COVER STORY H HOW to create ~ a & i v e ~ ~ u i t ~ G a i i

Property investing isn't just for those on six-figure salaries. You dpn't have to be wealthy to become wealthy. If you employ the right strategies you can get a foothold in the market and go on to build an impressive portfolio On any income. VANESSA DE GROOT

I property investors are rich. Surely the only way someone could afford to buy a rental property is because they

have plenty of surplus money, right? Landlords are all earning at least six - figures, right? Wrong.

The majority of property investors are actually mum-and-dad types, trying to improve their financial position and secure their future so they can live comfortably in retirement.

Not only is it possible for people on a low income to invest in property, says Jane Slack-Smith, Investors Choice Mortgages director and founder of Your Property Success, but it's actually a necessity.

"The reality today is that people who

are on a low income have to be very conscious of the fact that they might have 20 to 30 years ahead of them in working life and if they don't have a lot of capacity to increase their PAYG (pay as you go) income then their super is going to be a lot lower than they'll need," she says.

"The reality, too, is that they probably won't have government subsidies, so they'll be on their own. That means they need to get creative now so they've got time working for them and they can get ahead. You're really at the mercy of what life hands you if you do nothing."

So, how do low-income earners get started in property investing, and how do they make the massive equity gains needed to continue building a portfolio

and be financially secure? According to the experts, there are plenty of ways to not only invest but to fast track your wealth creation.

.I THINK I CAN The first, and arguably the most crucial, step to investing on a low income is to have the right attitude. If you have a negative mindset you'll be defeated before you start, so from the outset know that it's possible to invest in property, no matter what your income.

Nick Lockhart, managing director of MRD Partners, says while it's true that banks first look at income and serviceability, attitude has just as much to do with your success for creating 8 wealth through the asset class. B

How to Create Massive Equity Gains on a Low Income COVER STORY m

, -After many, many years working *ionally with property investors, I mmld have to say that a person's income 4 no indicator of how well he or she will 6 as an investor," he says. i In fact, I've seen on many occasions +me-rich people who either have minimal or no investments, even though -re on six-figure salaries.

1 - -People with more 'investor smarts' ; Ibm money will, over time, be able to . b track equity gains in their property

olio more than those earning the ~ f g u d c s ? : ; While Lockhart says you don't need to i k making a "bucket of moneyn to enter 1 b e property investment market and p iddy make your way up the wealth ueation ladder, he says the first step is always the hardest.

Neil Smoli, Aviate Group managing &rector, agrees that having the right mindset is the most important variable i determining success. He says there's BO denying that securing a foot in the property market is a challenge and for aome low-income earners it can be hunting, but it's a step they must take.

'Those on low to average incomes q u i r e financial security just as much,

: if not more, than those who earn the most," he says.

'People on lower incomes are often dl equipped with the fundamental tills of property investing; they can set and stick to a realistic budget, they a n appreciate the bigger picture and rrcognise the importance of putting money away for the future, and they're kss susceptible to the trap of living beyond their means."

.SECURING FINANCE How to secure finance for property ib one of the first things low-income earners will need to consider.

You'll need either a deposit or existing equity, and you'll also need to prove to potential lenders that you can service the debt. If you already have your own home, it's likely you'll have at least some equity, so this can be a good starting point.

Slack-Smith says that you can leverage off this equity to acquire investment properties. She notes one of the things people don't do is look at their own home as a way to keep building wealth.

"People are sitting on a goldmine without actually realising it," she says.

If you don't have existing equity you'll

have to save a deposit. Slack-Smith acknowledges that this can be daunting, but says it can be done. She advises low-income investors to be mindful of where they're spending their money and to concentrate on cutting expenses, as well as considering how they can make more money - and get creative about it.

"If you have a PAYG job maybe you can pick up a second job or casual position, but lenders will require you usually to have this second job for at least 12 months," she says.

"If you can't increase your traditional PAYG income or you're unable to work then maybe you can earn an income online, maybe selling on eBay.

"One of my students is building his deposit up by renting out his spare room on Airbnb. In fact he sometimes even rents his couch at $30 per night.

"Lenders will need to see you prove this income over two years, though, so you will need to be mindful of that."

Stuart Wemyss, Prosolution Private Clients director, suggests starting a business on the side to bring in some extra cash.

When it comes to investing in property, Smoli says discipline - that is, to save and stick to a budget - is more important than a high income, and it's about making the best use of discretionary income. He suggests generation Ys and Zs consider living at home for longer and buying an investment property first to gain entry into the market.

Another way for low-income investors to break into the property market is to seek help from others - for example, see if you can use someone else's equity, or if someone will go guarantor for you so you can secure finance. Otherwise, you may be able to get a cash gift from someone close to you or borrow from family or friends.

While you might have saved a sizeable deposit, lenders may be reluctant to give you finance believing you can't service the loan due to your income. In this case, the experts advise being persistent and looking for alternatives.

Consulting a mortgage broker can help you find a willing lender without having too many enquiries on your record, which can be a negative under the new positive credit reporting system.

Lockhart recalls when his own bank manager told him back in early 2003 that he couldn't get finance.

Analyse yaur spading Do up a budget and be mindful of where you're spending your money. Live within your means and cut down on living expenses where possible. Spend less so you have more to invest - it may not sound attractive, but in order to invest you'll have to make sacrifices along the way.

Lodratmyrtormkmonmolwy Pick up a second job or start a business on the side, perhaps online. such as selling on eBay. Yw could even consider havlng a gamge sale and selling any unwanted items. Come up with creative ways to make more money such as renting out your couch on Airbnb or taking care of people's pets in your spare time.

. ~ I n o r n ~ If you want more value, become more valuable. Work harder on yourself - upskill, learn and improve and employers will be more likely to pay you more.

.olrmrw-#uhor- You don't need to eam a lot of money in order to build a good-sized property deposit. Open a high interest savings a m n t and deposit your entire salary into it each month. The more money you can put into the account each month, the more Interest yw'll eam, which will help you

& b y * b k n g . r Gen Ys and Zs should consider staying at home longer so they can save more money to use as a deposit.

"Banks look at two criteria - income or serviceability, and deposit or equity: he says. "In my case it was a lack of deposit or equity that prevented me from moving forward, so I approached my brother and asked if I could use equity in his home. Steve had a home in Sydney with loads of equity and so by offering it'as additional security I was able to borrow everything required to settle the property, including stamp duty, legals and purchase costs.

"In fact, at settlement, I received a cheque back from the solicitor for $6000 to use as a contingency fund. Within 15 months I had my property revalued and its new value was sufficient to release my brother's home as security with 80 per cent of its new value exceeding the total borrowings I had undertaken 15 months prior.

MAY 2015 . APIMAGAZINE.COM.AU 41

- -- .

COVER STORY H How to Create Massive Equity Gains on a Low Income

INVESTOR SNAPSHO

Growing a $3 million portfolio While there are many people out there with salaries of well over $100.000, or even $200.000, successfully investing in property, Andrew Gleave believes there are just as many people on low incomes turning a profit from the asset class. And he would know, because he's done just that.

Over the decade from 2001 to 2011. Andrew and his wife Gerry built a $3 million-plus portfolio that consists of nine investment properties and a block of land, and the bulk of this portfolio was purchased when they had an annual wage of less than $50,000 per year.

What's most impressive is their The two properties were cash flow loan-to-value ratio (LVR), which is around positive from day one and Andrew says from 5 0 per cent. They've seen massive equity that moment he was hooked. At that stage. gains of more than $1.3 million -taking into Andrew and Gerry were earning a bit over consideration all costs - since they started $50,000 together, but shortly after Gerry investing in property. had a break from work, so they were

Their LVR is so low, explains Andrew. back to an annual salary in the low- to because they've seen such good value growth in their properties due to the areas they purchased in, as well as the market boom in the early- to mid-2000s. r . :r,

Andrew recalls they first became .

interested in property when Gerry started working at a real estate agency in Adelaide back at the beginning of the noughties. The agency needed help with their computer system, and since Andrew was working for

mid-$40,000~. The Gleaves had a short lull in investing

after their first purchases, but then went on to continue building a sizeable portfolio. Andrew says they've seen a lot of equity gains wer the years, mainly due to the time in the market, which helped them continue to grow their portfolio.

But he says they also bought in more affordable areas to enable them to afford

a computer company he came in to help out, and he ended up getting interested in property, which ultimately led to his first investment. Coincidentally their first

Aproperty investment purchase settled on 'Andrew's birthday. on April 11.2001.

They didn't just buy one property though. The Gleaves jumped headfirst into the market by purchasing two in the northern Adelaide suburb of Salisbury East. They paid $135.500 for the two units, which are now

multiple investments on their wage. They also bought properties with good rental returns and stuck with interest-only loans, which have helped with repayments.

When it comes to sourcing finance. Andrew's advice is to "keep chipping away until you find someone who can help you".

"I sat on my hands and thought I couldn't do anything and I lost time." he recalls, after he was told he couldn't borrow any more after the first two purchases. In fact, he

worth a combined $425,000, representing a more than 200 per cent value increase.

Andrew explains that he used the equity in his own home in Modbury Heights, which they paid $125,000 for and added value by doing a major cosmetic renovation before .later selling in 2005 for $310,000, to 'purchase the properties, taking out a loan with an 8 0 per cent LVR.

"At that stage I didn't really know anything about property investing, but I did a bunch of numbers and thought 'why aren't people doing this? I can make a profit!"' Andrew exclaims.

Names: Gerry and Andrew Gleave L k Adelaide. SA Inmstx SA and Qld Ropertk 10 w. ~rdorn inan t l~ buy and hold. I

remembers his bank laughed at him. But he says he eventually ended up going to a mortgage broker and was able to get finance fairly easily - it was just a matter of finding a lender that would come to the party.

While they've always had equity to leverage off to buy more, the Gleaves have only had issues with convincing banks they could service the loans they were applying for.

It's only since he joined the Air Force in 2007. at the age of 36. that he's actually earned more than $50,000 a year. And now his salary has gone up to just over $70.000. he plans to buy again very soon. Andrew says property has given him the choice of working as opposed to having to work.

"I could've retired at 40. While we wouldn't have been jetsetting around the world, we would've been comfortable."

HE NUMBERS I THE QLEAVES I W L o c a t i o n I Descr~ptton I Purchase date I Purchase pr~ce I Purchase costs I Renovation costs I Current value I LVROh I Rent per week I

Sallsbu ry East, SA

LlbkryrnSA

Salisbury East. SA

woobldg*w

Woodridg.. Qld

Lownholmr. ad Kllburn. SA'

KUkm SA'

RrafbklOllrrkns.SA

I / _

Modbuy. =

2-bed, l-bath unff

2-bed. 1-bath unit

2-bed, l-bath unit

3-bed. 2-bath house

3-bed. l-bath house

3-bed. l-bath house

4-bed. 2-bath house

4-bed. 2-bath house

4-bed. 2-bath house

Bkck of land

Apr 2001

ApI 2001

Nw 2002

Nov 2002

Nov 2002

Nw 2002

Dec 2009

Dec 2009

Nw 2008

Mar 2011

42 rn APIMAGAZINE.COM.AU rn MAY 2015

How to Create Massive Equity Gains on a Low Income I COVER STORY m -

7

additional wealth so far, with a lot more to come

cept of fractional ownership is a good way for those on incomes to secure a property investment, Smoli says. If

family or trusted friends.

d also consider syndicated investment. Cam McLellan of Open Corporation can help you get into the market sooner than you

ur own, or if you waited until ur own name. He says it

a good way to get enough equity together to then tment portfolio individually.

investment refers to pooling your funds a larger asset than you could secure on

small end of the scale this could be to buy an t property with a few close friends or relatives,

multi-unit development,"

and somewhere in the rty development syndicates." those on a low income could consider

g m commercial syndicates; he says they're better

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MAY 2015 rn APIMAGAZINE.COM.AU rn 43

tiow to Create Massive Equity Gains on a Low Income

' EQUITY GAINS FROM RENOVATING

1 Make a good flrst lmpmsslon

The planning of a home starts at the pavement. The journey of a potential purchaser from the pavement to the front door is the first opportunity to turn on emotion. If you can make the front door a visual mystery with a colour contrast and screened landscaping, the buyer's brain will be more likely to put what they're about to see in long-term memory rather than forget it as they walk out.

2 Pay attention to every part of the property

At any inspection I've ever attended. potential buyers walk in, look up at the ceiling, and stare out the window. The side passage of a property is nearly always neglected. If you have to have the blinds down because all you see is the paling fence, change it. Be subtle or bold but make sure the room at least visually includes that space.

3 Maximise your building envelope

Always look to maximise your building envelope to the council recommended floor space ratio. The two biggest mistakes I see in renovating for profit are over-developing/capitalising or under- developing a property. Again, this is all about doing your due diligence on the area's demographic but generally, a big backyard looks good but a fourth bedroom or an ensuite always sounds better and sells quicker.

4 It's not just about kitchens and bathrooms

The real estate game is full of one-liners and one that always bugged me is 'kitchens and bathrooms sell houses'. I have designed, built, bought and sold many properties and I don't believe a single one of them was sold because of a kitchen or a bathroom alone! It's all about a balance. Spend your reno dollar wisely and throughout the whole property - a fresh home with accents of colour, not floods of it. The home you present to market must be a combination of proportion, colour and texture that will appeal to as large a demographic as possible and be seen to be able to evolve with its new owner.

5 Style the property whan you sell

To attempt to sell a home without styling it is just throwing money away. Buyers always need a story.

because the income is higher, but you'll need some existing equity to do this.

"One syndicate we use quotes average historic returns of 6.4 per cent per annum in income and 9.2 per cent growth. So, if someone borrows at five per cent fixed they'll get some net income of 1.4 per cent plus capital growth."

.BUY IN A GROWTH AREA The experts agree that buying in a growth area is crucial for low-income investors looking to maximise equity gains.

A growth area isn't necessarily one in close proximity to a capital city, and in fact Liz Sterzel, managing director of Property Wizards, points out that these areas will largely be out of reach for low- income investors.

She says they may need to look further afield to find a suitable investment, and those who are willing to target properties further from the city but with easy access to shops, transport hubs, parks and entertainment options that appeal to tenants will generally find more options suitable for adding value, or with the additional potential of proposed rezoning.

Sterzel notes these suburbs will likely be cheaper and as the proposed rezoning creeps closer to coming into effect, demand from buyers increases rapidly, which pushes property values up.

"If you're able to purchase a property to buy and hold in one of these potential rezoning areas, you have the opportunity to either hold until your equity allows you to carry out the development yourself, or bank the land to sell to a developer when the market has lifted." To spot the early signs of an area entering a growth phase, Lockhart advises investors to understand the property clock, as well as what he terms the 'hidden media cycle'.

"While most investors have an awareness of the 'property clock' - which is that invisible market gauge that charts the cycle between booms and troughs - behind it sits a hidden property media cycle that plays a crucial role in driving market sentiment and winding the clock itself' he says. "When conditions are good people think it will never end, the media dutifully report the euphoria and gains to be made, and with consistent herd mentality they continue to pile into the market. Conversely, when everything's going bad investors think it

will never get better because the media report it so. Ironically, this is the best time to buy."

Lockhart points out that different property markets in Australia sit at different stages of the property cycle at any given time, and an investor's goal should to be invest in an area that's entering a market recovery, where the fundamentals for sustained capital growth are prevalent. These growth fundamentals include: b A limited supply of land but with an

ongoing growing population. b Employment opportunities where

average incomes are equal to or better than national averages.

b Amenities such as shopping centres, schools and hospitals.

b New infrastructure spending. b Good publjc transportation.

McLellan says investors need to buy a property that gives them the best potential for growth at the current point in time, and he advises looking at the four capital city markets of Sydney, Melbourne, Brisbane and Perth to see which is the next due for growth. Whereas some people would look to buy in a city that's booming, McLellan says he does the opposite.

"If one capital city has already had a good couple of years of growth, I don't get excited about it," he says, adding that he's now looking at Brisbane and Melbourne with expectations of upcoming growth. "If I'm buying in one of those four capital city markets I know I'll get growth over the next 10 years."

.BUY THE RIGHT PROPERTY According to Smoli, the most crucial strategic decision for those on a low income is selecting the right property, which will depend on the individual's needs, goals and means. Price will be a factor, of course, and investors should aim to buy under market value to make money right from the outset.

Returns will also be a key factor; low-income investors will be better off with a property that's either neutrally or positively geared, or essentially costs them very little to keep.

Not only will that help you hold onto the property, but it will also help you to secure finance, according to Mortgage Choice spokesperson Jessica Darnbrough.

"If you can show that the property you're looking to purchase has a strong

44 APIMAGAZINE.COM.AU MAY 2015

How to Create Massive Equity Gains on a Low Income W COVER STORY m

CClt's the power of multiplication, not addition, that will create your wealth99

rental return, a lender will take this into consideration, and it could mean the difference between securing finance and not securing finance," she says.

Like any investor, you'll also need to ensure you're buying in an area with low vacancy rates so you don't have to worry about the property being untenanted and having to cover mortgage repayments.

McLellan adds that depreciation can be helpful for low-income investors in terms of cash flow, so the potential for this should also be a consideration when choosing a property.

.PROFITABLE RENOVATING One of the quickest ways for low-income investors to make massive equity gains is through renovating or developing.

"If you're looking to secure a winning investment in a hurry, a property with the potential to add value either through development or renovation is without a doubt one of the best options," Sterzel says. "Sometimes you can get into a low-priced home and boost its value through subdivision, renovation or refurbishment."

Slack-Smith points out that doing a renovation can not only help

low-income investors create equity fast, which will help them with their next purchase, but it can also allow investors to increase rent, which in turn improves their cash flow and hence their ability to service new debt. She says flipping can be a good way to make immediate gains and build up a cash base.

"The wonderful thing about renovation is that if you do it right, to the right property, in the right location, you virtually manufacture money," she says. "For every dollar you spend you should at least be able to make two."

The key to renovation, according

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:OVER STORY. How to Create Massive Equity Gains on a Low Income

to Slack-Smith, is there has to be the opportunity to make money in the property, and just because a property needs to be done up doesn't mean you can make money.

"You need to have pricing disparity between unrenovated and renovated properties and you need to be able to bring the property up to the look and the feel of the median priced properties and make a profit doing it," she says.

"Most renovators overcapitalise and wonder where the money is. The key to renovating is getting the numbers right first before you even think of buying."

Cherie Barber of Renovating For Profit notes that property investors undertaking a flipping strategy need to know the right suburbs to renovate in, because low- budget cosmetic renovations are suited to certain suburbs, and there are attributes that make some suburbs more lucrative than others.

"Some people do a cosmetic renovation when the area is more suited to a structural renovation," she adds.

Barber says low-budget, quick cosmetic renovations can be a great way for property investors to make a fast profit. She says low-income investors can buy a property under $500,000, do a quick cosmetic renovation spending about 10 per cent of the property value, and then either flip or keep it.

"You can sell and realise the lump sum profit margin straight away or use the increased equity to do it again," she says, adding her advice is to reinvest the profit until you've built enough cash flow to change to buy, renovate and hold on for long-term capital growth.

"With quick cosmetic renovations it's all about the numbers, you need to know the formula for making a profit and many people don't know this," she says.

"You need to know what price to buy at, what price to sell at, what percentage you're spending on the renovation, and what the total project costs are so you do actually have that profit margin."

Before undertaking a renovation, Sterzel says, it's critical investors do comprehensive research and ensure they stick to their budget.

"A good way to update an investment property's look quickly and cost- effectively is to look for worn or unattractive features that can be easily fixed, such as floor coverings and light fittings," she says. "Keep renovations simple and watch out for costly works,

such as hidden rewiring or plumbing, that don't add any appreciable value to the property."

While Lockhart notes that renovating might be one obvious way to make big equity gains fast, he points out that there's risk attached, and a buy and hold strategy can be just as successful.

"For some buying an older property and adding value to it through renovations is one obvious way [to maximise returns], but just because that worked for your neighbour it doesn't mean it will work for you," he says.

Slack-Smith warns investors employing the flipping strategy need to be mindful that lenders want a customer for life so you may wear out your welcome if you do this too many times.

.LEARN TO LOVE LEVERAGE One of the most important things low-income investors need to do to make big equity gains is to "learn to love leverage", according to Lockhart. He uses the analogy of a farm to explain how you can grow your portfolio by leveraging equity.

"Imagine owning a farm with rich soils and the perfect balance of rainfall and sunshine - what an amazing opportunity you would be sitting on," he explains. "You could own the right equipment to plough the field and sow seed, you may even have a barn full of bags of high-grade seed, however if you don't plant your seed you'll have nothing more than missed opportunity.

"When you plant a seed it first dies and then out of that death springs new life and leveraging to invest is very similar - you use existing equity in another property as your seed to 'grow again:

At first, he says, it looks like you've taken a backward step as all that equity you had just died as you ploughed it into more debt.

"But out of that debt germinates the brand new shoots of a new 'money tree' or another source of future wealth.

"Remember 2 + 2 + 2 + 2 + 2 = 10, but 2 x 2 x 2 x 2 x 2 = 32. It's the power of multiplication, not addition, that will create your wealth.

"lf you buy and sell for a profit to buy and sell again for another profit you're a wealth adder, which is still better than the 'average Joe' who does nothing, but nowhere near as astute as the person who uses leverage to multiply their portfolio through a buy and hold strategy."

WMINIMISE YOUR RISK, BUT DON'T WASTE TIME

Some would argue that those on a low income should take the least risk in investing because they can't afford to lose out, but on the flip side others argue that those on a low income need to take bigger risks because they need to make more money.

Either way, potential investors would be wise to do their due diligence and be aware of all the risks involved before jumping in. No matter what your income, Sterzel says, being patient and having a carefully considered investment plan is vital.

"Looking to 'get rich quick' is a gamble, while effective property investment isn't a gamble," she says.

"Investors should seek professional advice to help clarify their property investment goals and determine which strategies will work with their finances."

Slack-Smith reiterates that it's important for investors to be educated. What they need to do is stick to the meat and potatoes, she says, the 'beige' property investment strategies of buying below market, adding equity and buying in growth areas.

While making big equity gains fast will help low-income investors get a leg up in property and continue investing, the experts stress that by and large property investing is a long-term game.

"The number one thing for investors to remember is that creating and accumulating wealth in property comes down to the time spent in the market," Stenel says.

"Successful investment is about getting the right property at the right price and in the right location and then holding on to it or adding value."

While low-income investors need to manage their risk, Lockhart says one of the best ways for them to maximise returns from property is to not only buy right, but buy right now.

"In my many years of professional experience I've listened to many stories of regret from people who procrastinated - sometimes for a decade or more - while that elusive 'steal' they sought continued to evade them," he says. "They slowed, even stalled, their wealth creation ambitions and they suffered what is commonly referred to as opportunity cost."

There's no time like the present to start your investing journey, it seems. I

46 APIMAGAZINE.COM.AU MAY 2015