1. There are no shortcuts
First things first, there aren’t too many shortcuts when it comes to building a property portfolio. We have shared some of the essentials in the past such as building knowledge, knowing your motivation, having good discipline and the most important piece of the recipe, taking action. Today we will share the steps we have taken along the way to building our own property portfolio and what we would have changed. It’s not a get rich quick scheme but strategies we have identified to show you how it can be achieved by just following the steps and taking action.
2. Spend less than you earn
The simple rule here and a great line from a mentor of mine “spend less than you earn”. Sounds very simple but it really is the starting point to being able to save enough for a deposit. In my early 20’s, I accumulated savings of $15,000 by just working and putting aside the spare money I had. At that age, it felt great to have that type of money even though I had no plan on what I wanted to do with it. Then over the next couple of years, it was a roller-coast ride on the way down. I had moved out of my parents house and started renting a place with a friend. Over the same time, there was a lot of partying and money spent. I was now in the red and down by $30,000. I had spent more than I could save.
Hitting that mark really was a wake-up call. I realised at that stage, I couldn’t continue spending that way and decided that I needed to move back home. Back to spending only what I could afford and saving the rest. From that point, it took me 3 years of disciplined saving and I was now out of debt and $30,000 in the positive. I was now in my mid 20’s and fresh from that lesson I learnt a few years earlier, wanted to be able to put this money to good use.
3. Develop a plan
At that stage, I didn’t know what to do with the money even though I had saved it. Shares, property or a business, all came to mind. This is where an opportunity came up after speaking with dad. He was looking to subdivide his current property and given it was a battle-axe at the back of the property, I would be able to buy it a little bit cheaper than a normal house. With that in mind, I saved up a few extra thousand and took advantage of the NSW first home buyers grant and stamp duty exemptions at the time to purchase my first home. Knowing what I know now, a couple of mistakes from my end at that time. One, I really didn’t have any knowledge at all of the housing market at the time. I just basically listened to dad and thought that I should spend my money on an investment without any plan or idea of what I wanted in future. Two, had I actually did some research and talk to different people that had some experience, there were a number of different areas and properties that could have been purchased for a similar amount with higher capital growth prospects. In saying that, the positive part out of it was that I did something with it instead of leaving my money sitting there doing nothing.
This is where having a plan at that time would have been much more useful and why I add this as the second step. Know what you want to achieve in the short term, medium term and when you are closer to retirement. That retirement one is hard to think of, especially when you are in your 20’s or 30’s, as it can feel like many years away but atleast knowing what you want at that stage is helpful so you can work backwards to create a plan. When you know what it will take for you to achieve that goal in the future, it will help dictate what, where and how you invest in the short term.
4. Learn about the property market
Over the next couple of years, I continued to save some money. I had now moved into my partners apartment, who is now my wife. My income had increased through a new role which enabled me to pay my part of the rent without it impacting my financial position too greatly. The first property was being rented out and close to cash flow neutral which meant we were enjoying the benefits of the capital growth without needing to put much money into it. We had also started thinking on where we could buy own first home together to live in with the money that we had saved and the equity that was available. We looked around in a few different areas across Sydney, to-ing and fro-ing between a house or an apartment. This process took a few months as we had found a couple of places that we really liked but because of the amount of money, we were scared of taking that step. What happens if there is a market crash? Is the place really worth that much? Can I afford to pay that much? Which one is going to grow in capital more? Is this our future home that we will live in forever? After being a bit late with one offer and not willing to pay an extra $10,000 for the other, we ended up finding our current place that we live in after going to an auction. It wasn’t our dream home but one that we liked and could see ourselves living in. We probably paid above what it was worth at the time but we felt it was ok to put that extra money to secure our home.
While we were able to secure our first home together, it didn’t come without mistakes and learnings along the way. This is where we think that learning is an important next step to take but we can share it here for other’s to learn from.
One, we actually didn’t even know how much we could really borrow at the time. We should have worked with our mortgage broker to get a pre-approval and know our maximum borrowing capacity. We were scared and thought that there was no way we could afford repayments if the property was more than a million dollars. Had we of spoken with someone or listened and learnt from experienced investors, we would have understood our borrowing power and also how our cash flow may work on a weekly or monthly basis if we were to buy a place at different amounts.
Two, we still didn’t have that retirement plan in mind. If we had learnt about our cash flow and thought about our retirement, it could of helped us in changing our strategy at the time to buying a place that may have more potential to create equity in future instead of a place to live in. Even if it meant spending more money, we would have been clearer on how much we would be out of pocket per month and also know what types of property would help us when we retire.
Three, going through the process of negotiating with real estate agents; searching the different suburbs to understand driver’s behind price; viewing the various property types; knowing how your emotions go crazy at an auction; finding what you and the partner like and don’t like in property; the strain people go through when looking at 5-10 open homes on the Saturday for multiple weeks; are all important things that you learn through the experience. Go out there and see what it is like so you can gain some experience. Read, watch and listen to other property investors to hear their thoughts and ideas so you can take it all onboard when you start your portfolio.
5. Take action
We decided that it was best for us to rent out the property we had just purchased and move in there a few years later. I learnt the benefits of a depreciation report and how that helped when tax time came around (I now know that we don’t even need to wait for tax time and you can receive it in your scheduled pay instead, which is much better from a cash flow perspective). We started formulating a plan. I was dreaming big and saying I wanted to buy a property every year and have 10 in 10 years. The next year after buying our last place, we flew up to the Gold Coast to look at a few properties. We were drawn to the area as Sydney property prices were heating up significantly and saw the good rental yields you could get in the Gold Coast. We did have one place that we thought was good but couldn’t agree with a price and we were not sold on the growth potential in the area. We ended up not buying anything that year. Over the next couple of years, we were even more determined to buy. We ended up buying a few more places in Sydney with the equity we had built and the savings we accrued. We have seen property prices increase in each of these places by more than 15% which then helps create more equity for us to buy in the next location.
By this fourth step, you should now be able to see that it was taking action which has helped us build this property portfolio. While we have made mistakes and we were fortunate to pick and continue buying in Sydney when the market was rising to cover some of these mistakes, nothing would have happened if we didn’t take action. We would have continued sitting and thinking about where and what to buy, be scared of the market changing, not willing to pay a bit extra, all of which would have left us in the same position while the market continues to move past us.
This concept of buying a place, renting it out, waiting on equity to grow, saving money and then looking for another place can be replicated in any market and has been the same for many years. While things are different today compared to 5 years ago, same thing could have been said 10 or 30 years ago. The market will continue to change and we have to learn to adapt to this.
So start saving, have a plan in place, learn about property and then go out and take action. If we had a chance to do it again, we would change the order in which we did things to this way.
We didn’t invent these steps and we didn’t have a magic formula along the way, it really was just going out there and doing something with whatever we had at the time.