There are a lot of people out there that will tell you, you need to buy five, ten, fifteen or even twenty properties to achieve financial independence. I’m going to show you just how easy it is to achieve this by having a focused and very specific strategy.
So why only a four properties strategy?
If you’re looking for $100,000 per year in passive income, you could own ten properties outright that give you $200 a week or you could just own two great properties that give you $1000 a week each. There are plenty of different ways to achieve the same thing.
A lot of people don’t realise how much management and how much maintenance goes into holding a big property portfolio. It can become a nightmare once you organise your insurances, rates, water bills, management with different agencies, collecting rent and simply managing and maintaining properties. It can just become a massive headache. You’ve also got to pay a lot more money to buy more properties in terms of stamp duty, legal fees and capital gains. The actual act of buying and selling real estate is expensive.
Three phases of this strategy
The first is where 95% of the action happens, and where all the work happens. This is the accumulation phase and for me this is the fun part, where you actually go out and buy the properties that are going to enable you to be financially independant in the future.
Next is the consolidation phase where you effectively go into hibernation. You allow the market and time to do its thing. You also might strategically add some value to your properties, which I’ll go into more detail about shortly.
The third phase is the debt reduction/lifestyle phase where you get to make the choices that are meaningful for you, for the rest of your life.
For this strategy to work over a 15 year period, we need the properties that you buy to grow by an average of 4.8% per annum over the 15 years. So that doesn’t matter if you get 100% growth in one year, and then you get 90% reduction in the value of your property the next year. What we’re looking for is an average over the 15 years of consistent savings at a 4.8% growth rate.
We also need time in the marketplace for the market to increase in value. So ideally you would purchase two out of these four properties within a relatively short period of time.
I am also making the assumption that the return (rent) on the properties will increase over time.
Another assumption is that you actually need to make this happen. This isn’t a strategy that happens on its own. You have to be an active investor, you have to actually go out there and buy these properties. While four properties might not sound like enough for a lot of you, you’ve got to remember that less than 1% of all investors ever get to the four property mark. So while it might not sound like a lot, the things that you’ve got to overcome to get there can be quite significant.
In Part 1 of the accumulation phase we are looking to buy two high quality properties featuring the below
- Good land size (500-600m2)
- Nice 3-4 bedroom home
- Quality street / suburb
- Quality market at the right stage of the cycle (start of the recovery or bottom of market)
We need to buy two properties worth $500K each with the goal being for each of these properties to grow on average by 4.8% per annum over the next 15 years. Therefore, your $500,000 is now doubled, and in 15 years your two properties are worth $1,000,000 each.
The second part of the first phase, the accumulation phase is then to go buy another two houses. Now it doesn’t really matter when you buy these next two houses, but obviously the sooner you buy them the better off you’ll be and the sooner you can be at your goal. These next two properties will ideally feature the below:
- Worth $400,000 each with potential rent of $400 a week
- Good side access
- Ability to build a 2 bedroom granny flat in the backyard
The cost of the Granny Flat might be around $110,000 to build and hopefully it will rent for $270 to $300 a week.
Total expenses are $510,000 per property including the granny flat, and those properties should be renting for $400 plus $300 a week, so a total of $700 a week in rental return. That’s around 6.5% to 7% return.
At the end of the accumulation phase you’ll have four properties in the market and two with Granny Flats.
Consolidation is boring and it’s slow, and this is where most investors come unstuck. They sell properties too soon.
This phase is about starting to pay down the debt on properties 1 and properties 2. Hopefully you’ve gone through your accumulation phase within about a five year period.
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Hopefully over that 15 year period, if you’re paying principal and interest repayments on those two properties, you can actually pay off about 30% of the value of the property. Why 30%? Because as we all know the Australian government loves to take capital gains from us. That 30% is effectively you saving the tax that you’re going to have to pay the government when you sell in the future.
It means that if you’ve purchased a property that is worth $1,000,000 in the future and you’ve been able to pay down a portion of the loan over a 15 year period, it offsets some of the Capital Gain’s Tax you’ll have to pay in the future when you sell. You then have a larger amount to put in your pocket when you sell.
We then go through a period where you don’t really do too much to these properties; just keep them well maintained. You could give them a paint and re-carpet every now and then just to make sure that you can continue to rent them for a premium.
Once you have held the properties for 15 years, you can then look at renovating property 1 and property 2 to get them presenting as well as possible and ready for market. Selling those two properties is the final step to complete the consolidation phase.
The lifestyle phase
The third and final stage of your four property plan is debt reduction and what I like to call the lifestyle phase. After selling those first two properties, you can then pay off property number 3 and 4, which are the houses with the granny flats.
Remember how I said that property 3 and 4 with the granny flats will be renting for roughly $700 per week from the first year. Well hopefully, 10 -15 years after you’ve bought those properties they will be renting for somewhere between $850 to $1000 a week. This will depend again on how well the Australian economy does and how much you can increase the rental returns on those properties.
Let’s just say all of the stars align and you’re getting $1000 a week from those two properties. After renovating properties 1 & 2 and selling for a premium you can then pay off property number 3 and 4 outright and all of a sudden you’re getting $100,000 per year of passive income from owning two great properties.
So that’s the four property strategy. It’s not complicated, although there might be some new ideas for you. There are a few things that keep people from achieving this;
- Lack of education
- Limited information
- Mistiming markets
- Not being focused enough to save the deposits that they need to actually achieve these goals
- Making excuses about the income that they earn and not going out and creating more income for themselves
I understand because I’ve been through all of these setbacks and as an investor I still go through them. Creating wealth and financial independence through properties is really just problem solving. This is the simplest strategy I’ve been able to find for the average person to achieve financial independence.
Don’t get overwhelmed by the whole four properties strategy. The most important thing you need to do regardless of where you’re at right now, is to understand the overall cycle. To really be focused on this strategy and to not sell properties too early and to not freak out during times of the cycle where property prices will go down.
If you’re not financially independent at those times you can do one of two things. You can sell just before we go through a major crisis or you can hold through it, knowing that as the cycle continues property prices will be back up again at least to where they were before, if not significantly above that, like we’ve seen in Sydney and Melbourne after the Global Financial Crisis.
To book a complimentary strategy session with the team at Pumped on Property click here. We would love to spend some time learning about where you are right now and where you’re looking to go in the future.