How to buy the right dual income property

Tara FIRE investing, Real estate June 18, 2021September 13, 2021dual income property, Financial freedom, multifamily property

This one property investing strategy can make you financially free.

We’re not kidding. We’re talking about the wealth building potential of dual income property.

Dual income property has been a foundation stone of our financial freedom strategy so far. It’s a super wealth building strategy if you know what you’re doing. And the good news is you don’t need to stumble through.

Here’s the intro to this series to get things started.

Today, we take you through how to buy the right dual income property for financial freedom. At the outset, you’re going to want to know what your investment strategy is and what your investment objectives should be, because if you don’t how’re you going to meet them right? So let’s get started.

The dual income property strategy

Your initial investment strategy is buying low and upgrading the property for short term cashflow and capital growth, so you can continue your property (or other) investing journey. This is not the end of your plans for this property, but it IS how you’ll leverage it into another investment and keep on with your wealth building plans.

Buying low means you can preserve your own capital and will have some spare cash for upgrades. This bit is critical peeps! The value creation strategies we talk about below will help you take out equity as quickly as possible for your next investment venture.

Our full dual income property strategy will emerge over the course of this series .. I can just tell you are on the edge of your seats with anticipation 🙂

Investing objectives for dual income property

Positive cashlow

In our intro to this series we talk about the main benefit of dual income property being cashflow. So cashflow is going to be one of your main objectives because it’s relatively easy to achieve when you’ve got dual income. A cashflow positive property is when your annual rent covers all annual expenses and you have a little left over in your pocket.

So how do you work out if it’s cashflow positive when you don’t know what all your expenses are?

The 10% rule

The first thing you’re going to need to do is work out the gross rental yield for the property. From our experience and as a rule of thumb, with older properties you are looking for at least 10% gross rental yield to achieve a marginally cashflow positive property. One caveat – your yield percentage can really live or die on the condition of that property and its occupancy rate. We’ll get to that later….

Your gross rental yield calculations should follow this formula:

Property yield = annual rent / property price x 100

So for example, a $400,000 property with a gross rent of $40,000 will give you a gross rental yield of 10%.

This is a nice rule of thumb because it’s easy to work out when you’re hitting the pavement inspecting potential investment properties.

Properties that are less than 10 years old may have some worthwhile depreciation benefits for both the building and its fittings and fixtures. You can also use these benefits as a strategy to achieve a positive cashflow outcome. BUT peeps, the depreciation thing only works if you have complementary income you’re paying high tax rates on – like a high earning wage. If you’re looking at an investment that on the surface doesn’t meet the 10% rule, consider whether depreciation tax offsets against your personal income might get you across the line. If you want to learn more about this strategy, we recommend reading ‘7 Steps to Wealth‘ by John L. Fitzgerald.

Newer dual income properties will come at a higher buy in price. This will mean a larger deposit, which may eat into your portfolio investment plans. It’s also hard to know with certainty before you buy whether this strategy will work with the specific property you’re targeting, unless you get a depreciation report done before purchase. Last we had one done it cost about $600…

Find property with low operating costs

We mentioned before that your holding costs and occupancy can really put a spanner in the works when it comes to positive cashflow. So if you want to find a property that is not going to kill your wealth building strategy with ongoing expenses. Here a checklist of things you want to see in a good property:

Brick veneer – external timber requires heaps of paint, maintenance and repair
Structurally sound with solid roof and stumps / slab
Hard wearing flooring – tiles, timber, laminate or planks. Tenants trash carpet and that becomes expensive.
Separate electricity meters for each unit or apartment – so the tenant pays their own power bills
Separate plumbing and good quality water efficient tap ware – if you have these you can pass on variable water charges, lowering your ongoing costs
A property on a single title – so you’re only paying the one city rates bill and not a rates bill for each unit. This one factor can literally save you thousands a year.

Capital gains

Now we’ve covered what to look for to land yourself some healthy cashflow, let’s talk capital gains. Your objective is always to get good growth no matter what kind of property investing you’re into right? But how do you know with a dual income property what growth might be on the table?

Organic growth – find the right location.

The right location will give you some good organic growth if you hold the property as part of your portfolio and look to leverage it as a financial freedom strategy. Now, there are a gazillion cities, towns and suburbs across Australia or America or even the UK and finding the right area is going to be up to you. Sorry!

Once you do get to a shortlist of locations, take a look at historic data over the last 10 and 5 years. You want a location with strong long term capital growth over at least 10 years. Strong is anything above 7% per annum. Depending on your time horizon, you also want that growth NOT to have all rolled out in the 3 years prior. This is because growth in property can be lumpy – where you might get a really good 24 months of capital growth and then a slow period of 3 years. If you jump in at the beginning of that slow 3 year period, you’re going to be waiting a long time to recycle any equity from your dual income property into your next investment.

Manufactured growth – find the right property

Manufactured growth strategies for dual income property differ massively from single family homes. Here is a checklist some of the things you want to look for, with a dual income property, based on your growth objective.

Cosmetic renovation opportunity – think purple, pink or orange wall paint, lace curtains, moth eaten carpet, overgrown garden. This is gold when it comes to easy to manufacture equity. A internal cosmetic renovation of paint, flooring, window coverings and some simple landscaping can help produce a higher valuation on the property AND increase your rent and your cashflow position.

Structural must haves – there are also somethings that the property must have to take advantage of manufactured growth opportunities longer term:

Carports or space for off street parking for each unit or apartment.
Firewalls between each apartment, usually constructed of Besser brick. You can check by poking your head into the ceiling cavity – they should extend up to the roof between each unit.
Separate entrances for each apartment or the ability to create them.
The potential to create separate and private outdoor spaces for each apartment.
Adequate (for the size of the building) stormwater drainage from the roof to the street.
You also want to make sure that each apartment in the property has separate electricity meters and separate water meters, or the ability to inexpensively separate them, and that you a buying a property on a single title.

We’ll cover why these things are important in part 3 of the series, but for now you’ll have to trust us – these are the thing to look for if you want a super charged strategy for financial freedom.

Where to find a low buy-in dual income property?

So if you’re still following along we’re at the bit in the story where we talk about where. Where do you find dual income property that lets you buy low and leaves you some cash to do upgrades, without blowing all of your savings on the one deal?

One of the major hurdles to dual income property investment for folks trying to build their financial nest egg is the buy in price or affordability. In tier 1 cities in Australia – like Sydney, Melbourne, Brisbane, Perth and even Adelaide – a dual income property comes in at a whopping $800k plus so you’ll need $100k plus in your pocket to buy. This just isn’t an affordable investment for a lot of people. It’s probably the same in the States or the UK… In some cases these price tags have already spilled over to tier 2 cities like Newcastle, the Sunshine Coast (well its not a city but you get the picture), the Gold Coast and Geelong

But.. in tier 3 cities (more like regional towns) you can still find dual income properties at affordable prices within a reasonable buy-in range. And the good news is that since the pandemic, tier 3 cities have become a lot more attractive for renters because of the lesser disruptions and impacts from shut downs, and for their affordability. We’d be looking specifically at towns within a 2 hour drive of a major city and with a population of 80,000+ as well as some diverse industries behind them to prop up employment. Think Cessnock in NSW, Toowoomba in Queensland, Devonport in Tasmania, Bendigo or Ballarat in Victoria. In these locations, dual income properties are still a possibility for many folks with a buy in price of $400 – $500k.

The final word – hey, hey you’re underway

In this post we’ve kicked off our dual income property planning with how to buy the right dual income property. Adding value peeps! We’ve set out:

a clear initial buying strategy – to buy low and upgrade so you can manufacture immediate cashflow and capital growth.
a checklist of what to look for when you buy – to maximise your property investment income and eventually the money you’ll make
some pointers on where you will find these types of properties.

Not all dual income properties are equal in the game of money financial freedom seekers. Buying a dual income property with these things in mind should help get you on the right track and on the fast track to crushing your financial freedom plans.

NFA – which stands for not financial advice (as opposed to NFI which stands for No F*cking Idea and is the opposite of what we’re all about here at the LLP).

Intro – The wealth building potential of dual income property

Part 2 – How to make passive income from property, double your money and pocket a 15% annual return

Til next post – have fun, be happy, do good!

Inflation forecasts for 2021: how to hedge for financial freedom

Tara Achieving financial freedom, Financial Independence Retire Early, FIRE investing May 4, 2021July 26, 2021how to hedge against inflation, inflation 2021, inflation forecasts for 2021

Well that was a few hours of my life I’ll never get back. Researching the latest inflation figures and economist viewpoints. Now, let’s see if I can turn those few hours into a three minute engrossing read for you. Challenge accepted!

In this post we take a look at inflation forecasts for 2021, the debasement of fiat currency, how these might impact our passive income and financial freedom goals and how to hedge against them.

Mainstream media, at least in Australia, has been awash with stories about increasing house prices in capital cities and skyrocketing prices in regional areas. Apparently prices in February rose in every capital city and every rest of state region in the entire country. This hasn’t happened since 2010. Fuelling the growth, they say, is the recovery after lockdown. Government building incentives and low interest rates. Add to that the fact that Aussies have returned in their droves from overseas and now need a place to live. It’s certainly not population growth as gone are the days of immigration led economic boom times. At least temporarily.

Stocks have also been on an unrelenting run up throughout 2020 bar the March dip. Price to earnings ratios are through the roof. Economists keep calling the top, but we never quite seem to hit it. By any Warren Buffet measure, markets are overheated and a correction is imminent.

Are we in an inflation economy?

We’re all aware that governments have been printing money at record levels to keep the economy afloat during Covid. Quantitative easing that has dwarfed the money printing of the Global Financial Crisis. But did you know that in March, the International Monetary Fund magic-ed out of thin air $650 billion in what they call ‘Special Drawing Rights’ – cash they intend to lend to a bunch of member countries? This didn’t make the 6 o’clock news.

Special Drawing Rights were a tool created a few decades back to deal with what was thought to be an impending US Dollar crisis. They’re a basket of 5 fiat currencies that used to be pegged to the Gold price but now are pegged to nothing. Since their creation in 1969 $200 billion has been issued in SDRs, so this year’s efforts are a tripling of that. SDRs can fly under the radar because they prop up member economies without adding to their official debt levels.

What I’m getting to with all of this is, if you thought the world was awash with cash already, you can add another $650 billion to that tidal wave that won’t show up as debt on government books and that no-one we know really knows about.

So are house prices really going up because of economic recovery and returning expats, or is the value of the fiat cash in your pocket or bank account dropping like a lead balloon with inflationary monetary policy?

So what the hell is going on?

Some economists say it’s a myth that money printing causes inflation, but if you’re worried about the price of goods and assets going up and things becoming unaffordable, you’re not alone. Just search on Google Trends and you can see the search engine data for yourself. And here’s some Australian consumer price data as a cherry on the top.

Inflation 2021 - consumer price growth — ABS & CBA data. Australian consumer prices. Source

It is true that inflation as calculated by economists has many inputs including wage growth and spending. If you look at the money printing that happened during the GFC and inflation rates afterwards, you’d be put somewhat at ease about what’s coming. Quantitative Easing didn’t lead to rife inflation in the OECD post 2008.

Inflation forecast 2021 — OECD inflation data and forecast from the GFC until now.

You could argue that wage growth and spending were the two missing factors then and now. They’re just not happening. The velocity of money (transactions) in the economy has fallen through the floor. Companies and people are hoarding their cash uncertain about what the future brings. Household savings rates have ballooned. Who can blame us?

Inflation 2021 - household savings — ABS data. Australian Household savings jumped during Covid as did savings rates around the world. Source

So without wage growth and spending, inflation forecasts for 2021 are moderate across the board. The OECD has them ticking upwards along with the Reserve Bank here in Australia, but at historically moderate levels.

The answer is no-one really knows. Read this and you’ll see that the head of Australian economics at the Commonwealth Bank of Australia isn’t even sure. To take a trading view, he argues you could build a bullish and a bearish inflation forecast for 2021.

Fiat currency debasement

Meanwhile, is anyone else thinking that the prices you’re paying for property and other assets seem to bely what the government data and forecasts say? Has anyone noticed that stock markets are on an unending tilt upwards while the economy and jobs have tanked? Has anyone realised that since 2008 central bank balance sheets have been growing by around 13% each year? If you haven’t heard about this, have a listen to Raol Pal or Michael Saylor.

So maybe it’s not inflation at all (with CPI based on the price of a basket of consumer goods). Maybe with the printing of money world wide and the crazy growth balance sheets what we are actually experiencing is the debasement of fiat currency on a global scale. Maybe this is just causing assets to rise (or just to hold their value against fiat currency), but not consumer goods. It’s something to get your head around but without a doubt, things are changing. Quietly in a way that is creeping up on us, we’ve moved into unchartered financial territory.

So, what we’re saying is, if you’re planning to be financially free at some point in the next 5 years then it’s time to keep your eye on the ball. We may not know until afterwards whether covid economic recovery will be inflationary or whether all fiat currency is debasing and hence the value of assets rising against fiat. But in this time of enormous uncertainty you need to hedge your bets.

How to hedge against inflation or debasing currency

If the value of your cash disintegrates over time and you didn’t do anything about it when it was happening, financial freedom will be much harder to attain. But what do you do financial freedom seekers, to hedge against inflation? How do you keep moving forward on your financial independence journey?

Cashflow is still king

Let’s face it, income is your first concern to pay your bills and put food on the table. So passive income is still a massive focus in your financial independence journey and will continue be a cornerstone of our blog.

On top of maximising your income, FIRE (Financial Independence Retire Early) talks about savings rates being the single biggest determinant of financial freedom and your retire early strategy. In 2020 the RBA provided explicit forward guidance that we won’t be getting anything for our savings anytime soon by stating that “the Board does not expect to increase the cash rate for at least 3 years.” If we’re in an inflation economy or fiat is debasing, cash is a losing game – you’ve got to use it or lose it peeps!

So what do you do with your excess cashflow and passive income? What do you invest in if inflation surprises to the upside?

Digital assets

Let’s face it, if banks are going to keep giving you 0% on your savings for the next 3 years, your cash in the bank is going backwards. Bank bail-out laws, at least in Australia, also put your cash in the bank at risk in event of some kind of catastrophe. One thing is sure, with uncertainty comes risk. Don’t assume your cash in the bank is safe and you’ll be protected dear readers. Squirrelling may not be as safe as you once thought. The independence part of financial independence is more important now than ever.

Bitcoin was made for this very situation and while the price is pulling back there may be an opportunity to hedge any currency risk right there. If fiat currency is debasing at the same rate as central bank balance sheets are growing, you’re looking for assets that can maintain a growth rate over 13% just to tread water. This would explain the growth in equities and in crypto. And as blockchain brings tokenisation to more assets, Bitcoin is just the start of a migration to digital assets and the internet of value.

DeFi

There are other ways to beat the bank rates but they involve more risk. You want to find returns for your cash that sit above the real inflation rate or currency debasement rate to stay ahead. We’d personally be aiming for something over 5% for short term interest. With companies stashing their cash too, these kinds or returns in dividends are harder to come by. Check out this post where we talk about ways to generate more passive income from your savings in the emerging DeFi financial services arena. We staking crypto and lend stablecoins and are earning rates as high as 30%. But remember, it’s buyer beware as always when it comes to the wild, wild west of crypto. But we’d say that cash and investment risk is rising across the board with mainstream products, you just don’t know or hear about it because rules of the centralised money game are transparent to but a few.

It’s time to think about your wealth allocation

Another strategy worth giving some thought is to migrate some or more of your tertiary wealth (paper and digital wealth) into secondary wealth (products) and primary wealth (primary resources, raw materials). For the average person, primary wealth building is usually with property, land, or monetary metals. We think over the next 5 years you can add Bitcoin to this list of primary assets and some other digital assets that don’t exist yet but will emerge as assets tokenise on the Blockchain.

Most of the wealthy 1% already know that if fiat currency is debasing then a way to hedge against that is to borrow fiat now and buy assets, which will adjust upwards as currency weakens. Governments are applying oil to the wheels of big debt by relaxing lending rules. Stimulus packages too. So if it’s available to you, this is one strategy you might think about. It’s definitely why we will not be parting with our real estate investments any time soon.

What we’re not saying is put more of your wealth into ETFs that claim to be back by those primary and secondary resources. Have a read of this article on The illusion of Owning Gold. If it smells fishy, it usually is. Resource ETFs are a tertiary asset. You need to make sure whatever assets you invest in, the legal title for the asset is in your name in part or in full. Like it is with digital assets on the Blockchain.

The final word – we’re not stashing our cash

Inflation and fiat currency debasement can be like the proverbial frog in boiling water for financial freedom seekers. We don’t know it’s eroded our wealth until it has. Keep a watching brief on the prices of primary products – monetary metals like gold, sliver and copper. Stay across the price of raw commodities like timber. Watch the prices of asset classes and real estate instead of the consumer price index and government inflation numbers. If assets are what we need to build our nest egg and produce income, any price rises in assets will flow though to your financial future. No matter what the economic data says, this is where the rubber hits the road to financial freedom.

The temptation in uncertain times is to save for a rainy day and collectively we’re doing it more than ever. But right now, if you’ve got your wealth in cash and you’re on a wage you’ll be going backwards. And that’s not a recipe for financial independence. None of this is financial advice dear readers but definitely food for thought.