How to build a 10 property portfolio in 3 – 5 years realistically on $50,000pa.

People quiet often ask me "Nathan, how can you build such a portfolio with a low income when you first started investing? How can you save deposits? How does the bank keep lending you more money?" so I decided to write a blog as a scenario which is one way to look at your investing. Remember this is one way to do it, there are many! http://binvested.com.au/?p=982
How can you go from a small savings to owning 10 x properties on a $50,000pa income?
Before we devulge into specifics, understand that this is an example and does not constitute as financial advice. One should seek industry professionals such as solicitors, accountants and finance representatives.
Now lets take an example scenario where we have a single person call them Sarah for the exercise and Sarah earns $50,000pa as a office support (Pretty consistant salary in the market). Sarah has $30,000 saved up and doesnt know whether to buy a new car outright, go overseas for a year or…. buy a property (HOW CAN SHE BUY 10?)
Well it all comes down to having the foundations right and having the correct strategy. Sarah gets wind of different properties and specific companies which all say to negative gear because its good and she will save tax. However the drama is Sarah doesn’t pay all that much tax and the property will be eating into her lifestyle of $10,000pa or $200pw. She cannot get her head around what all these spruikers are on about with $10,000 expenses it seems absurd. and to be frankly it is! Negative gearing is a term spruikers use quite commonly to justify losing money. For an investment strategy you must understand why your investing and how your investing can get you towards your end goal.
Sarah decided she would develop a property investing strategy which would work for her and she used the same methods as B Invested uses which is buying properties below market value so she will have instant equity to help her into the next one and a buffer of safety in case she needs to sell at a fire sale she wont be losing her money. The second principal being that it must be as close to cashflow positive as possible so she doesn’t lose her lifestyle she currently holds and the ability to continue to sip on a chi latte with her girlfriends. The third principal is she buys bread an butter not, not only because it serves with a solid exit  strategy having more buyers but that it also has great potential of going up in value because of its low starting point ensuring capital growth in the future.
10 properties is around 3 per year for Sarah and how can she do that?
Well each property she is setting out to purchase is around $200,000 and renting around $300pw. The reason of this is to keep her portfolio relatively neutral geared. Some are slightly negative and some may be slightly positive such as regionals etc…
If she has a deposit of $30,000 and buys property # 1 using 10% deposit and $10,000 for closing costs she has achieved 10% of her goals.
She then either needs to save up some funds from work, get a second job, or…. because she bought well with the first property she can extract her capital back out.
This will look like this…Purchase price $200,000 Revaluation price $240,000Top up loan 90% or $40,000 = $36,000.
Therefore she has even more money and she can repeat the process again.
After that she has property # 2.
Repeat the process over and over again.
What now? She has 10 x properties and wants to retire 5-10 years after her first purchase.
Sarah has a couple of options.Firstly, her properties have doubled in value and she had $2,000,000 purchase prices ($200k x 10) and now they are worth $4,000,000 or 10 x ($400,000). She can sell down half pay off all her debt and be owning 5 x properties outright
Secondly she could increase her rents by $100pw (remember rents should double or go up $300pw) each and this will be $100 x 10 = $1000pw positive cashflow as her expenses stay relatively similar. So she has still made $2,000,000 equity and also an income stream of $52,000pa.
Thirdly, she could sell down a couple renovate a few, add a granny flat or manufacture extra growth.
There are multiple options available however without getting the strategy down right first it would be impossible to get the right portfolio which will get her closer to financial independence and improve her lifestyle instead of getting her more enslaved into her job.
There are multiple ways of making money in real estate but firstly start treating your investing like a business. McDonalds, Bunnings, Wollies, Coles, etc… They dont go and open a new store to go and lose money do they? They spend time researching, and understanding their markets and the figures before taking a stake and setting up a store. Why wouldnt you as an investor take the time and research to ensure you are making the correct decision.
Goodluck!
© Nathan Birch.