If I said you could make an extra $9360 a year passive income from property with just $60,000 invested, would that get you to read this post?
It should, because you can.
And I know you can because we did. As first time property investors. We also doubled our initial investment while doing it.
In this post we’ll share how we created an a cool passive income stream and 15% annual return from our first investment property using just $60,000 of our own money. We’ll also share how we doubled that initial investment in just 12 months and reveal just how much our $60,000 initial investment will make us all up.
The wealth building potential of dual income property
This is the second article in our property investing series on the wealth building potential of dual income property.
To get the background you need for this post to make sense, check out our first post in the series which covers what a dual income property is. The second post explains how to buy the right dual income property.
For now, we’re going to assume that you’ve had a read through the series and already know why dual income property can be a great property investment strategy for financial freedom. We’re also going to assume you know what sort of dual income property we recommend investing in. As a quick recap, here is a photo of our dual income property taken from when we bought it in 2012. The property is a triplex, which means it is made up of three apartments on the one title.
Why not all property investments are equal
Step 1 – buy the right dual income property
This is where it all starts with manufacturing capital gains making passive income with property – you need start out buying the right property. So what are you looking for exactly?
We started with by apply what we learned from Robert Kiyosaki’s Rich Dad education – An asset is something that puts money in your pocket.
A lot of property investors don’t realise this and so are actually buying liabilities when they invest in property. Liabilities take money out of your pocket. This is also where a lot of people fail at property investing – they buy, then find out they don’t have the cashflow to hold the property and have to sell. Sometimes for a loss.
So we knew we were looking for a property that could produce enough income to cover its holding costs and put a little money in our pocket. If you’re read part 1 in our dual income property series, you’ll know to end up with money in your pocket each month you need a rental yield of around 10%.
That knowledge led us to to start looking at dual income property because of the multiple rental income streams.
How to make passive income from property using a dual income property strategy
As we were looking at dual income property we found that most were advertised with a gross rental yield of around 6%, which was not enough to put money in our pocket after holding costs. So we had to improvise. We needed to find a way to increase the rent of any property we invested in, for as little outlay as possible. Here’s what we started looking for:
- A dual income property with apartments or units that are rented at below market rates. This means becoming familiar with the rent prices for similar types of properties in the local area.
- Apartments that were tenanted with upcoming lease end dates if possible. We’ll reveal the reason for this later.
- A structurally sound building with cosmetic renovation potential.
Our triplex investment
Our triplex has two x 2 bedrooms apartments and one x 1 bedroom apartment. At the time we purchased it, two of the units were rented with one approaching its lease end date in 3 months. The third had just come out of a rental lease and was vacant. The rents were:
- Unit 2 – 2 bedroom 1 bath 1 car – $190/week
- Unit 3 – 1 bedroom 1 bath 1 car – $160/w
- Unit 1 – 2 bedroom 1 bath 1 car – vacant but was rented for $190/w
Total rent – $540 per week.
So we went onto the local property rental app and researched exactly what similar properties (but more up to date) were renting for.
We found that similar 2 bed 1 bath 1 car walk up apartments were renting for $240 per week.
1 bed 1 bath 1 car apartments ranged from $180 – $210 per week.
Based on this, we knew that if all of the apartments were modernised we could achieve a weekly rent of at least $690 per week. $150 per week better than what the current owner was getting. We also knew that vacancy rates in the area were tight, hovering at around 1%. Given anything below 3% means that rental demand is higher than supply, we were confident of being able to raise rents further in the near future.
So, Box 1 and 2 ticked and high fives all round…
The triplex we ended up buying was also structurally sound with PLENTY of renovation potential. The brick footings, walls and timber framing was all as solid as a rock but each of the units were like time capsules back to the 1970s.
Box 3 – ticked also..
Here are some photos and yes, this is really what the units looked like in 2012!
Step 2 – use other peoples money
We had a promising property on our hands so the next step was to make sure that we invested in the asset in a way that would allow us to pull off our passive income and capital gains plans.
The property was listed for sale at $438,000. We had roughly $140,000 in the bank and knew we needed some of that money to renovate. We also wanted some of our savings to stretch to a deposit on a home to live in.
We needed to make our cash go as far as we could. So we offered $400,000 and applied for a bank loan on that basis, with a 90% loan to value ratio (LVR). This meant we were required to put in $40,000 plus the buying costs of around $14,000 (thanks to stamp duty – or property taxes for non-Aussies).
Our offer was accepted so we invested $54,000 of our own money into the initial purchase. This left us with cash of around $40,000 to renovate and a $45,000 deposit on a home.
Step 4 – vacate and renovate one apartment at a time
The lease arrangements on a dual income property are critical when you’re buying. Existing leases provide proof of rental income for the bank, which is good for your loan application. But the timing of leases is especially important if you know you’re going to renovate the apartments. This is because renovations take time and you still need to cashflow the property (make your loan payments) while you do those renovations.
The rental agreements in place across our triplex were ideal as we could renovate Unit 1 immediately and still have the rent from Units 2 and 3 ($350 per week) to help pay the $360,000 mortgage we had just taken on. The lease on Unit 2 was due to expire within 6 weeks of us owning the property, which meant we could renovate the two 2 bedroom units back to back.
Multiple rental income streams provide one of the biggest benefits of investing in dual income property – income diversity. This helps you manage investment asset risk overtime.
The rent we were getting was not enough to cover all of the property’s holding costs, so make sure you budget some holding costs out of your own pocket over the period of the renovation. You should also factor in a reasonable time to advertise and rent out the newly renovated apartment. We allowed 10 weeks for in total for two back to back unit renovations and listing of both. This was a short and ambitious timeframe, but the builder was fine working with us to this schedule.
Our Triplex renovation
We started the renovation of Unit 1 immediately after the property settled. We had negotiated access to the empty unit during the purchase period to get builders quotes and signed a contract with the builder who was available and reasonably priced.
The most critical part of the renovation piece? Not to over capitalise.
We could have gone nuts with the renovations on these apartments given they were straight out of the 80s. But we didn’t. The target market research that we did was critical here. Our target tenant was a new renter or young couple, looking for affordable but modern accommodation. We’d also looked at what similar rental properties were offering to achieve the target rent we wanted for each unit.
What we didn’t spend our money on was just as important as what we did.
We didn’t install aircons, dishwashers, new built in wardrobes, high end fittings or a high end kitchen. We went for a functional but affordable kitchen and a paint and repair on existing wardrobes. We spent most of our renovation budget on a solid, long lasting bathroom and on bringing up a ‘hero piece’ in each of the units that would get renters to rent the place. In this case, it was the polished timber floors that we found under the disgusting 40 year old carpet…
Here are some before and after shots for your viewing pleasure 🙂
Bathroom before and after
Bathroom before Gutted, replumbed and waterproofed Bathroom after
The one bedroom unit before and after…
Kitchen with laundry behind Kitchen moved into large laundry space New kitchen, larger living, new entrance to bath and bedroom Bedroom before Bedroom after
One of the 2 bedroom units before and after
Kitchen before Living dining before Bedroom 2 before Kitchen after Living dining after Entrance to bedroom Bedroom after
The renovations cost $20,000 per unit with around half of that being spent on gutting and installing new bathrooms. We also moved some walls in the 1 bed unit to improve the design by providing a more open living dining space and access to the bathroom from the living instead of through the bedroom.
Step 5 – re-list each apartment with new photos and higher rent
The renovations of units 1 and 2 were completed within 8 weeks. We then had the real estate agent take new photos and re-list the properties. They took around 3 weeks to rent. As we expected, the market had moved a little since we put the triplex under contract. We rented both units out for $245/week. We were able to increase the rent further to $255 per week within 12 months.
The one bedroom unit was not renovated until the lease ended – which was around 10 month later. We achieved a rent of $220 per week for that unit.
Our $9360 a year passive income stream
By renovating each apartment our total rental income went from $540/w to $720 per week. So within 3 months we had created a $180 per week passive income stream from the renovation. Annualised, we made an extra $9360 passive income from property with this strategy. Thats an annual Return on Investment of 15.6%.
If you consider the upgrades we did have use life of 15 years for the kitchen and probably 20 for the bathroom that’s a payoff of $140,000 on a $60,000 investment over that period.
And that’s only half the story.
How we doubled our initial investment
The other equally important aim for this, our first asset investment, was to be able to leverage it into other assets. That’s why we chose a dual income property. It helps with future loan servicing requirements of banks because of the cashflow. Value creation strategies like renovating can also increase the value of the property allowing you to take out equity for future investments.
After renting the property out for 12 months we had it revalued by the bank. The valuation came in at $520,000, which meant we had created $120,000 in equity from the renovations. In addition to the extra passive income we had doubled our initial investment of $60,000.
Our total capital gains and passive income profit on the $60,000 we spent? Somewhere in the vicinity of $200,000.
The final word – passive income takes work (at the start)
As is true of all passive income, this investment took work. It took time and research to find the right property and plan the right kind of renovation.
It also took financial literary – particularly in how to invest in good real estate assets. We got that literacy through a Rich Dad education and you can too – it literally costs just a buck to start!
It took sweat equity – we did all of the painting and installed the blinds and some of the fittings ourselves, spending holiday leave from our wage-earning jobs hard at work
It took risk too. But as we’ve explained, we calculated and took steps to manage that risk.
To us, the pay off for all of that hard work has been and continues to be worth it. You see, the story doesn’t end here and neither does our profit. In part 3 of this series we’re going to explain how we were able to double down on the capital gains from this one property.
For now, I hope you got value from this post where we step out, in a way that you can replicate, just how we made $9360 extra passive income from property within 3 months and turned $60,000 into a $200,000 profit.
Til next time have fun, be happy and do good!
Oh, and by the way we did get that home with our $45k 🙂 More about that later… please give us a like if you want more content like this!