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
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.
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).