Ep#34 The Two-Property Strategy: A Simple Path to Wealth
Investing in property is one of the most reliable paths to building long-term wealth, and you don’t need a large portfolio to succeed. In fact, owning just two well-chosen investment properties can set you on the path to financial security. Let’s explore how this strategy works, using real-world examples from Melbourne’s property market.
The Two-Property Strategy: A Case Study
Imagine purchasing two properties priced at $750,000 each, a realistic target for middle-ring suburbs in Melbourne. This example focuses on two key locations: Werribee and Frankston.
1. Location Matters
Werribee: Situated west of Melbourne, Werribee is a rapidly growing suburb. With infrastructure projects like the $1.8 billion Werribee East Employment Precinct, the area offers both strong rental demand and capital growth potential. A $750,000 budget here could secure a spacious 3-bedroom home.
Frankston: Located 40km southeast of Melbourne, Frankston is a bayside suburb with growing appeal due to its affordability and proximity to the Mornington Peninsula. For $750,000, you can invest in a 3- to 4-bedroom house in a family-friendly neighbourhood, perfect for renters seeking a lifestyle upgrade.
Building Wealth: The Numbers Behind the Strategy
2. Smart Leverage and Capital Growth
You purchase the properties with 80% loans, contributing $150,000 as a deposit for each property, and borrowing $600,000 per property. With $300,000 of your own money, you control $1.5 million worth of assets.
Assuming an annual growth rate of 6%—a realistic figure for growth suburbs—your properties will increase in value by $45,000 each in the first year, or $90,000 in total. Over five years, this amounts to a total capital gain of $510,000.
Thanks to leverage, the capital growth applies to the full property value, amplifying your returns on the initial deposit.
3. Rental Income and Cash Flow
Rental income is another essential component of your wealth-building strategy:
Werribee: Properties typically offer rental yields of 4%, equating to an annual rental income of $30,000.
Frankston: Similar yields provide another $30,000 annually.
Combined, the properties generate $60,000 in rental income per year. Assuming a 5% interest rate on your $600,000 loans, each property incurs $30,000 in annual interest costs, leaving a small shortfall. However, this gap can often be reduced through negative gearing and depreciation benefits, which improve your cash flow by reducing taxable income.
4. The Power of Time: A 10-Year Outlook
Holding onto your properties for 10 years can significantly grow your wealth:
At a 6% annual growth rate, each property will be worth approximately $1.34 million after a decade.
Combined, your portfolio will grow to $2.68 million, with an equity increase of $1.58 million (after accounting for outstanding loans).
Unlocking Equity: Options for Further Growth
Once you’ve built significant equity, you can leverage it to fund further investments or secure your financial future.
Option 1: Sell One Property
Selling one property (e.g., the Werribee home now worth $1.34 million) provides substantial liquidity:
After repaying the $600,000 loan, you’ll have approximately $740,000 in cash (before selling costs and capital gains tax).
This money could pay off the loan on your Frankston property, leaving you with a debt-free asset generating passive rental income.
Option 2: Refinance
Alternatively, you could refinance both properties to access equity without selling. This allows you to use the funds as a deposit for a third property, expanding your portfolio while maintaining ownership of the original investments.
The Long-Term Exit Strategy
Wealth creation through property doesn’t necessarily require selling. Many investors choose to:
Hold one property debt-free to generate ongoing rental income.
Sell the second property to unlock equity for retirement or reinvestment.
Periodically refinance to access funds for additional investments, maintaining a growing portfolio.
Case Study Recap: The Numbers in Summary
Initial Investment: $300,000
Property Values: $750,000 each (Werribee and Frankston)
Portfolio Growth: $2.68 million after 10 years
Equity Growth: $1.58 million
By strategically leveraging debt, choosing high-growth areas, and holding for the long term, you can build substantial wealth with just two properties.
Key Takeaways
Choose Growth Areas: Invest in suburbs with strong infrastructure, rental demand, and lifestyle appeal.
Leverage Wisely: Use loans to amplify returns while managing debt responsibly.
Hold for the Long Term: Time allows capital growth to work in your favour.
Unlock Equity Strategically: Use equity to reduce debt or reinvest in further opportunities.
With this approach, a modest initial investment can pave the way for financial freedom and a secure future.
Start planning today—your wealth-building journey through property is within reach!
