If only we could all have been that disciplined. 

In hindsight, we would have saved up our meagre wages working  at McDonald’s as a teenager and bought our first investment property the day we turned 18. We would then have slept every night on the steps outside the Salvation Army to save on accommodation costs, pumping all our money from working three jobs into properties. That way, we’d have retired before turning 30. 
But let’s be honest, few of us are that disciplined.
In all likelihood, you’ve probably got some expenses that you wouldn’t want to skimp on. You might like to enjoy a drink every now and then,and we’re guessing you’ve got a hobby that might steal away some of your income everymonth. You probably haven’t been that prudent in saving either. You’ve got a little stashed away, but it’s nothing they could write on the giant cardboard cheques they give out at golf days.
In your case, how can you build a property portfolio big enough to retire on? How do you get your hands on a passive income that you can use to comfortably replace or supplement your existing income?
This is the question we asked two different experts in the property industry. These are seasoned investors who are doers, not just theorists. They’ve made big money in property and have personally used a multitude of different strategies for obtaining wealth through property.
The premise we put forward to them was this: how can an average Australian on an average income, with limited  savings, establish a passive income stream of $90,000 before the end of 2020? Knowing that there are some great, albeit highly risky, opportunities to  make money in some of Australia’s mining towns,we set our experts a condition. Mining towns or other high-risk, high-reward areas were not an option. Any strategy they came up with for creating wealth would need to be foolproof. No special considerations could be applied: the strategy would need to work in any market. Conservative estimates would be better than highly optimistic ones. 
These are the parameters we set:
  • Our investor, who we’ll call Joshua, has an annual income of $70,000
  • He has $30,000 in savings
  • He is willing to invest in any low-risk housing market around Australia
  • He is willing to use any strategy, so long as it does not incorporate:
  1. buying in a mining town
  2. changing jobs for the sake of strategy
  3. living in a different city 
  • Joshua currently owns no properties
  • He is a renter paying$350 per week
  • He has nodependants and no debt
The property investment experts who were set the task of putting together strategies included RESULTS Mentoring’s Brendan Kelly and the Empower Wealth Team. 
The following is what they came up with...
Cate Bakos & Michael Pope
Investor purchases five properties over a four-year period, making sure the cash flow on each purchase is good enough to allow him to hold the properties on his modest salary. He takes loans with high LVRs and purchases properties that are likely to outperform the average capital growth rates of their suburbs. This will get  the investor to his target in 17 years, not seven, but he will have done it relatively risk free.
  • Solve problem of investor’s limited savings by buying property with loans at 95% of each property’s value Aid investor’s limited ability to service multiple loans on $70,000 salary by purchasing properties with strong cash flow potential, as well as promise of capital growth
  • Investor should seek to limit his expenses by moving in with his parents (if possible),or scale his accommodation choices down by renting something cheaper
  • With each purchase, investor uses a combination of savings and equity to put together 5% deposits on properties
  • Strategy relies on our investor having a keen eye for finding  outperforming properties. Some of the yields necessary to support  this strategy will not be possible in ‘safe’ urban areas, unless the investor looks for truly exceptional investment properties
The game plan
Based on our model, a stable purchasing strategy, when combined with limitations to ourinvestor’s ability to borrow more money,means that Joshua won’t be able to reach his passive income goal as quickly as he would like. Seven years is too short. The good news is that it is still possible. If heis willing to wait until 2029 instead of 2020, he will have reached his passive income target. More importantly, he will have done it without going into high-risk mining towns or other speculative areas.
Joshua has $30,000 in savings, so we have planned for him to purchase a total of five properties over a period between August 2013 and 2017. We would like to see him purchase one property for each of those years, which we believe will be a rate he can sustain if he is willing to dedicate himself to his goal.
Our selections of areas to invest in have been contingent on our investor being able to sustain the cash flows on his modest salary while also generating adequate equity growth so he can continue unveiling the rest of his strategy. For the purpose of our  model, ourinvestor lives by himself and pays $350 per week in rent. We’ve based his outgoings on the Westpac servicing calculator’s lifestyle outgoings for a single person. 
Still,our investor has some serious limitations. These severely impact on how he can achieve his passive income goal. The more critical ones include:
  1. He does not have adequate savings to buy a large number of cash flow positive properties in a short space of time, based on lending requirements.
  2. His income limits him from accruing higher growth (and hence higher negative cash flow) properties. Things that could improve Joshua’ssituation would be if he was able to live at home with his parents or, if that is not an option, pay considerably less rent. In a major capital city, he could potentially live in a house share or select a cheaper one-bedroom unit to bring his rental payments down. He could also seek to earn a higher income, either through a variation to his role or by seeking out a second job. There is also always the option of partnering with another income earner in his investment.
The purchases
Property 1– August 2013
The first property we would like our investor to buy is a villa unit in Melbourne’s inner western pocket of West Footscray. He willdo this in August 2013.
The unit purchase price is $300,000, with the loan financed at 95% LVR,given our investor’s tight savings pool. 
The growth prospects are calculated based on historical long-term growth averages and typical yields for units of this type in the area. Our targets are 9% growth and 4.5% yield. This growth target is slightly higher than the 37-year historical valuer general growth targets for units in this area (8.3%), so the onus will be on our investor to make sure he buys a well-located and boutique-block villa to achieve a result that will outperform the long-term average.
We’ve selected West Footscray for a couple of reasons. For starters, it is in close proximity to the CBD ( just 9km) and excellent value for money in terms of what $300,000 can buy. Melbourne’s inner north and west are also delivering higher yields,compared to many other inner-city areas,and,most importantly, the area is undergoing some rapid changes. Barkly Street is abuzz with little coffee shops, cafes and delis, while a recent rail upgrade will further enhance travel times on the nearby train line.
Property 2– August 2014
By August 2014, the investor should be in a position to purchase his second property. This time wewould like to see him purchase a two-bedroom apartment with balcony in Brisbane’s inner eastern pocket of Morningside.
The unit purchase price is $350,000, which requires some equity from the West Footscray unit to complete the 95% LVR purchase.
The growth prospects are calculated based on historical growth averages and typical yields for units of this type in the area; our targets are 7% growth and 5% yield. 
We selected Morningside because of its proximity to employment in the city centre, the changing demographic, rate of development and current tenant demand in the area, as well as its connectivity with rail and bus services in and around the city.
Property 3– August 2015
By August 2015, the third property will need to be purchased. We would like to see our investor purchase a house in Victoria’s regional city of Ballarat. This particular purchase is deliberate as a yield purchase because our investor will be seeing negative cash flow on his first two properties. We need to be mindful of balancing his capacity to save and the provision for holding multiple properties. 
The house purchase price is $200,000,and the growth prospects are calculated based on historical long-term growth averages and harder- but possible-to-find yields for houses of this type in the area. Our targets are 6% growth and 7% yield. 
By the time Joshua purchases this property, however, he will have saved more income to put towards it ($6,000), and we can rely on equity also being released from his first purchase to complete the 95% LVR loan and purchase.
We chose a house in Ballarat because the city has enjoyed consistent long-term growth and remains tightly held by tenants. The city is home to almost 100,000 people and has plenty of employment drivers, namely government services that are decentralising from Melbourne, a university and a hospital. Most importantly, Ballarat is a commuter suburb for many Melbourne workers who are happy to travel the 64-minute train trip into Southern Cross Station.
Property 4– August 2016
A year later,once again the next property should be a unit in NSW’s second largest city, Newcastle. This east coast city is an exciting choice because of strong yields, tight vacancies,and excellent growth prospects.
This particular purchase is deliberate as a combination of historical long-term growth and yield to balance up the investor’s overall cash flow and help diversify his portfolio. 
The purchase price is $300,000, and the property will be purchased at 90% LVR for the first time. Our target is 8% growth and 6% yield. 
Property 5– August 2017
The final purchase, completed in August 2017, is within Queensland’s inland community of Ipswich. We’ve selected Ipswich’s eastern suburb Bundamba for affordability and its proximity to rail and arterial connections direct to Brisbane, and for the strong yields currently on offer.
The property is a detached house, purchased for $250,000 with the help of more equity accessed from the above properties. The LVR at this stage is still above 80 but finally below 90%. Our target is 6% capital growth and 6% yield, based on average yields for houses of this type in the area. 
The following assumptions have been used in preparing this analysis and in our projections and forecasts, except where other values have been specified in information provided:
  • The market value of property investment assets is assumed to increase at the rate of 7% per year
  • Costs incurred in the purchase of any new properties (stamp duty, conveyancing fees, etc.) are assumed to be 5% of the purchase price
  • Rental income from property assets is assumed to be 4% of the estimated market value of the property, and is assumed to increase in line with the market value of the property
  • Properties are assumed to be occupied and providing rental income 90% of the time (with an occupancy rate of 90%)
  • Property management fees are assumed to be 7.7% of the gross rental income (including GST)
  • Costs associated with the property (including rates, insurance, maintenance, etc.) are assumed to be 1.5% of the estimated market value of the property at the time of purchase, and are assumed to increase at a rate of 3% per year
  • Any new loans required to fund the purchase of a property are assumed to be interest only,and the interest rate is assumed to be 7.25%pa**
  • No allowance has been made for the cost of Lender’s Mortgage Insurance
  • No allowance has been included for any potential tax deductions that may be available for depreciation expenses
  • Unless specified otherwise, it is assumed that the costs of investing in property (including the interest on any money borrowed to fund the purchase) are deductible against other taxable income and will be applied at the investor’s marginal tax rate
** In the model for this article, we have used specific assumptions for growth and yield for each property, we have specifically included Lender's Mortgage Insurancefor each new loan, and we have set the interest rate for loans for Properties 2 through 5 at 6.50% instead of our standard 7.25%.

Brendan Kelly

Increase the investor’s bank balance with a series of quick-renovation, subdivision and building projects. Once these properties have all been sold, the investor can use a now sizeable pool of investment capital to purchase high-yield, quality properties that will deliver the  $90,000 passive income every year.
  • Live in every property purchased to reduce rental expenses and holding costs
  • Renovate first property and sell it for a profit
  • Use enlarged funds to purchase a larger property and sell for a profit once again after a cheap cosmetic renovation
  • Initiate a third project, this time renovating a house on a large block, while subdividing the property. Sell renovated house and newly split block for a profit
  • Repeat process for fourth, fifth, sixth and seventh properties, adding the construction of units to the subdivision process to increase profits
  • With close to $1.5m in the bank, use considerable pool of funds to purchase blue-chip real estate with high yields
  • Quit job and live off substantial passive income
The game plan
Financial freedom is entirely possible over a relatively short period of time if you’re using property to build wealth. 
While it is never safe to assume that market-driven growth on property is consistent every year, it is safe to  assume that there will be some growth during the seven and a half years our investor will be buying property. 
For the sake of simplicity, I’ll assume that each year will yield a growth rate of just 5% per annum. This is approximately half the rate of growth needed to satisfy the common perception that property prices double every seven to 10 years.
After this, we need to be very clear on where the investor is at today and what the destination looks like before we  decide how they aregoing to get there.
Preliminary assumptions 
Our investor earns just $70,000 a year and clearly has a fantastic capacity to save. Knowing this, we can get a picture of what his lifestyle might have been like over the last 12 months. This will make it easier to forecast the next seven years,given that he will not be  changing his personal situation over this period of time.
Since Joshua is already living a frugal lifestyle, any lender will easily see he is in great control of his spending habits. If we then combine his current rent with his saving capacity, he has up to $3,183.34 he can spend on mortgages, whether for investment or for putting a roof over his head. Of course, any more than this amount will definitely put him under mortgage stress.
Borrowing capacity
When trying to calculate how much we can borrow, one of the most critical numbers in the equation is the rate of interest we need to pay. 
It is possible to pay as little as 5% at the moment, but this is unlikely to be the case for the next seven years. Being conservative, history suggests that about 8%pa represents a fair and reasonable average long-term  interest rate. 
On the premise that banks believe that a person can comfortably afford 30% of their gross income on mortgage repayments, our investor can comfortably afford $1,750 per calendar month. 
If we consider the rate of interest he is likely to pay is in the order of 8%, then he can borrow (relative to bank fees and charges and whether he chooses interest-only payments)
Of course, inflation is a factor and, if you consider that his salary will likely track inflation of 3.5% over the next seven years, we’ll see our investor able to borrow slightly more each year.
Creating passive income
For our investor to proceed with his goal, he’ll need to work out how passive income gets created. The answer to that is fairly simple. An investor needs to have a large amount of capital invested into an asset base that other people will pay to use. The more they are willing to pay, the better the return on investment. 
Again, for the sake of conservatism we’ll assume an average rate of return ofabout 8% a year – whether this is through rent or any other income producing means. At this  rate of return Joshua will need to have $1,125,000 invested in property in order to get $90,000 in passive income. This may seem like a random number, but $90,000 is exactly 8% of $1,125,000.
There are fundamentally two ways he can achieve that rate of return by owning property. One is through the income property generates via rent; the other is via the appreciation in value it can generate from the completion of added-value projects, or through market-driven demand. 
If Joshua was to pursue the first option, purchasing cash flow positive properties on low loan-to-value ratios (LVRs), he would need to own many properties to be able to score $90,000 a year in net cash flow. Given his financial position and borrowing capacity, this simply wouldn’t be possible – certainly not in the timeframe of seven years. 
For this reason, I’d recommend he explore opportunities to add value and see market-driven growth.
The purchases
For this buying strategy to work, our investor has to be willing to get involved along the way. This means sacrificing some (non-financial) lifestyle conveniences.
Property 1
  • Strategy: Buy unit to live in, renovate and then sell
  • Starting funds:$30,000
For the investor to get a big start in his financial life on a small budget, there are few options better than cleverly renovating his home. 
Doing this he combines a small sacrifice in lifestyle with the intent to make a profit in property. Meanwhile, his holding costs are reduced and tax breaks enable him to retain more cash for future deals.
Property 1 details
  • Type: 2–3-bedroom unit in capital city investor lives in
  • Features:1–2 bathrooms, part of a smaller complex of 3–6 units
The numbers
These numbers may seem pie in the sky, but remember that the investor is living in the property, which significantly reduces his expenses. Because he only has $30,000 in savings but will have the ability to save an additional $1,666 a month and will not need all of the capital required for this project up front, he can manage the purchase and renovation expenses over the period of time that he holds the property.
Property 2
  • Strategy: Buy small house, live in it, renovate and sell
  • Funds available: $84,028
The ideal next step for our investor is to move capital from the settlement of the sale of his first property on one day to the settlement of the purchase of the next property on the next day. If this is achieved, his capital will always be in play and generating a return. We’ll assume his timing is perfect.
Property 2 details 
  • Type: 2–3-bedroom small house in capital city investor lives in
  • Features: 1–2 bathrooms
The numbers 
As with any endeavour, experience adds to wisdom and the speed of execution. It should be no different with our investor. The second project should be easier. The renovation should be completed in three months and the property sold in six weeks,with a six-week settlement period after contracts 
are signed. By the time the renovation is complete, our 
investor should be scouting for hisnext purchase.
Property 3
  • Strategy: Buy small house on large block, live in it while subdividing and renovating it,and eventually sell
  • Funds available: $144,833
Splitting one block into two isn’t a complex process in most circumstances. Once you know the basic guidelines for your area,it becomes significantly easier. Our investor will need to become familiar with zoning restrictions and get the assistance of a good local land surveyor.
The investor will likely need to pay income tax and/or GST on the sale of the second block. The amount and timing of this payment will have a bearing on the outcome of the project, but not significantly enough to threaten his primary goal.
The investor will also need to hold the property for longer, as getting new titles takes time. 
Property 3 details
  • Type: 2–3-bedroom 
  • Features: Large blockofat least 750sqm; 1–2 bathrooms
The numbers
From settlement to settlement, this deal is planned to run for roughly nine months: six months for the subdivision and reno, six weeks for selling,and a further six weeks for settlement.
The results of this project should put our investor into new territory. At the end, his bank balance should show more than $250,000 for the first time in his life. This should give him pause for reflection: he has achieved this in just two years, coming from just $30,000 in savings.
Properties4, 5 and 6
  • Strategy: Buy small house on larger block, live in it, and subdivide it this time into three properties, also renovating before selling. Repeat processfor Property 5, simply with bigger numbers, and add a development aspect to Property 6
  • Funds available: $252,587
Splitting one block into three is very much like a 1-into-2 split. The basic guidelines for the area will not have changed, so the skills and knowledge the investor has acquired and built over the last two years plus willbecome a valuable platform for bigger and more profitable deals. Of course, he will still have to do them at a rate of one at a time. 
Playing with bigger numbers,it will be possible to put nearly half a million dollars into our investor’s bank  account after the fourth property project. While his goal is still firmly fixed on a passive income of $90,000, his confidence will certainly be building. It will soon dawn on him that the skills that have been acquired so far are skills for life. They can be utilised at any ageandtime,and in any market. 
With significantly more funds at his disposal for the fifth property purchase, the investor willsimply repeat what he did in the fourth property deal, with even bigger numbers, but bigger numbers in a critical way. 
His deposits should be getting bigger, but his loan amounts should remain relatively the same. That’s because his ability to borrow won’t be changing. All that’s changing is his cash position,which is getting better with every deal. As long as he keeps his head he should have $690,311 in the bank at the end of the Property 5 deal.
By the time the investor gets to Property 6 he should be very familiar with the process of subdividing and renovating. Now he will be doing something bolder. He will add the construction of two units on the two additional blocks he creates through a subdivision. He will elect to purchase a cheaper property to secure a loan, but will spend more on adding value. 
Property 4 details
  • Type: 3-bedroom houses
  • Features:2 bathrooms;large blockof at least 1,200sqm
The numbers
From settlement to settlement, this deal is planned to run for 12 months, with the renovation and subdivision taking nine months of this period, while it will take six weeks for the property to sell and a further six weeks until it is settled.
Property 5 details
  • Type:3-bedroom house
  • Features: 2 bathrooms;large blockof at least 1,200 sqm
The numbers
Like the fourth property, this project willrun for 12 months, including six weeks to find a buyer and another six-week settlement period.
Property 6 details
  • Type: 3-bedroom house
  • Features: Large blockof at least 1,200sqm The numbersFrom settlement to settlement this deal will run for 18 months.
Property 7
  • Strategy:Buy small house on larger block, move in once more, subdivide into three properties, and renovate the existing dwelling while constructing two more units and selling
  • Funds available: $1,034,115
By now our investor will realise that he is getting very close. 
With his current bank balance he is just $91,000 shy of his target of $1,125,000. The temptation to stop will probably be strong because converting $1,034,115 into income-generating assets will produce a passive annual return of approximately $82,500.
Being very committed to getting $90,000 passive income, our investor won’tstop. He’llpress on with another project, same as last time, but with bigger numbers. 
Property 7 details
  • Type: 3-bedroom house 
  • Features: 2 bathrooms; large block of at least 1,200sqm
The numbers 
From settlement to settlement, this deal is planned to run for 18 months, including six months for building and six weeks respectively for selling and settling.
After the final project
It’s the end of 2020 and Joshua will be in a solid position to resign from his job. He just needs to get that passive income. At the moment he has a bank account with more than $1.5m in cash, but he doesn’t have any actual cash flow.
At this time, he needs to go shopping. Over the next few months, he’ll need to scout out high-yielding properties that typically attract blue-chip commercial tenants. As long as he can achieve an annual yield of 8% across three to four commercial properties,then the income will be reliable. 
What’s more,it will require little ongoing effort, giving our investor the truest sense of financial freedom.