$5 million in 10 years: part 1


Many investors aspire to a multi-property portfolio, but the numbers involved with a portfolio of 10 or more properties can intimidate even the most financially-savvy.

It’s easy to dream about the passive income and the comfortable and relaxing retirement a portfolio this size could potentially generate.

Yet, it’s equally easy to imagine what could go wrong. It’s not hard to become intimidated by the ‘what ifs’. If you own one property and something goes wrong, bouncing back seems relatively manageable. Once you start dealing with bigger numbers though, the potential problems, complications and ultimate outcomes can seem that much more dramatic.

With that said, achieving a $5 million portfolio in 10 short years is achievable, and according to wHeregroup’s Todd Hunter (who himself has 40 properties), all you have to do to get started, is get started.

 

The first purchase

Investors aiming to achieve $5 million dollars don’t need to start with a big purchase. Instead, it’s about getting your foot in the door.

“The first thing is, just get a property,” Mr Hunter says. “Start at an affordable price point. Give yourself time to let the numbers make sense. Have the debt, have the rent and see how easy it actually is. All of a sudden that fear factor becomes a lot more manageable and it’s put into perspective.

“Once you have one property, you can work out how much it’s costing you per week and decide how you’re going to duplicate that for multiple properties.”

Getting started, he cautions, is not the same as just buying anything. When you have a smaller portfolio and you’re trying to grow it, a dud purchase can considerably stall your progress – so making the right moves and setting yourself up for success should be a top priority.

“A bad purchase does have the potential to throw it off track completely, especially if the property starts costing you a lot of money or if you’re having tenancy issues,” Mr Hunter says.

He says a costly purchase not only dents your bank account, but also throws off investors’ motivation.

“So you need to make sure it’s the right property in the right area,” he says.

“Don’t get me wrong. I have 40 properties and I think I’ve probably got about three duds in there. I have one where a tenant walked out on me. The tenant was fantastic for a period of time, but something went wrong in their life and they went off the rails. But when you have a bigger portfolio, a dud property doesn’t matter as much.

“When you only have two to five properties, having one bad property means a lot because it’s a large percentage of your portfolio.”

Sam Saggers, CEO of Positive Real Estate, agrees and says even though investors may be keen to get started they can’t afford to let their enthusiasm overtake their rationality.

“A bad property can hold you back for up to five years,” he says. “Let’s assume you buy a property, you’re in your thirties, you sit on it and it does nothing.

You’ve put all your money into that property, you’re going to work and you’re finding it hard to save again because that property is draining your finances.

That’s really, really challenging. 

“Most people fail in the real estate market because they choose the wrong investment to begin with. They sit there for so long and the investment does very, very little. It doesn’t give them the opportunity to get back into the market quickly enough.”

Investors need to be looking for properties that will enable them to extract equity quickly if they want to achieve a big portfolio within a decade, according to Mr Saggers.

“When people are looking for a property to undertake this strategy they need to be looking for opportunities that will have a domino effect,” he says. “Once you buy the right few to begin with, it’s much easier for the rest to sort themselves out.

“You have to look for a property where you can extract value in one or two years’ time. Generally, we measure that by how much deposit you put in. You want to be able to pull out the equivalent amount in the form of equity in one of two years’ time. Then you instantly have another deposit to buy another property.”

Money makes money. Once you’ve started, it’s easy. It’s just that the figures scare the hell out of most people.


Valuable assets

Investors know that to achieve a sizable portfolio, they will need to find properties that are set to go up in value. Yet there has also been increasing commentary in the market that properties are no longer ‘guaranteed’ to double in value every seven to 10 years.

How then, can investors ensure they’re finding properties that will set them up to achieve portfolio growth?

“People need to remove themselves from the ‘doubling in value every seven to 10 years’ concept,” Mr Hunter says. “That only ever occurred in certain price brackets in certain areas.

“Instead of just hoping the market will work out based on past performance, you need to do research. If you can research places that you know are good areas, that have all the right attributes of being a great investment area, then the only thing you have to add into the mix is buying at the right time. That is, buying when the market is dead within its own property cycle.”

Mr Saggers takes a similar approach with his own property acquisitions.

“You have to educate yourself on what the market is doing. I like buying at the bottom of a property market cycle, or at least in a flat period or after a long period of flatness. I don’t look for markets that have already risen quite rapidly. Instead, I look for markets that have done nothing for a fairly long period of time and I try to work out if there is a reason that this might soon change,” he says.

“It’s just a matter of trying to keep in the loop with what’s happening.”

Getting your head around the numbers

Five million dollars is a sizeable sum by many investors’ standards, but Mr Saggers says investors need to remember that if they invest well, most of the money won’t be coming out of their own pocket.

“If you have to have a job for the next 10 or 15 years, the best way to look at property is this: the tenant is going to pay for at least 70 per cent of the cost of owning the property. The tax man is going to pay the other 20 per cent of running the property in the form of tax deductions and so forth,” Mr Saggers explains.

“So really, if you can afford $50 a week for owning a property, you can afford to start doing this. Then once you get your head around that and realise $50 a week is affordable, you can do it again and up your outgoings to $100 a week. You will start to work out how to budget and become a good money manager.”

Mitchell Burge, an investor who has already built a $2.4 million portfolio in less than two years, says positive gearing has helped him manage his debt levels. Understanding the numbers, he says, will also help investors avoid becoming overwhelmed by debt.

“Money makes money,” he says. “Once you’ve started, it’s easy. It’s just that the figures scare the hell out of most people.”

Brendan Kelly from RESULTS Mentoring says it’s also worth remembering that debt isn’t a bad thing – it is simply a means of helping investors achieve greater wealth. He says the $5 million doesn’t need to be instantly debt free once the 10-year time period ends.

He says investors also need to avoid focusing solely on the numbers.

“You need to know what you want from the portfolio. Simply shooting for $5 million with nothing else in mind won’t help you make the right decisions. Is this for retirement? Do you want positive cash flow? Are you looking for capital growth? Are you going to hold onto the properties or are you looking to ‘buy, add value and sell’ so that you can get into more deals?” says Mr Kelly.

“It’s a matter of how you think and what you want as an outcome.”

Most people fail in the real estate market because they choose the wrong investment to begin with.


Roadblocks

Mr Hunter says one of the biggest roadblocks for investors seeking to achieve a $5 million portfolio is ‘life’ – but they just need to stay focused.

“Having a family can decrease your income and put a dent in your bank account. It certainly slows people down. There’s nothing wrong with that, but investors just need to make sure they don’t lose sight of their goal,” he says.

“I have a lot of people who walk into the office who want 10 properties in 10 years. They get to the second property though and they lose focus. Investing doesn’t have to stop you from living your life, but at the same time, life doesn’t have to stop you from investing.”

Mr Saggers says the largest factor stopping investors from achieving this goal is simply a lack of education.

“A lot of people simply don’t know what makes a good investment. If they inadvertently buy something that underperforms, they don’t know what to do to rectify the situation,” he says.

Properties can underperform when investors buy in the wrong marketplaces or when they buy a property without value-add potential, he says.

“The other roadblock I’ve seen is people just not understanding that real estate is a numbers game. They buy and hope that it will work out so that they can buy again,” he continues.

Mr Kelly says one of the biggest hurdles to achieving a $5 million portfolio is complacency.

“Some investors assume capital growth is an instant given. I’m not a fan of ever assuming regular growth. It varies year on year; no two years are the same.

“Capital growth alone is unlikely to achieve the outcome that you want. You have to do something to the property to increase its value and extract equity. You have to actively change the property in some way, shape or form to build equity more quickly,” he explains.

“Either that or you need to be very good and have the insight into the market to know that the market is going to boom and be able to ride waves of growth. If you ride waves of growth, yes you can achieve this.

“You need to skill up in what it is to be able to read a market and what it is to be able to do research quickly, easily and efficiently in a multitude of suburbs simultaneously. So you can work out what you want – and bang!”

Mr Hunter says investors who are unable to adapt their strategy to market conditions and an expanding portfolio will also experience further roadblocks in their property acquisition.

“Life changes and sometimes you can’t get around things like that. It could be job changes, it could be children, it could be buying a home,” he says.

“It’s important to have a strategy if you want to achieve this goal, but it’s also important not to be too rigid and inflexible.”

Mr Kelly says investors need to be prepared to work and adapt.

“This is possible to achieve,” he says. “Don’t get me wrong, it can be a tough gig, but it is possible.”

 

Case study: ‘I bought four properties in four months’

Mitchell Burge
Mitchell Burge


Mitchell Burge started investing in property 18 months ago, with the aim of obtaining 10 properties in 10 years – but he’s since realised he can do a lot better.

Mitchell Burge was inspired by a ’10 Properties in 10 Years’ article that appeared in the April 2012 issue of Smart Property Investment, and used the equity in his house to begin investing.

He says he could never have imagined how well his property investment project would go – nor the speed with which it would happen.

His primary residence was costing him $1,200 per week in repayments and the property wasn’t going up in value.

He now has a $2.4 million portfolio – five investment properties and his house – all of which only costs him $500 a week to pay down.

“My investing started with the ‘10 properties in 10 years’ concept, but with the market the way it was, I had to seize that opportunity because it was moving quickly and aggressively – especially in Queensland,” he says.

He is now on track to go well beyond 10 properties in 10 years, he says.

Mr Burge used $140,000 of equity in his house to generate deposits for his investing. By purchasing positively-geared properties primed for capital growth, he has been able to buy quickly and aggressively.

“I got one property in Logan in Queensland for $128,000. It gets nearly $230 rent per week. It’s a 9.3 per cent yield and it’s already gone up in value,” he says.

Mr Burge says the ability of his buyer’s agent – Steve Waters from Right Property Group – to negotiate has meant his properties have achieved instant equity.

“I bought a place in Minto in New South Wales where we got the price down from $295,000 to $260,000. With a $10,000 renovation, the place now gets me $360 a week in rent,” he says.

Mr Burge says investors seeking to build a multi-property portfolio need to be ready to move quickly.

“I first viewed one of the properties I bought at eight in the morning and I was signing contracts by midday the same day,” he says. “It’s all about knowing which opportunities to take and which ones to pass up.

“The market has been moving so quickly that I bought four properties in four months – which is an intense experience. Everything has gone so quickly but it was worth it to get everything across the line while the market was right.”

 

5 steps to $5 million

  1. Get started 
    To achieve a $5 million portfolio you don’t need to start big, but you do need to start. Get your first property and get your foot in the door. To be a property investor, you need to invest in property

  2. Pick carefully 
    When you’re starting out, an early ‘dud’ purchase can considerably stall the speed at which you grow your portfolio. Making the right moves early will reap long-term rewards

  3. Look for growth 
    Fast acquisition is key to growing a big portfolio in 10 years. You need to acquire properties you can extract equity from quickly to fund more purchases

  4. Understand the numbers 
    Get a handle on how much it costs you per week to hold the property. Once you realise it’s affordable, you can do it again. It will also help you avoid becoming overwhelmed by debt

  5. Keep your focus 
    With everything life throws up, it’s easy to get distracted from your 10-year plan after a couple of purchases. Investing shouldn’t keep you from life, but don’t let life stop you investing
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Top Suburbs

Highest annual price growth - click a suburb below to view full profile data:
1.
FAIRLIGHT 46.02%
2.
CASUARINA 44.36%
3.
THE ENTRANCE NORTH 41.09%
4.
ULTIMO 40.67%
5.
LAVENDER BAY 40.2%