Property rookies often make a big mistake before they even start investing. They think that it takes a huge pile of cash to start building their wealth.
As a result, they get discouraged from the get-go.
The truth is, there are ways to start out in property for those who plan to invest less. Think of them as starter strategies for dipping your toe in the property waters before you get serious about investing.
In this article, you’ll see some of the most effective starter strategies.
Let’s start with one of many stories that show how cheap properties can yield a huge ROI.
123% ROI for a young mechanic – the buying under market value strategy
Frank is a young mechanic from Melbourne that has a big and noble dream. His goal is to replace his paid income in the next three years and pay off his mum’s house so that she can retire comfortably.
To make this happen, Frank decided to dive into the property investment waters. And with our help, he started his journey with a bang!
We found a property in a high-growth area for $310,000. Better yet, Frank bought well under market value, capturing around $40,000 at the point of purchase.
If that’s not enough, the property is rent ready without any changes! Sure, we could do some cosmetic work down the line, but Frank can start generating a positive cash flow from day one.
Speaking of which, the property yields a return of 5.95 per cent. The rent can go up to $360/week, and the vacancy rate in the area is only 1.4 per cent. This means a positive cash flow of $2,306!
So what about ROI?
The acquisition and expenditure estimate is $55,450. With a projected year-one growth of 7.4 per cent, the estimated total year-one upside is $68,206. This is an ROI of up to 123 per cent in the first year!
Other than Frank’s strategy, there are many others that can generate a high ROI on cheap properties. Let’s see some of the best ones.
This is a hot new trend that has gained a ton of traction in recent years. It allows any investor to comfortably and gradually build their portfolio.
The way it works is really simple: if you can’t afford to buy in your desired area, usually where you’re living or planning to live in, find an outer suburb that offers lower prices. Buy a home there and rent it out. In the meantime, you can live in that desired area as a tenant. Of course, you must look for a place where the rent doesn’t exceed the typical mortgage payments.
You’ll be able to accumulate some cash and start investing without making lifestyle sacrifices.
Besides, this will take emotions out of the equation when you buy your first home. Since you won’t be living there, you’ll have a clearer focus on what your tenants need. In addition, you’ll be putting your money into an appreciating asset that will work for you.
If you live in the home that you own, you probably don’t consider yourself an investor. But the fact of the matter is that as an owner-occupier, you fall under the most common category of investors.
With this, you’re basically using a buy-to-hold strategy, except that you’re living in the property as opposed to renting it out. Although this doesn’t give you rental yield, it still has a major piece that will work for you long term – capital growth.
You also don’t have to pay capital gains tax; you’re practically building equity tax-free. You could live in the home for 30 years or so, wait for it to triple in value, and sell it at a huge profit.
Not too bad for someone who doesn’t consider themselves an investor, isn’t it?
Plus, you might enjoy some of the other financial benefits on top of this. For example, if you work from home, you can claim the appropriate tax deductions.
For an aspiring property investor, not having a lot of money is not an obstacle. As you can see, there are all sorts of things you can do to start small and work your way up.
Of course, general property rules still apply. Look for positive cash flow, growth areas, and potential value-adds. This way you can start off on the right foot in your journey to create long-term wealth.