How Low-Income Earners can Become Property Investors

Your Investment Property spoke to Jeremy Sheppard, creator of DSR Data, to find out why he says “low-income earners can become property investors even in high-end markets like Sydney”.
It’s not going to be easy, but he says those who can get smart, live tough, and ‘possess a smidge of discipline’ have everything they need to get ahead in the property game. Here, he shares his advice for getting ahead in real estate investing when you earn a low or single income.
First of all, you need to appreciate that success as an investor is all about working smarter, not harder, because knowledge is power.
You need to become a ravenous reader and a continual ‘question asker’. You also need to think for yourself and trust nobody but logic (and maybe your mum). There are plenty of marketing experts masquerading as property experts, so be sure to qualify them by asking yourself:
• Does your advisor have a vested interest in conclusions you draw about their advice?
• Are they selling you something other than advice?
• Have they done it tough themselves?
• Does what they’re saying stack up against common sense?
• Could they be well-meaning but simply wrong?
• Can you find a contrary view to theirs?
Don’t ask an expert to take you by the hand, or they’ll lead you down the garden path. Instead, ask them to teach you so you can walk your own path.
I’m a big believer in books as opposed to seminars. Books free you from the emotional influence of high-pressure spruiker seminars. What you’ll learn in a free seminar is likely to be biased, with some hidden agenda, and what you’re likely to learn in a paid-for seminar probably requires a high level of skill and comes with high risk too. All you need is the basics. There are plenty of books on the basics.
Capital city property markets usually surge in growth for short periods of about two to four years. Then they tend to drift along for longer periods of little or no growth, say five to 10 years.
This surge and slough cycle repeats, but it rarely repeats in the same way, so the length and amount of growth in each surge and slough will change with each cycle.
A low-income earner can’t afford to enter a property market at the wrong stage of the cycle, so it’s essential you time your purchase strategically. Give up on entering just before a surge – you will never be able to reliably time entry. Currently there is no expert or technology that can reliably pick this point.
Instead, enter a market that is already in its surge phase, but not so far into it that prices are about to reach their peak.
Enter a market that is already in its surge phase, but not so far into it that prices are about to reach their peak.
This strategy reduces your profit but also reduces your risk of entering the market at the wrong time.
Two years is a long time to hold a non-performing asset, and you’ll be surprised at just how long the market takes to turn.
How do you pick the time to enter?
Six months of recent growth might be too short to indicate the start of the next boom. On the other hand, three years of good growth might be too late to enter that market – it might have already boomed.
The longer the period of flat or no growth that precedes the next growth phase, the more confident you can be that it is indeed a growth phase. You want about five years of very little growth and ideally 10 years.
You may have to wait several years for one of those affordable markets I mentioned earlier to come into its next growth surge. This is why you should have your eye on a number of gentrifying suburbs across several cities. You won’t have to wait too long before one of them becomes a ‘buy’.
Despite how much you know, and despite how well you time your entry into the property market, you still need to jump over that little hurdle of building a deposit.
I’m not going to lie: it will still be tough for a low-income earner. There’s no escaping the discipline you’ll need to develop early on. But don’t worry. The tough times won’t last for the rest of your life if you learn the following…
Learn to defer gratification
Put off what you want now for later – when you can afford it. From now on, you save for every purchase. No more buying a car on finance, or a phone on a plan, or clothes on layby, or gadgets on a store card. Save up and only buy something when you can actually afford to pay cash.
No more buying a car on finance…  Save up and only buy something when you can actually afford to pay cash
Learn to budget
If you don’t budget, then you’ve got no idea just how bad your cash flow is and what you can change to fix it. Once you’ve drawn up a budget you’ll know the big-ticket items that are really hurting your cash flow. Then you must make the tough decisions and come up with a plan to reel your spending in.
Learn to live within your means
Spend less than you earn. Do whatever you have to, but make this happen. Don’t eliminate the small pleasures like a nice coffee every now and then. Instead eliminate the expensive pleasures like big holidays and expensive cars.
Learn to increase your earnings
You might need to put in more effort at work to get a promotion or bonus. You might consider some part-time work.  Is there a course you can take to improve your job options? Can you ask for extra hours? Again, this is tough stuff. But you don’t have to put up with it forever.
Learn about savings accounts
Once you’ve got your budget figured out and you’re living within your means, you’ll be saving. So, learn everything you can about savings accounts. Find the one with the least fees, the best features and the highest interest paid.
Learn about assets and liabilities
While your savings are accruing, you need to learn about investing. And the first and most important lesson is the difference between assets and liabilities.
•     An asset is something that goes up in value over time, long after you’ve bought it. An asset can also be something that generates income, like shares that pay a dividend
•     A liability is something that is worth less the longer you own it, like a mobile phone. A liability can also be something that generates expenses while you own it. A car is a good example of both cases. Buy the cheapest liabilities and only buy them when you need to, and only using savings, not credit.
Learn about shares
That’s right, shares. I know this is an article on property investing, but the share market is going to teach you some valuable lessons about:
• preservation of capital
• market sentiment
• volatility
• herd mentality
• risk
While your savings are accruing, learn everything you can about share investing. Buy at least two books on share investing, not share trading. One good thing about share investing is that you don’t need much money to get started. It will take a long time for a low-income earner to save a deposit for their first property, and though having that money in a savings account may be safer, it won’t deliver the same returns as investing in the share market.
The kind of investing you’re aiming for with shares is low risk. Put what you’ve learnt into practice with one goal in mind – don’t lose your capital. You may need to diversify across a set of stable blue-chip stocks.
Learn all you can about property
Now, once you have an investment building in the share market, buy some books on property investing. Again, learn everything you can. It will take some time to build up a deposit, so use that time to study property investing.
Don’t chase after fancy strategies or high-risk ventures; stick to the basics. Learn about:
• mortgages
• capital growth
• supply and demand
• rental income
• property managers
• sales agents
• buyers’ agents
• how to research growth spots
• different property types
• leases
• depreciation
• insurance
• council rates
• strata fees
• building inspections
• ownership structures
• conveyancing
The trick here is to get on the train any way you can. When the market takes off again, you must be riding along with it, not chasing after it
All of these aspects are part of property investing. You don’t need to become the expert on every topic, but you do want to gain an understanding of what each step in the process is about.
You’ve learnt everything you can learn, you’ve got your budget in check, and you’ve identified the right type of market to buy in. You’ve also managed, somehow, to put together a modest property deposit. So what comes next?
Next, you need to take action. One of the big problems first home buyers have is chasing the market, which means that, just before they have a deposit saved, the market starts climbing and quickly moves out of reach once again.
The trick here is to get on the train any way you can. When the market takes off again, you must be riding along with it, not chasing after it. Take action and buy what you can afford, and then move onwards and upwards from there.
In other words, jump on the baggage wagon or start in second class, but just get on the train. Once on the train, you can shuffle your way up to first class. But you’ve got to get on somewhere, and the sooner you’re riding the sooner you can relax and stop chasing.
“Don’t just buy in regional areas because they are cheap, as they come with higher risk”
To do this, there needs to be a careful balance between affordable markets and safe markets. Don’t just buy in regional areas because they are cheap, as they come with higher risk. You’re looking for affordable city markets, which is a city market in any state capital. Some of those that might fit the bill right now include Hobart and Adelaide, but you need to choose wisely in these markets – more on that later.
Yield is one of the most tempting aspects of a property to pursue for low-income earners. However, you need to be careful you don’t actively pursue higher-yielding markets to the detriment of the other factors, especially capital growth.
The fastest way to better cash flow is via capital growth, not by paying down a mortgage or chasing yields. This is because capital growth lifts rents. Rents may not rise at the same time as prices, but eventually it will happen.
The faster rents rise, the sooner you’ll be in a position to service another loan to get your next investment, and you’ll have equity to use as well. Capital growth is the ant’s pants of property investing!
If, however, you chase higher yields at the cost of growth, your new equity will come from paying down the mortgage. This will be much slower for a low-income earner to do. The easier way is to leave the heavy lifting to capital growth.
If cash flow is tight, then you should aim for the best capital growth market in which you can acquire a neutrally geared property.
Remember to consider all the costs:
•     Mortgage interest
•     Insurance/strata
•     Property management fees
•     Repairs and maintenance
•     Council rates
Ultimately, the majority of the benefit you’ll get from investing in property will come from capital growth, and most of the capital growth comes from your choice of location and timing.
To get this right, there are three trends you will need to utilise:
1.    Long-term trend
–     big city moves
2.    Medium-term trend
–     gentrification
3.    Short-term trend
–     current supply and demand

Since the end of the agricultural era, people have moved from regional markets where land was necessary, into city markets where all the new jobs are. This trend has been playing out over many decades. It might end one year, but it’s not about to sneak up on you, so bet with it rather than against it.
In my view, investing in cities you have never visited is no big deal. You’re not looking to understand a property market as if you grew up there; you’re looking to understand a property market from an investor’s perspective, which is quite different. You’ll have plenty of time to get to know your target market before you need to buy.

Not every suburb in a city will have the same rate of growth. To maximise your chances of having above-average growth rates, you should select suburbs that are gentrifying.
Some hallmarks include:
• Fading stigmas
• New infrastructure/facilities
• New culture
Fading stigmas
A suburb may appear affordable compared to other suburbs the same distance from the CBD, but there could be some stigma or bad reputation attached to the suburb that is thwarting growth. The stigma could be a history of crime or lots of state housing.
Eventually, the cheap prices will be enough for buyers to put up with the stigma. They move in and make their mark. They may renovate or they may bulldoze an old house and rebuild.
Other buyers may see how the pioneers have renovated and follow suit. Over a long time, these changes start to rejuvenate the area and the atmosphere changes. Once the stigma has disappeared, prices climb quickly.
These trends play out over a long time – something like 10 to 50 years. Don’t buy in a market that currently has a stigma. Buy in one that has lost its stigma recently or is in the process of losing it.
New infrastructure/facilities
The following recent additions to a suburb may kick-start a new growth phase:
• New bridges
• New railway stations
• New shopping centres
• New schools
• New business districts
Note that all items in the list are prefixed with the word ‘new’. When a new train station appears in a suburb, it makes properties in that suburb more appealing. They go through
a period of faster growth until the benefit of having that train station is factored into the new prices. Then growth continues as it did in the past at a more moderate rate. So you’re after new infrastructure and facilities, not just any infrastructure or facilities.
New culture
They say that birds of a feather flock together. Often new migrants will settle in the same area to be close to like-cultured people. They bring diversity to the city. If you
can see new restaurants or cafes emerging, then you may have found a gentrifying suburb.
Boutique or specialist stores are another good indicator. Specialist coffee shops as opposed to fast-food chains are also an indicator.
When you see a suburb moving from a generic nature to having its own character, then you’re probably looking at a gentrifying suburb. There should be a number of such suburbs in a single city. Gentrification plays out over a number of decades and usually results in higher growth rates for that period of gentrification.

All capital growth is based on the fundamental law of supply and demand. Price growth happens when demand for property exceeds supply of property. The greatest increase in prices happens when demand exceeds supply by the greatest degree.
All your capital growth research should aim to answer the question: what is the ratio of demand relative to supply? If you can answer this question accurately, you can pick markets with immediate growth potential.
To get a rough gauge of demand versus supply, check these indicators:
• Days on market – the quicker property sells, the higher demand is to supply
• Discount – the closer the asking price to the eventual sale price, the higher the demand to supply
• Online search interest – the more people looking for each property for sale, the higher the demand to supply
• Vacancy – the lower the number of properties available for rent, the higher the demand for them and the lower the supply
• Auction clearance rates – the more properties that sell at auction, the higher the demand to supply ratio (DSR)
• Percentage stock on market – the lower the supply, the more pressure there is on buyers to scramble over what’s left
Use the DSR to gauge immediate growth potential for a property market. Do not buy into a suburb that has low demand relative to supply.
Once it’s all working…
Once you’re in the market, you’re riding along with it rather than chasing it with savings. From here on, you can relax your frugal living.
“All your capital growth research should aim to answer the question: what is the ratio of demand relative to supply?”
If you time your entry into the market and make good choices, you should outperform the overall market. In other words, your portfolio’s value will be growing faster than the prices of some expensive suburbs. At this stage, it’s only a matter of time before you can afford to buy there too.
If you started investing in property late in life, you may not have enough time to get up to the dizzy heights of buying property in Elizabeth Bay, Peppermint Grove or Albert Park. But you’ll definitely be better off than if you hadn’t started at all.
My golden rule? You should always take action sooner rather than later. There are some very successful property investors out there who did nothing clever to generate their wealth, other than to start early.
The final piece of the puzzle is actually selecting the investment property you wish to purchase. My tips are:
• Don’t pick a property on a main road. You want to be within walking distance of the most popular amenities, like transport links. But you don’t want them to be right on top of you.
• Try to find a property that could be improved with a simple cosmetic renovation, but don’t pick a property that needs a reno to maintain a happy tenant.
• Aim to buy a house, if you can afford to. Ideally, aim to buy one on a block big enough to subdivide in the future.
•  If you can only afford to buy a unit, buy into a small complex – ideally, a block of 12 in a three-storey walk-up. These are lower risk.
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