Part 3: How to make $1m on a lower income

This is the third part of How to make $1m on a lower income, read part 1 or part 2.

We took a fictional couple with a very average income, and a lower level of savings, and asked the question: could they make a million dollars in 10 years through property investing? 

We posed the question to three highly regarded property experts to see what sort of strategy they could come up with to reach this goal. They were Margaret Lomas of Destiny Group, Brendan Kelly of RESULTS Mentoring and Ben Kingsley of Empower Wealth. 

To guide our experts, we’ve created a profile of our investor as being a married couple who: 

• earn a combined income of $90,000
• have $50,000 in savings
• have no outstanding debts
• ideally don’t want to go above a 90% LVR
• own no property
• are paying $400 rent per week
• have no dependents   

Brendan’s plan

Considering this couple’s situation, reaching $1,000,000 in net income producing assets would not be easy, but it is doable. 

We’ll assume that the couple have jobs near to a CBD location and that the $50,000 they have in savings was gathered over a four year period. Since they have no prior debt, we’ll also assume a conservative borrowing capacity of $400,000 and that their circumstances allow a 90% LVR.  

The primary restriction of this couple is the cash they have available to invest with. One option for them would be to buy a negatively geared investment property for about $330,000 and wait for capital growth to occur. The problem is, they would have to subsidize their rental income to hold the property. This strategy would also be reliant on growth in what is, broadly speaking, a flat market. 

Low growth means that their next purchase will depend on their ability to save and may take several years, so while this type of strategy would meet their financial restrictions, it wouldn’t meet their longer term financial objective. 

Another option would be to buy a positively geared investment property for about $300,000 and start to accumulate the income. For this to work, however, they will need to put all their income from rentals towards debt reduction to hasten the equity growth. They’d also have to save another $50,000 to purchase their next property. This approach would also meet their financial restrictions, but once again, the chances of them meeting their long term goal would become very low – especially considering how long it would take them to save $50,000 for every purchase. 

Yet another option would be to buy a property for about $180,000, renovate and then sell – in six months, settlement to settlement. The drawback of this is that the holding costs during this period will eat into their profits and will make it hard for them to fulfil the ten year timeframe they’ve set themselves. 

The strategy

Considering their limitations, we think the best strategy for this couple would be to adopt a buy, renovate and sell approach, but as live-in occupiers of the property while it is being done up. This would require a lot of self-sacrifice. The couple would need to grin and bear the cosmetic renovation as it occurred around them and be comfortable walking over circular saws, panels of wood and whatever else every morning. 

It’s not for the faint hearted. This couple’s whole life would be centred on the investment, but if they are prepared to take on that challenge, the advantages are numerous. Because they are adding value to the property, their profit won’t be dependent on upward market movements. They will also be incorporating their holding costs into their living expenses, so they won’t be paying for two roofs. 

Remembering that this couple owns no property, living in the property would give them the added advantage of being able to access the First Home Owners Grant (FHOG). They’d also have less tax expenses because it would be their own home. 

The numbers would look something like this: 

 The property selection

Assuming that this couple both have jobs working in an inner city location, the property should be as close to their city CBD as price will allow. I’d suggest they get a house, but to find one for $225,000 might be a tough ask. An alternative would be to get a unit on a block containing a small number of units. Either way, they would want a two bedroom, something with a well-maintained exterior, but tired 70’s or 80’s style fittings. The building has got to be structurally sound, but have décor or other trimmings that are out of date. Good choices that could meet these criteria are deceased estates or ex-rentals. 

If they are able to find such a property, buy it, complete the reno within nine months and sell it before the year is out, they will meet their profit objective for the year while staying within their finances. Of course, they would have no roof over their head, but the upside is they would, boosted by some savings during the year, have approximately $100,000 in the bank. 

The second property

 Now with $100,000 to spend on investment purchases, the couple will have greater choice in making their next purchase. They would aim to buy, renovate and add value to a property once more, but wouldn’t have to necessarily live in the property this time. It would be their choice. If our couple survived the first reno, liked it and think they can live through the experience again, another live-in reno is always an option. 

I’d like to see them buying a property for about $350,000, renovating it and then selling it over a six month period. Assuming a resale value where they’ve added 33% in value onto the original buying price, they’d now have approximately $130,000 in the bank after tax. 

By the time it gets to their third time using this approach, they should be aiming to add more complexity to their deals. They could try a subdivision or increase the buy-in to acquire more wealth. The idea is that as their projects get more complex, the couple would continue to build their wisdom on where to buy and how to do these deals. 

 How it will work

 This entire strategy hinges on the couple possessing certain personal attributes. They have to have the capacity to grow and be willing to invest a lot of energy into their investment strategy. This means reading newspapers, reading property books, magazines and generally being aware of what’s going on in the property world around them. This won’t suit people who are looking to do this part-time.

 Although novices in the beginning, the couple would also need the ability to correctly anticipate the resale values. If they get this wrong, it is entirely possible to make a loss.

 Just as important would be the ability to manage reno budgets properly, so it does take a certain perspective and passion to want to make this sort of aggressive approach to wealth creation work. But it is possible and very fulfilling.

 Projections

 Forecasting between now and nine and a half years, I anticipate history to continue. Prices will double in roughly seven to 10 years. Given the global financial turmoil we’re facing now, I suspect that the growth will occur later in the next five to seven years and then plateau from there into the eighth and tenth years. 

Will this affect the buy-add value-sell strategy? Not really. While they are adding value, they are in a growing market. They may not have the volume of properties that the traditional buy and hold approach accumulates, and they may be required to be more hands on, but the skills they develop will never leave them. They will see wealth no matter what the state of the market might be. 

Fast forward to nine and a half years, I think the next step for this couple would be to purchase a mixture of commercial properties in high demand areas with 6-7% yields and lower demand areas with 10-12% yields.