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!

The wealth building potential of dual income property

Tara Achieving financial freedom, Real estate June 9, 2021April 19, 2022dual income property, Financial freedom, multifamily property 3 Comments

This is the intro post in our series ‘The wealth building potential of dual income property’. We own dual income property and it’s been a fundamental strategy in our financial freedom plan. We’re going to take you dear readers through the wealth building potential of dual income property using a bunch of different value creation techniques. You’ll get the real story, warts and all – not the BS sales pitch that real estate developers want you to believe. You’ll also get our tips from the trenches; we’ve made the mistakes so you don’t have to!

So if you’ve been wondering whether a duplex or triplex investment is right for you, read on financial freedom seekers.

What is dual income property?

To start you off, check out this little intro to dual income property on our Traditional FI page. In short, a dual income property is multiple apartments or town houses in one property, giving the owner more than one rental income stream. You’ll often hear dual income properties referred to as duplexes, triplexes or multifamily properties. These are typically in a small complex or are semi-detached in that they share a common wall and some common areas. At the big end of town, they’re entire multilevel apartment buildings.

Picking the right investment property for your financial freedom plan

There are two things about property investment that make it attractive as a financial freedom or wealth building strategy – capital gains and cashflow. When you’re looking for an investment property, it often boils down to a choice between the two.

Capital gains are the increase in the price of the property over time as the market moves (not all property increases in price while you hold it, we’re just saying that this is what you’re aiming for). If you’re aiming to build a property portfolio you can live off, you need capital gains to fund your deposit for future property investments.

Cashflow is generated from the rent your tenants pay you. You need this to be able to service future bank loans to leverage your deposit into more property.

There are also a couple of generalisations in the property market (which itself is a generalisation!) to know about when picking what property to invest in and where:

City properties are capital gains properties – they tend to be more expensive, grow in price faster over time, and because of this they produce a lower yield
Properties in smaller regional towns are better cashflow properties – they’re cheaper to buy and the yield is better, but there’s not the market demand to drive high price increases.

We’ve observed these generalisations in real life across different property markets around Australia, although there are always exceptions. Investment properties that give you both capital growth and cashflow FROM THE OUTSET truly are the holy grail of real estate investing. We say from the outset because if you hold an investment property long enough and pay down the mortgage it will inevitably produce some capital gains and you’ll be cashflow positive with rental growth and smaller loan payments….

Anyway…This is all good context to understand where you are at in your investments and your financial freedom planning, what you need to take the next step (cashflow or capital growth) and how dual income property it might fit in to those plans.

What is the benefit of investing in a dual income property?

Cashflow

Dual income properties are typically labelled a ‘cashflow play’ in property investment – because you get more beds, baths and kitchens than in a single-family dwelling. That leads to more rental income. Cashflow is seen to be the major benefit of dual income property investing and it’s what we focussed on when we were looking for a dual income property.

Income diversity

Dual income property gives you a couple of independent income streams. This is an important advantage over single family properties especially if you have a sizeable loan against the property. The thing with rental properties is, tenants vacate them. And when they’re vacant, your rent stops. With dual income properties, you can spread out the rental leases and the natural vacancies that occur between tenants and you always have rent coming in. Huzzah!

Value creation opportunities

The benefits so far are all around income generation. But dual income properties also have massive value creation opportunities and this is why we’re devoting an entire series to exploring how dual income strategies can catapult your wealth building and financial freedom! In terms of a property investment, multifamily properties are extremely versatile and can be a real blank slate opportunity for the motivated, active value creation type investor. Once you’ve set them up, they can also become low risk passive investment – all depending on how they’re run.

Building wealth from dual income property

So how do you leverage this type of property to build wealth? In our dual income property series we’re going to take you through the killer wealth building strategy that we used to pour rocket fuel on our dual income property investment – step by step dear readers. Over the coming weeks, we’ll post about:

How to buy the right dual income property
How we turned a $60,000 investment into a $180 per week income and doubled our money in 12 months
How to explode the equity in a dual income property – twice!
How we’re killing it with our secret dual income strategy
Options to cash out from a dual income property

We’re going to take you through what we did, all of the numbers, our tips from the trenches at each stage, and we’ll even share photos along the way. We’ll also reveal some traps for the uninitiated and things we wish we knew BEFORE we got started.

The final word – is dual income property a good investment?

You’ll have to make up your own mind dear readers, once you read through this series and have weighed up the pros and cons yourself. Only you’ll know whether it’s right for you.

One thing to note upfront – dual income property is not an advanced investor strategy! Our first property purchase was a dual income property – before we bought our home! We were property novices – so if we can do it, you can too!

Stay tuned!

Part 1 – How to buy the right dual income property