
Without shelling out any additional capital expenditure or painstaking time on renovations, the combined value of those five properties is now $254,000 higher than the initial purchase prices. And the combined annual rental income is $5,000 more than all expenses, including loan interest, property management fees, council rates, insurance, and general maintenance.
This was achieved during a 5-year period when real estate in most Australian capital cities performed modestly.
It’s not as if Leigh and Hayley have been gifted a financial leg-up. They earn everyday incomes, they have two teenage boys to raise, and a mortgage to pay on their family home.
Importantly, Leigh and Hayley have a positive attitude plus an understanding that financial decisions made during the 40-years that most people are in the workforce for will ultimately determine the quality of lifestyle beyond 60 years of age.
Plan with the end in mind
When Leigh and Hayley first reached out to Propertyology, they had already made good progress with accumulating equity in their family home (value $850,000 and home loan $430,000).
Their goal was to be in a financial position to cease work in 15-years’ time and enjoy a retirement lifestyle that would cost $100,000 per year. They recognised that, as with the majority of Australians, superannuation would fall well short of what they needed and that an aged pension amounts to very little.
Strategic advice for the investment strategy
Having properly considered their household budget, Leigh and Hayley had allocated $20,000 per year of their personal salaries towards supporting an investment portfolio for their future retirement.
Propertyology’s role was to help Leigh and Hayley to put the equity in their family home, plus the $20,000 per year investment cash flow, to good use.
Using the financial system to their advantage, the foundation of Leigh and Hayley’s strategy involves structuring loans such that the purchase of each investment property was completed by using equity in the family home (as opposed to cash) to fund deposits and acquisition costs.
Clever debt structuring that involves an offset facility, quarantining ‘deductible debt’ from ‘non-deductible debt’, and strategically directing personal and rental incomes has helped Leigh and Hayley to accelerate the reduction of their non-deductible home loan. The net result is they wiped $70,000 off the principle balance over those five years.
Multiple opportunities, risk mitigation, sustainability
Propertyology’s formal studies of Australian real estate history has taught us that every capital city and every regional city has produced periods of very strong price growth, they’ve all had downturns, and they’ve all experienced prolonged periods of stagnation.
The official evidence has also taught us that the biggest driver of housing demand is NOT population growth, instead it is consumer confidence (primarily influenced by local economic conditions). While the most common causes of a property market downturn are either an overzealous local construction sector (creating over-supply) or a retraction in local economic conditions.
With this in mind, we believe that astute and responsible investing is about aiming for the best while planning for the worst.
Rule 101 of all major financial decisions is to never put all of one’s eggs in the same basket. To do so means that one is taking on a significant concentration risk. It only takes a single event to swiftly slice out a big chunk of value off the balance sheet.
In the same way that an astute share investor would never allow their share portfolio to have a large percentage of their shares invested in the same industry (eg. finance, industrial, etc), a property investor would be foolish to place all of their eggs in the same basket (eg. investing all of their money into one expensive property or buying multiple properties in the same city / state).
Rule 102 of good decisions is to retain an open mind and consider 100 percent of one’s options. When investing in real estate, that means putting aside one’s hometown bias, being careful not to generalise or stereotype, and to (objectively) review the investment fundamentals of Australia’s 8 capital cities plus each of the 177 (big and small) regional towns.
A well-balanced property portfolio involves spreading one’s investment capital across multiple (affordable) assets, in completely different cities, and in multiple states. Helping people to acquire this is Propertyology’s expertise.
When we first met Leigh and Hayley in 2015, while they didn’t realise it at the time, they had the financial capacity to afford two investment properties.
We agreed on a $350,000 purchase price budget for each property. To avoid any unwanted surprises, Propertyology also prepared a cash flow budget which made a provision for receiving rental income in 48 out of 52 weeks, plus all standard annual expenses (property management fees, council rates, insurance and general maintenance).
Propertyology then presented comprehensive research to support the strong fundamentals that we identified for an interstate capital city plus a major regional city in a different state.
Over the following few months, our award-winning national buyer’s agents then found suitable low maintenance properties within targeted parts of town, we successfully negotiated the lowest possible purchase price, coordinated due diligence, and helped Leigh and Hayley with setting up property management.
By the end of 2015, we had helped Leigh and Hayley to purchase two properties. In addition to targeting capital growth potential in multiple locations, this small-fish-are-sweeter strategy is kind on the household budget.
Excitement and disappointment
Over the next two years, Leigh and Hayley enjoyed some solid capital growth while also paying a down a bit more non-deductible debt on their family home.
By the end of 2017, Propertyology had helped them to purchase a further two investment properties. The selection of the specific cities that we invested in was, once again, a process of reviewing Australia-wide growth drivers and market fundamentals while also maintaining diversification for their portfolio (different states, different economic drivers, sustainable cash flows).
After uncovering another location with exciting capital growth potential, Propertyology bought a fifth property for Leigh and Hayley in late 2019.
While Leigh and Hayley’s 5-year investment journey has been free of any major incident, that’s not to imply that they haven’t had to lift a finger and that every location has boomed. Such a world is one of smoke and mirrors.
We have been elated when a couple of locations produced a some of the strongest rates of capital growth in Australia. Conversely, we’ve been frustrated when other locations produced only mild growth due to the impact of unexpected delays to major infrastructure projects and changes of government. But that’s the real world of investing in real estate.
Leigh and Hayley have avoided property market downturns that occurred at different times over the last five years in the likes of Sydney, Melbourne, Perth and Darwin and their portfolio isn’t laced with large annual land tax bills.
Sure, a few tenants have come and gone (as they do), but there hasn’t been any instances of nightmare tenants or long periods of rental vacancy. In fact, their combined gross rental income has increased by much more than the national average and their portfolio is technically cash flow positive.
Within just five years, Leigh and Hayley’s preparedness to put the equity in their family home to good use means that they now have a six (6) property portfolio and they are located in a diverse range of cities across Australia. They’ve already seen $254,000 in capital growth, investment cash flows are sustainable and they’ve wiped $70,000 off their home loan.
So, while they are still in the early stages of their investment journey, Leigh and Hayley are certainly off to a flying start with results that are well ahead of the rest of the pack.
They continue to go about their daily lives while managing to keep their finger on the pulse with what’s happening in the property market of each of their locations through Propertyology’s fee-free online (member’s only) platform.
Propertyology is Australia’s premier property market analyst and award-winning buyer’s agency. Every capital city, every non-capital city, we analyse fundamentals in every market, every day. We use this valuable research to help everyday Aussies to invest in strategically-chosen locations (literally) all over Australia. Like to know more? Contact us here.