As is true with most worthwhile endeavours, the hardest step is the first one. Entering the real estate market is no different. Exactly where do you start and what comes first? As my own (nervous and uncomfortable) entry confirmed, you don't need hundreds of thousands of dollars to buy a property. In fact, under normal circumstances, a bank will lend you 80–90 per cent of the property value.

So, if you're buying a $500 000 property, the bank will lend you between $400 000 and $450 000. That means you only need to come up with the balance — somewhere between $50 000 and $100 000, depending on how much you're prepared to put in (or you want to borrow). This is what successful people refer to as leverage, which means using someone else's money (in this instance, the bank's) to invest.

‘Why would I want to get into debt?’ you ask. The answer comes back to the distinction between good debt and bad debt.

Good debt creates income or earnings, whereas bad debt is an expense. Take your home loan, for instance. Yes, you will almost certainly have capital growth over time, but it's bad debt because it doesn't generate any income or contribute positively to cash flow. Where a lot of people get into trouble is when they borrow too much money to buy their own home and overextend themselves.

On the other hand, borrowing money can be used to great advantage if you do it properly and strategically.

A successful investor such as my uncle John borrows with the knowledge that the cost of using somebody else's money (i.e. the interest) is less than the growth and income the loan will help generate. This applies to any asset.

For example, interest on a $400 000 loan might be $12 000 per year, but if the property increases in value by $50 000, you are ahead by $38 000 (see table 12.1) and that's before rental income is added. The way smart investors operate is to use the rent to pay the interest on the loan, so it doesn't end up costing you anywhere near $12 000. More on that later.

Then you need to consider the purchase costs: these are usually 3 to 5 per cent of the purchase price, which equates to about $20 000, using the midway number of 4 per cent. These costs comprise:

• stamp duty, a tax payable to the state government on any property purchased. It's calculated according to the value of the property but it's safe to assume the amount will be between 2 and 5 per cent of the purchase price (depending on what state you're buying in, the value, the type of property, and whether it's your own home or an investment).

  If you buy land only, you pay stamp duty on the land price, whereas if you buy a house, unit or townhouse, you pay stamp duty on the total price. If you buy land only, what you save on stamp duty you end up paying in holding costs during construction. We’ll talk about holding costs in the next chapter, and again in the appendix.

• bank fees (incurred when establishing the loan).
• conveyancing (property lawyers).

No matter which way you dice it, the total impost will be around 4 per cent. On a $500 000 purchase, you're looking at a total outlay of $520 000 ($500 000 for the purchase price and $20 000 in purchase costs). If the bank lends you 80 per cent of the purchase price ($400 000) you'll have to come up with the balance of $120 000. Table 12.2 outlines your investment amount based on borrowing 80 per cent (also known as 80% LVR, or loan-to-value ratio) of the property price.

Lender's mortgage insurance

If the bank lends you 90 per cent of the property's purchase price — which for a property worth $500 000 would be $450 000 — you'll have to pay lender's mortgage insurance (LMI). I touched on this in the case study in chapter 8. This works out to be around 2 per cent of the purchase price.

Again, the figures vary according to the loan amount and your personal financial circumstances, but let's say for now it's a neat 2 per cent, or $10 000 on a $500 000 purchase. Your total outlay if you borrow 90 per cent would be $530 000 ($500 000 in purchase costs, 4 per cent for other costs and 2 per cent for LMI).

If the bank lends you 90 per cent of the purchase price, that equates to $450 000, so your investment — that is, the amount you would have to contribute — is only $80 000 (compared to $120 000 in table 12.2).

For a visual summary of this scenario, see table 12.3.

This insight was a real eye opener for me. I could buy an investment property with $80 000 of my own savings. If I bought a $500 000 investment property, I would owe $450 000.

As we saw in John's example in chapter 10 (and summarised in table 12.4), if that property was in a high-growth area and doubled in value over 10 years, in 10 years' time it would be worth $1 million. My investment of $80 000 would be worth $550 000 ($1 million, less the debt of $450 000). I would have turned $80 000 into $550 000 in 10 years, increasing my investment (or ‘thy gold’) by a multiple of 5.9. That would be a return of 21 per cent per year — insane! This is the reason successful investors ‘leverage’ — that is, they put in less of their own money and amplify their returns.

If we use the example of borrowing 80 per cent of the property price, I would be making an initial investment of $120 000. If I buy a $500 000 investment property, I would owe $400 000. If the property doubled in value over 10 years, it would be worth $1 million. My initial investment of $120 000 would be worth $600 000 ($1 million less the debt of $400 000). I would have turned $120 000 into $600 000 in 10 years, increasing my initial investment by 4 times. Table 12.5 illustrates this scenario. That would be a return of 17 per cent per annum — still incredibly impressive!

For comparison purposes only — because this isn't something any wise property investor would consider — if I didn't use leverage and paid for a $500 000 property, plus purchase costs of 4 per cent, I would have invested a total of $520 000. Notwithstanding the fact I would have to save for years to be able to do that (impossible for most people), in 10 years that $520 000 outlay would be worth $1 million (see table 12.6). Still a pretty good investment, almost doubling in value (a 92 per cent increase) with a return of 6.8 per cent per year, but far less than the leveraged return of 17 per cent or 21 per cent per year, using money belonging to someone else (the bank). Granted, however, that you wouldn't have a mortgage.

Even an investment that only increased in value from $500 000 to $750 000 in a 10-year period would work out to have a return of 11 per cent (if you borrowed 80 per cent) and 14 per cent (if you borrowed 90 per cent) — double or triple a scenario where you didn't leverage (see tables 12.7 and 12.8 respectively).

Government grants

Although I'm bulletproofing the ROI by using conservative estimates, you can see that property can give you a very good return, particularly when you consider that, if acting astutely, you're not taking a lot of risk, relative to other investments.

My lightbulb moment was realising that even someone as wealthy as John used other people's money (i.e. the bank) to amplify his investment returns. If he was doing it, then somebody like me, with far fewer resources behind him, should certainly be following suit.

The trick was to do it in a way that didn't involve unnecessary risk and send my conservative mind into an anxiety-related fog — particularly as I had worked so hard to put that panic mindset behind me!

As an aside, there's a common theory that American financial maestro Warren Buffett doesn't use debt. True as that may be, he does use other people's money. He started his business as an insurance company, collecting insurance premiums and investing the funds. What's more, he uses shareholder money via his publicly listed company. It might not be ‘debt’ per se but he's still leveraging other people's money!

It turned out that the first property I bought in Ipswich became my ‘principal place of residence’ (PPR). I lived in the house for a short period so I could take advantage of the First Home Owner Grant (FHOG).

Depending on what state you live in, the government will waive some or all your stamp duty and, if it's a newly built home, give you up to $15 000 as a First Home Owner Grant. This can save you up to $22 500 on a property worth $500 000, which reduces your required investment from $80 000 to $57 500. It's essentially free money — you never have to pay it back!

I encourage anyone reading this book who has never owned property to explore their eligibility for the grant. Buy in an area that meets the eligibility criteria and take the free money. If you don't want to live permanently in an area that meets the criteria, I still advocate sucking it up — moving in for just six to 12 months and then renting it out. Once you've qualified, you're free to do whatever you like.

At the time of writing this book, the federal government released a financial assistance package called the HomeBuilder grant, which is available for owner occupiers of any kind — first home buyer or otherwise. This incentive contributes up to another $25 000 ($25 000 for contracts signed between 4 June and 31 December 2020, and $15 000 for contracts signed between 1 January and 31 March 2021) towards the cost of building a home, reducing your required commitment even further. Truly a once in a lifetime opportunity!

My first property

In 2011, when I was looking at buying my first property, I couldn't afford to do so without buying it as my first home (as opposed to an investment property) so that I could access the various government incentives. I paid $295 000 for the house in Ipswich — I would need 5 per cent for my costs (before government incentives), so my total outlay was $309 750. The bank provided a loan of $265 500 (i.e. 90 per cent of the purchase price) so I had to invest a total of $44 250 (see table 12.9).

Fortunately, I didn't have to pay stamp duty and was able to secure $10 000 from the government as a FHOG (this was the amount offered by the government at that time). This reduced my total investment to $30 000 (see table 12.10, overleaf).

At this point I got quite lucky. John agreed to lend me $30 000 — funds which fell into the category of ‘someone else's money’ (see table 12.11, overleaf)! It wasn't charity because I would repay him and he would receive 25 per cent of any increase in the property's value. There were a few other conditions: I would have to take out the loan, keep the property in good condition and pay all the holding costs. He even made me sign a formal contract.

I took up John's generous offer and bought the property in January 2012, but despite everything John had taught me, I still found the experience overwhelming. I ended up settling on the purchase during Easter, after cancelling and re-entering the contract several times (hence John's ‘numbnuts investor’ jibe). There was no logical reason; I put it down to good old-fashioned fear. Someone once told me that fear stands for ‘Forget Everything And Run’ and that's exactly how it felt when I signed the contract!

In most Australian states, bar New South Wales, a typical contract includes a finance clause that says something like ‘this contract is subject to the buyer obtaining finance at their absolute discretion. If the buyer does not waive the benefit of this finance clause then the seller will have the right to terminate the contract’. The place I bought was nowhere near where I lived at the time, nowhere near where I grew up and did not resemble a lot of those areas. My immediate (emotional) response was that I should not be buying the property. It didn't feel like somewhere I would live long term and, in my mind, that made it a poor investment.

I also couldn't wrap my head around taking on the debt, being able to repay John or the costs of the property. John had to coach me — on three or more occasions — to take the emotion out of it. I was buying in a location with three to four times the average population growth of Australia. There was ample employment in the area, good existing infrastructure, with the further promise of future growth on the back of government investment in infrastructure. Most importantly, I was buying a block of land with a house on it. I had been shown the cash flow several times and, from those figures, after 12 months of living in the house myself (a condition of the FHOG) my interest payments would be all but covered by the rent I would receive. What's more, John had told me on a couple of occasions that he wouldn't let me lose money, particularly when he was investing $30 000 of his own money!

So, I went for it. I had done all the numbers, run through all the scenarios, asked all the questions and it came to a point where I had to trust that my mentor was guiding me in the right direction. Boy, was I glad I did! Two years later I ended up repaying John. The property had increased a bit in value from $295 000 to $340 000.

The bank allows you to borrow up to 90 per cent of the property value, so I was able to increase my loan to pay back the $30 000 John had loaned me, plus his share of the increase in the property value, which he agreed to be a neat $10 000 (slightly under 25 per cent). Not a bad 33 per cent return for him over two years. It was more than I would have to pay the bank, with interest rates about 6 per cent per year at the time, but I couldn't complain — I had made $34 500 without putting in any money! Tables 12.12 and 12.13 detail the difference.

By no means am I saying that everybody (or anybody) should do what I did, but you do not need money to get started and, for those lucky enough to have family or friends who could help them get into the market, I would encourage you to ask them for financial help — under tight terms and conditions of course. You will be surprised how open the older generations are to helping younger generations get a start. Give them part of the return or upside if you have to — half of one is better than all of nothing! The simple message is that you don't need a lot of money to get started. In fact, successful investors and money managers use other people's money, whether to get started or to amplify the returns on their own investment, but they do it in a smart way.

The other message is that there's always a way if you're willing to look at your options and think a little outside the box. My committing to answering the questions of what I want (and don't want) led me to this opportunity. Some might pull me up at this point, suggesting debt leads to risk and stress and, on one level, I agree. However, you're going to have a level of risk with any investment — it's unavoidable — but I would argue the stress of worrying about money that you don't have is worse!

Leveraging is a way to accelerate your progress. As the saying goes, sometimes you need to get into debt to get out of debt. The main reason you should leverage is so you can buy a good investment and the returns (or profits) from the purchase exceed the cost of borrowing (somebody else's) money. John taught me to invest less up front and get a return of at least 20 per cent on my investment. The cost of other people's money today is 3–4 per cent. When I first started it was 5–6 per cent.

It's crucial that, before taking on any debt, you understand the importance of cash flow — that's where we're going next.