Personal Portfolio | Adelaide, SA
This property in Northern Adelaide is part of the start2invest Founders’ personal portfolio. As their second foundational property, it builds on their learnings with another low-risk, long-term property. Located in a capital city market and a different state to their first investment, this property marks the start of geographically diversifying their portfolio.
Property Snapshot
This property is a freestanding house with 4 bedrooms and 1 bathroom on a 583 m2 block.
Location Snapshot
Located in North Adelaide’s City of Playford, this region had various factors driving growth, including its strong economy, affordability, urban renewal, and growing population
Strategy Overview
The following strategies applied to the purchase: High Cash Flow, Buy & Hold, and Minimise Risk.
Investment Numbers
Purchase price in 2011: $235,000
Estimated value in 2024: $580,000
Weekly rent: $420
Cash flow: +$2,312/year
Situation
After successfully purchasing their first property in early 2011, start2invest’s founders were ready to go again just 6 months later.
Why so soon? For a start, the property market was still in a downturn phase, which meant that it was an ideal time to purchase properties below market value. And the couple were keen to apply their learnings from the first property and replicate their success as new investors, continuing with their property accumulation phase and growing their portfolio with another low-risk and high cash flow purchase.
On a personal note, their first child was due in just a few weeks. With impending maternity leave, a reduction in household income, and the extra expenses associated with a new baby, they were looking to secure a positively geared property that could bring in a little passive income and support the family budget. They also knew that in order to secure finance approval based on two salaries, they needed to complete the loan application and purchase before starting maternity leave.
In the meantime, the couple continued with their plan to rent a small, two-bedroom apartment in Sydney and invest where they could afford, leveraging their limited available cash and equity.
Goals & Strategies
The main goal behind this investment was to continue to grow their property portfolio so that they could build on their legacy. They had learned a lot from their first purchase and wanted to replicate their success and build on their knowledge with another strong foundational property.
As the couple were in the accumulation phase of investing, the most relevant strategies included sourcing a low risk, high cash flow property that they could buy and hold. Based on experience, they knew that an ideal property would have both low holding costs and a low vacancy rate. They were also interested in maximising any available tax advantages to help support cash flow.
They also wanted to minimise their risk by diversifying. Instead of investing in the same market as their first property in Orange, regional NSW, they looked at capital city locations in different states.
Solution
While continuing to rentvest in Sydney, the couple began the process to secure another affordable investment property with strong growth drivers and high cash flow.
They started by assessing their borrowing capacity, engaging their trusted mortgage broker to find out how much additional funds they could borrow, following the previous purchase 6 months earlier. Thanks to the Orange property’s high cash flow and rental yield, it was possible to complete another purchase valued between $250-$300K.
Next, they completed macro-level analysis, focusing on affordable property markets with high rental yields and a growing economy to support future price growth. From there, they shortlisted Northern Adelaide’s City of Playford.
Why Adelaide? Adelaide is known as the ‘City of Churches’ and boasts world class beaches and a thriving food and wine scene (think the Barossa and McLaren Vale!). In 2021, the Economist Intelligence Unit ranked Adelaide as the most liveable city in Australia and third most liveable city in the world. The local economy is also strong and growing, having successfully transitioned from its origins of industrial car manufacturing into a high tech manufacturing super hub. And it’s diverse, with some 28,000 jobs in Northern Adelaide across advanced manufacturing, defence ($4B in projects including AUKUS nuclear sub construction), aerospace, logistics, information technology, medical research, renewable energy, and mining. Major government investment in infrastructure and defence projects are set to create 11,000 jobs in the coming decade, while properties located close to employment nodes are still available in the $300-$400K range, making Northern Adelaide attractive for first home buyers.
Micro-level analysis involved looking for locations close to employment hubs that were benefiting from government investment and urban renewal. The couple started to look for cosmetically challenged properties that had potential for small renovations, which would allow them to manufacture equity and rental growth (without having to wait for the market to move).
Next it was time to source the right property. As with the couple’s previous purchase in Orange, they sourced a suitable property, negotiated an offer, and organised due diligence. The vendor agreed to allow early access (prior to settlement) in order to complete a minor renovation. This included replacing old carpets, repainting the interior, concreting the side access, completing bathroom repairs, and doing general maintenance.
Following settlement, the couple engaged a local property manager to advertise the property and source quality tenants. Thanks to the renovation, they were able to place great tenants quickly and secure a good rental return.
In order to mitigate the potential loss of rental income and risk of property damage, the couple also organised building and landlord insurance. And with their new status as property investors, they engaged an accountant with specialised expertise in property investing to help prepare their annual tax return, submit a PAYG income variation form, and capture available tax benefits. These tactics reduced the couple’s income tax withheld based on an estimate of their annual income and taxable expenses, which significantly improved cash flow.
Outcomes
The couple were able to secure an investment-grade property in an attractive location within close proximity to transport (train, bus, and freeway), retail shopping, medical facilities (hospital), and employment hubs (defence and high-tech manufacturing). They successfully negotiated a $44,000 discount against the original asking price, and paid $25,000 less than the valuation at purchase.
On top of this, their $5,118 initial cosmetic renovation made the property more appealing and increased projected rental return by $2,000 per year. They were able to secure a quality, long-term tenant within one week after settlement.
Since 2011, the property has achieved strong capital growth and rental growth. It was positively geared (after tax) from day one, and now generates more than $2,000 in passive income (after tax) per year.
Learnings
The investors learned so much through their second property purchase. This included:
How a property downturn can create opportunities to purchase properties below market value
How even a small, simple cosmetic renovation can make a huge difference to the quality of tenants you attract and your rental return
That you may not need to put huge amounts of capital into an extensive or structural renovation in order to make an impact
The importance of mitigating your risk with landlord and building insurance — and reading the fine print to see what’s included and what isn’t, ensuring that you cover the replacement cost of the building and any costs involved (like landscaping, demolition, and removals)
The benefit of PAYG Income Tax Variation to tap into your tax refund early and increase your monthly cash flow
How a tax depreciation schedule from a qualified quantity surveyor can help you minimise your taxable income (for years to come)
How to leverage additional funds in an offset account to help reduce your interest loan
The importance of a property-savvy tax accountant
Overall, this property perfectly demonstrates the importance of “going again” and continuing with your second investment property as soon as your personal circumstances allow. Don’t procrastinate or wait too long for the “ideal conditions” to invest. If you do that, you’ll never make it past your first property.
In order to maximise your portfolio growth and ‘time in the market’ (and really achieve your wealth/independence/legacy goals!), you need to get into that second property as soon as possible. Fortunately, if your first purchase is in a growth location with good cash flow, you should be able to leverage your learnings and increasing equity for your next purchase, allowing you to grow your portfolio over time.
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