Late in 2011, I was sitting in Uncle John's office chatting, as we did at our monthly meeting, about how things were going and what was going on in the world when, without warning, he pitched me another curve ball.

‘James, you should be buying an investment property,’ he said.

The suggestion caught me completely off-guard. At that point, a big step like investing (let alone purchasing property) was just a good idea — something I would do at some stage in the future — but John had deliberately dumped the idea on the table and seemed to be waiting for a positive reaction. I brushed him off, advising my mentor that, yes, investing and buying property was the plan, but not until I'd paid off the student loan.

‘You could do that,’ John responded, ‘but that would be working hard, not smart.’

I wasn't sure what he meant, but I was curious to find out. He started by asking me what I would define as being ‘financially independent’. I hadn't given it much thought but figured it probably meant that I'd replaced my after-tax income, which at the time was around $1200 per week.

‘If that's the case, I'd say you'll need about $1.2 million in cash or savings, which, at 5 per cent per annum, would give you a return of $60 000 per annum to live on,’ he explained. ‘You could get 3 per cent from the bank or you could get 8 per cent as an investment return or by lending the money out — but that's a bit risky. Five per cent is a nice, relatively risk-free return based on my many years of experience.’

My eyes and mind widened. One point two million dollars! He asked me to get my calculator out and do some sums, explaining in the process that, while I was doing well to be saving $120 per week, it would take me 10 000 weeks to accumulate $1.2 million. Ouch! Not much chance I would ever enjoy the financial freedom I'd been seeking.

I realised then that I'd forgotten all about the second key point from The Richest Man in Babylon: ‘Make thy gold multiply’, which was of course the crucial second part to ‘Start thy purse to fattening’. The principle was to make your treasure (read ‘savings’) work for you. ‘Make it your slave. Make its children and its children's children work for you.’ I had to continue saving 10 per cent, but I also had to invest it in a way that increased its value by getting it to multiply and — over time — add to my savings.

Comfortable that I was starting to grasp the concept, John revealed the three simple steps his mentors had taught him:

1. Buy an asset that will grow (in John’s case, land).
2. Protect your cash flow. (Cash flow is so important that I've dedicated a whole chapter to it — see chapter 13.)
3. Repeat over and over by reinvesting the growth in more assets that will grow (in John’s case, more land).

The strategy, he said, would not make me wealthy or successful overnight, but financial success would arrive eventually without any unnecessary or foolish risk.

John's next recommendation was to determine a time frame for my goal of becoming financially independent. I plucked the figure of 10 years out of my head, instantly regretting such an aggressive timeline, when John explained I would need to generate $120 000 per year over that decade to achieve my goal ($1 200 000 divided by 10 years). Remember, my annual salary was $80 000 ($60 000 if you take out tax)! John didn't flinch; he just started scribbling figures on the white board.

‘I can tell you, if you work smart and buy the right property, it should double in value every 10 years,’ he said.

He did the sums:

a $500 000 property today would notionally be worth $1 million in 10 years’ time

profit: $500 000

divided by 10 = $50 000 per year.

The cogs in my brain started spinning faster. By buying just one good investment property, I could make $50 000 a year, on top of the money I earned working. That was a significant chunk of the $120 000 I was aiming to save each year.

‘That's what I mean when I say working smart,’ John said. ‘Imagine if you could get to the point where you owned more than one?’ The white board maths lesson continued.

A second good investment property bought one year later, again for an outlay of $500 000, would be worth $900 000 in year 10. That would be another $400 000 in profit.

I now had $900 000 of my target of $1.2 million.

By year four, if I were to buy another good investment property — again for $500 000 — I would have a property worth $800 000 in year 10. Another $300 000 profit and I'd have achieved my $1 200 000 target.

Clearly there was a lot more to it than that — we'd made a range of assumptions and oversimplified the maths — but I perfectly understood the principle of working smart: accumulating and multiplying, but without taking unnecessary risk. I was excited — it was like finding $50 in an old coat I hadn't worn for five years!

There was nothing revolutionary or particularly complex about the concept. I'd been exposed to the thinking before. In school, we were taught about assets growing in value — that is, compound growth and how it worked. Then at university I had learned about derivatives and all sorts of other complicated mathematical and financial equations, but I hadn't been taught in such practical terms and I'd never joined the dots.

If I could get to the point of owning three investment properties, I could notionally be earning $150 000 per year, with each property increasing by $50 000 annually, and even if the three properties only increased by half that amount, I'd still be making $75 000 per year, which would almost double my income at the time. My more conservative strategy clearly wasn't going to work. Saving $120 per week only gave $6240 per year, just 25 per cent of the lowest estimate achieved by ‘working smart’, as John labelled it. No matter which way I looked at it, it was a no-brainer.

It's simple, but not easy

‘It sounds simple when you put it that way,’ I said to John. ‘Why doesn't everyone do it?’

‘It's simple, but it's not easy,’ John responded. ‘First of all, it doesn't happen overnight — it takes time, so you have to be patient and disciplined. Secondly, you need to do three things right, and this is where many people fall short.’

In short, John revealed that you need to:

• buy the right property — that is, one that's going to increase in value
• have good cash flow
• persevere — that is, repeat, year after year.

‘The third requirement is what most people find hardest to do. Successful people call it compound growth. It's the most important part, the ‘secret sauce’, if you like. The example I just showed you had you owning three investment properties. Only 1 per cent of all Australians own three investment properties; 90 per cent of property investors own just one investment property. That's because they buy the wrong property, they don't have good cash flow and/or they don't repeat. Some people get one or two requirements right, but not all three. As I said: it's simple, but not easy.’

At this point, the left side of my brain started kicking in. I understood what John was saying, I understood the numbers and I understood that I would need to learn about those three principles if I was to act. Like an onion, there were layers to the concept that I had to embrace and master.

The next thing I had to get my head around was how I could possibly get started. How was I going to buy a $500 000 property? I could think of 10 reasons why I shouldn't — in fact couldn't — buy a property, starting with the fact that every spare cent I had went into repaying my student loan. Then there was the fact I'd need savings and a deposit. Plus, I had no idea what sort of property to buy. What constituted ‘good’?

The heart, the head and the hands

John told me to trust him. There was a way, but first I'd need to understand a little more about the key elements of a successful strategy properly executed.

Specifically, there are three important components: the heart, the head and the hands. According to John I'd need all three and I'd need to work through them in that order. The heart is your ‘why’, the emotional reason for doing what you're doing. The head is understanding what you need to achieve the goal you've set. The hands is the ‘doing’ part — once we know why and what we have to do, it becomes a question of how we implement it (we're not there yet).

‘I've given you an example of what success looks like but there are a couple of things you must do to get those results,’ John said. ‘Then, and only then, can we get the hands working.’

And so began my bulletproof investing journey.