Good day. My name is Ben Everingham, I’m the director here at Pumped on Property, and in today’s video I’m going to talk about how to invest in property and create a passive income for life. Thanks so much for your time and attention today. If this is the first time you’ve been to my YouTube channel, please subscribe. Love to hear your comments, or if you’ve got any videos you’d like me to create or shoot for you around the property space, please drop them in the questions box below.
This video is going to be action packed. We’re going to talk about why investment property, in particular the history, the effect of leverage and compound growth, I’ll also share some great resources and books that I follow and have read that have really helped me put the property knowledge together that I have today. I’m also gonna talk about the 4 property strategies. That’s a strategy to help replace your current annual salary or an income of between $80,000-$100,000 within the next 15 years from buying 4 properties. And then I’m gonna talk about what makes a great property, based on the 120 million dollars worth of properties that I’ve bought in the last 2 and a half years for my clients.
There’s gonna be a lot to cover today but I’m really, really excited. So the first thing I wanted to talk through was why property?
For me, I’m a guy that follows history and I read an amazing book recently by an economist called Phil Anderson called “The Secret Life of Real Estate and Banking.” And that book really looked at the last 250 years worth of booms and busts in the American economy and how that affected property prices. There was another great book I read by Fred Harrison called “The Power in the Land.” Which looked at 250-350 years of boom and busts in the English economy. And then I read a great book by John Lindeman, an Australian author, called “Mastering the Australian Housing Market.” Which briefly looked at the Australian market over the last 100 years.
After reading those books, I started to do some more analysis, myself, on the history of the Australian market and what I learnt, that in the last 46 years, property prices in Sydney, Melbourne and Brisbane have all gone up by over 9.5% per annum, which absolutely blew my mind away. In the last 20 years, property prices in all 3 markets have gone up by over 8.5% per annum. And even in the last 10 years, it’s 2017 when recording this video, property prices in Sydney and Melbourne have gone up by just under 8%. And in Brisbane, they’ve gone up by just under 5%. It kind of reaffirmed my belief that there are good times to buy a property, there are bad times to buy a property. There are times when property prices rise and dramatically fall and times when they sit flat. In fact in the last 46 years, there’s been periods in Sydney, Melbourne and Brisbane where prices have sat literally dead flat or gone backwards for a 9 year period and then they’ve obviously increased. But the long term averages is the game that I wanna play.
By knowing your history, it helps me sleep a little bit better at night. There’s plenty of great data out there including those books, if you haven’t read them, I think you’re at a major disadvantage as an investor in this country, because you’ve gotta compete against people that do understand that stuff.
Another thing about property that I love is the leverage. From a leveraging perspective, what I mean is that; If I have $1, the bank will give me between $5-$10 back because if I have a 10% deposit, then they’re gonna give me $10 back. If I’ve got a 20% deposit, they’ll give me $5 and it’s not like having $100,000 and going and putting that into a market and getting yourself a 10% return and making $10K in the first 12 months. It’s like having 100 grand and the bank gives you 5 times that so $500K and now that 500 grand goes up by 10% in 1 year, you’ve made $50,000. So you’re significantly better off by using leverage. It really does come back to your risk profile though. Understanding the market conditions. I think it’s actually better to do nothing than to go and buy property and make big mistakes or take on big debt or make big risks, or buy at the wrong time.
So you really need to understand what you’re doing before you jump because the challenge or the difficulty, or the risk associated with leverage is when it all comes crashing down, which at different times throughout history it does and it will again. Then the people that are most exposed or most leveraged are the ones that get wiped out first.
Make sure you think about interest rates being higher than they are now. Make sure you think about you not being able to get a job for a year. Make sure you think about not having a tenant in the property for period of time or having to dramatically discount the rent to find someone. Make sure you’ve got cash savings in the bank to protect yourself as well. These are all the sorts of things that as you learn more, you will understand risk and leverage better and put yourself in a better position.
The last thing I wanted to talk about in regards to property is Effective Compound Growth, which Albert Einstein calls the 8th Wonder of the World. And what I mean by compound growth is, let’s say you had that $100,000 again and in year 1 it grows by 10%. So you’ve made $10k. But in year 2 the property price is now $110,000 and if you can get another 10% return on that money, you’re talking about … The exponential compound growth line looks like this, it’s slow, very slow, very slow, and then over time it spikes. You’ve seen that with population globally. It’s also the same with money. It’s very, very gradual, it’s like an aeroplane taking off. It takes a lot of fuel but once it’s up, it’s a lot easier to keep in the air once you get into that higher altitude where there’s less resistance.
Compound growth is very powerful. For anyone that hasn’t played with those calculators online, get on to Google now and look at a Compound Growth Calculator. Maybe put in $400,000 and look at what you can do if you can get a 4% return on that money over the next 20 years. And maybe put in $400,000 and see what you can get over the next 20 years if you get a 6% average annual return. Just that 2% difference will completely change the way that you invest for the rest of your life because you’ll know if you understand those numbers that you’ll be 6,7,8 hundred thousand dollars better off just from putting that money into something that’s gonna get you a better return.
That’s the first part of today’s video. The second part is this 4 property strategy that I wanted to talk about. This is a very, very simplified, back of the napkin at a restaurant type of model. I don’t have time to get into it all today and I don’t have a whiteboard behind me to draw it out. So just persevere with me, I promise I’ll link it all back together for you at the end of explaining it. But effectively in this 4 property model there’s three stages there’s the accumulation phase, which is where you buy the properties to achieve financial independence in the future. The second stage is the consolidation or debt reduction phase where you reduce your risk and you pay money back.
The third phase is the lifestyle phase, where you get to make the decisions with your family to do whatever it is that you want to do for the rest of your life, which is a really powerful position to be in. And I hate this concept of retirement. Seriously who wants to just do nothing for the rest of their lives. But I do like this concept of financial independence or passive income for life, where you have the choice to do whatever you want to do whenever you want to do it for the rest of your life and there’s a very, very big difference there. Who wants to be 40 years of age and retired while none of their friends and none of their family are in the same position? You really want to be a productive member of society but you want the choice to do the things that you love and maybe that means working three days a week on a passion or starting a business and not needing it to succeed or fail. Or travelling the world and helping other people, or spending more time with your kids while they grow up and then when they get the school, going back to work.
It gives you lots of opportunity to do different things and so they’re the three phases. The accumulation phase, the consolidation phase, the lifestyle phase.
The very first thing that you need to do if you’re starting from scratch, and if you’ve already bought a couple of properties and you’re probably already 50% of the way there. All you need to do is buy properties that grow on average by 4.7% for a 15 year period. That means buying Sydney, Melbourne, Brisbane. Possibly Newcastle, Wollongong, possibly Sunshine Coast, Gold Coast. Possibly Perth, maybe not. But they’re the markets in Australia consistently performed at that level or have the potential to, from my perspective knowing what I know long-term.
The first step in this 4 property strategy is to buy your first property now. That first property needs to achieve capital growth and should also have a cash flow position that doesn’t cost you a huge amount to hold. So let’s say you go and buy a $400,000 property you’ve got a 10% deposit so you put $360,000 in debt and it rents for $400 a week, the property now. After you’ve bought that first one, the second property out of the 4 properties is exactly the same. You go and buy another £400K property. Put down a 40% deposit giving you 360 grand debt on that property. It rents for 400 bucks a week. Congratulations that is the first part of the accumulation phase, you’re already 50% of the way there by doing just that.
Now the second part of the accumulation phase. You need properties that give you capital growth and cash flow. And again there’s so many different ways of doing this, this is just the easiest way that I’ve found without taking on a huge amount of risk if you’re earning $80,000-$100,000 per year as a household now. The second part of the accumulation phase, again, you go buy another $400,000 property $360,000 in debt. That rents for $400 a week. But this time you also build a $110,000 granny flat, which rents for another $300 a week. Now you add 400 plus 400,000 plus 110 so it’s a total value of $510,000 for that third property. You can work out the debt position just take 10% off $510k and basically the rental return is going to be 400 on the house and 300 for the granny flat so the $510,000 worth of value, you’re going to get $700 a week in rent, which is a 6.5% return, which is perfect for this strategy.
Now that’s property 3 that requires you to be a little bit more active. Don’t get overwhelmed about the concept of buying and then building a granny flat. It’s super easy to do. You know me now, so if you need any help around that just give me an email or a call at pumpedonproperty.com And the fourth property is exactly the same as property 3. You can see that this isn’t rocket science this is just a strategy where you rinse and repeat the same thing to achieve the result you want to achieve.
The fourth property again is $400k home that rents for 400 bucks a week. $110,000 granny flat that rents for $300 a week. They’re the four properties that you buy. If you only want to replace $80,000-$100,000 within 15 years and then that’s enough to do it. If you want to go further than that, then you can add some more properties in. If you want to do less than that and then take a couple out, but this is a strategy to achieve 80 to 100 grand a year. Now what we do now, that is the accumulation phase or the first phase that I mentioned before done and dusted. You’ve bought 2 quality properties that will achieve good long-term capital growth. You’ve also bought 2 properties, which equality with good potential for growth plus great cash flow now.
What you do once you get to the accumulation phase is you go and do a basic cosmetic renovation on property 3 and 4. I’m talking about carpets, paint, lights, blinds, fans, tidy up the kitchen and bathroom. Very simple no more than 15 grand total on each property and the only reason you do that is to increase the rental return on those houses, so that the return on properties 3 and 4 is as high as it can be for the entire consolidation phase.
After you’ve done that, all of the money that you own for the next … Let’s say it took you 5 years to buy those four properties, or if you’re already halfway there because you already own a few, then it took you 5 years to do the two house with granny flats. And if it takes you 10 years to do that, that’s fine. It just stretches out the time to be financially independent from 15 years to about 20 because you really need a long hold period. Particularly for those first two properties.
So in this consolidation phase your goal is basically to reduce your debt as much as possible. At this time your property portfolio, up to interest rates of about six percent, should be pretty much balanced or neutrally geared because you’ve got those two really positive properties. Now all of the surplus income from your tax returns, from those properties from your savings each year that you’re not spending on lifestyle, should be going into paying off debt on properties 1 and properties 2. The reason we want to pay those properties off is just in case the property market doesn’t double in a 15 year period, which would mean properties rising by 4.7% per year, you’ve paid down some debt over that period of time to make sure that you can still achieve this strategy. The other point there is obviously when you sell properties 1 and 2 in the future, you’re gonna have to pay some tax and the money that you put away now, or pay off the properties now, will help with all of that.
So effectively you just pay down debt over that period of time that you hold them and as soon as properties 1 and 2 have increased in value enough or you’ve paid enough debt off to pay off properties 3 and 4 outright, you sell them and you pay off those properties. Let’s say you hold properties 3 and 4, which we’re running for $700 a week today but in 10 to 15 years time should be renting for $800-$1,000 per week each. Imagine owning two properties it gave you 1600 bucks the 2 grand a week in your pocket, without ever having to go to work again.
This is why this strategy is so simple. The last thing that you do in the second phase, which is consolidation, is sell those two properties, number 1 and 2 that you bought and pay off properties 3 and 4 outright. And now you go into lifestyle phase, which is making decisions based on what you really want to do with your life, as opposed to scarcity or fear, or having to continue to do whatever it is that we all do to achieve financial independence. And you can go and spend the rest of your time … For me it’s about health, it’s about spending time with the people I care about, with my family. It’s about travelling and adventuring. It’s about doing this business, which I absolutely love, which is Pumped on Property, which helps people just like you and I achieve financial independence over a 15-year period by walking them through this type of strategy and then helping them buy the right properties at the right prices, in the right markets at the right time.
I hope I haven’t overdone that, because I don’t have a whiteboard behind me it’s a little bit more challenging to explain the numbers. But in reality to simplify it; there’s four properties you need to buy. Two of those properties of capital growth. Two of those properties of the four are capital growth plus cash flow. You basically buy them, you pay some debt on the first two, you sell the first two and you pay off the properties 3 and 4 which are the houses and the granny flats outright. And it’s not more complicated than that. There’s so many different ways to achieve this strategy so many speakers in the market talking about 10 properties in 10 years and all that bullshit, which just sounds to me like a lot of debt for no real extra return or reward. I’d rather own two properties outright that give me a 7% return, then three properties outright to give me a 4% return.
So that’s what I’ve had, I’ve made my peace that I want passive cash flow today while I’m young, as opposed to waiting for it in the future. And so the decisions that I make all revolve around “How can I pay off properties more quickly?” As opposed to how much money can I die with when I’m you know hopefully a hundred years of age and can’t enjoy that money properly anymore.
So the last thing, the third and final thing that I wanted to talk about in this video is “What makes a great property to me.” So how to invest in property and how to create a passive income for life comes down to what properties you buy ultimately, and how those properties perform over time. The things that help you get above-average results over time, firstly is targeting capital growth. Secondly is timing the right market at the right time, think buying Sydney or Melbourne six years ago from 2017. The third is manufacturing growth or adding value to the properties that you buy. The fourth thing for me is cash flow. And then it’s also very, very important for me, personally, the fifth and six things to buy houses. Because I know they perform better, and to buy metro properties because I know they historically performed better.
We’ve talked about heaps today we’ve talked about wire property. We’ve talked about the 4 property strategy to achieve passive income for life, and I’ve talked a little bit about what makes great property. I’ve got heaps of other videos about more of the property related stuff, more of the history stuff and more of the strategy stuff on YouTube, or on my website www.pumpedonproperty.com. For those of you who would like to continue the conversation with either myself or my brother Simon, we’d love to talk further. Jump over to www.pumpedonproperty.com and book in a complimentary strategy session with us. And in that period of time we’ll talk about where you are and where you’d like to go. We’ll look at what’s stopping you or holding you back from achieving those goals, and we’ll look at what your immediate next step is.
For those of you who are looking for a buyer’s agency as a business, we’ve helped our clients by a $120 million worth of property in the last two and a half years. We’re very, very focused on what we do and we’re very, very grateful for the opportunity to continue the conversation with you in the future.
So until next time, thank you and have a great week. Bye.