Highlights from this week:
- How to look at your investment as a business
- How to get into property with little or no cash
- Do women make better property investment decisions?
- What will happen to property after the boom?
- How do real estate agents set values?
Leave your emotions at the front door – Cate Bakos
Kevin: Buying property is all about, well, I guess it’s a lot about emotion. It’s also, if you’re an investor, you need to look at it as a business, which in some cases, means taking out the emotion of investing. But how much of a trap is it if you do get caught up in that, especially first-time investors, I guess?
Joining me to talk about this, Cate Bakos, who is a buyer’s agent out of Melbourne from CateBakos.com.au.
Good morning, Cate. Thanks for your time.
Cate: Good morning, Kevin. It’s lovely to be on the show.
Kevin: Have you seen that as problem, particularly for first-time investors?
Cate: Every day. Every time I talk to someone, there’s been usually a little bit of a need to reprogram them at the start if there’s emotion slipping into the picture.
Kevin: How do they demonstrate that? What do they say to you for the alarm bells to go off?
Cate: As soon as they start overlaying criteria that’s not financial-related. For example, they might tell me where they want to be or what sort of attributes they want the property to have. I need to ask them whether this is purely an investment decision or if there’s a potential for dual purpose? So, in other words, that difficult project where someone says “I want an investment but I might want to live in it.”
From there, we really have to work out whether there’s a short-term need for them to live in it and whether it does need to suit them personally in their lifestyle, or whether they’re just hedging their bets, which is what a lot of people do. Whether they’re deliberate about it or whether it’s just in the background, they want to think that there’s some logic and some sense to what’s otherwise an investment.
Kevin: Yes, they apply those personal standards to it. I guess this also happens a lot with renovators where they try to renovate a property to suit their lifestyle as opposed to what the market should be dictating.
Cate: Absolutely. You always have to look at what the target buyer or the target tenant will value in a particular area for a particular dwelling type. And as soon as you get that wrong, you can devalue the property or you can make a bad decision or buy a property that will under-perform what you could have targeted if you got it right.
Kevin: What are some of the things that a buyer or an investor should be looking at to determine the type of property that’s going to appeal in a particular marketplace? What are some of those trends, Cate?
Cate: The first thing that everyone wants to go for is capital growth, and that should be right up there. But I think the criteria that’s even more important than capital growth is making sure the cash flows will suit you, because if you take on a property that is too cash flow negative for your own budget, you will find that you can’t afford to hold it, so there’s no sense in doing it.
We still want to target something that will deliver capital growth but it needs to deliver the right kind of rent, and we need to make sure that the rental vacancy rate in the area is attractive to an investor. There’s no point going for a dwelling that will be difficult to rent and will have extended vacancy periods.
Then the second-last criteria is understanding the target tenant and the demographic in the area and making sure that you’re happy and comfortable with that demographic. And then the final one is taking into account any other property that you have in your portfolio and trying to be a little bit diverse with your decisions so that you’re not planting all of your eggs in one basket.
Kevin: Is it a mistake for buyers, particularly when they’re working with a buyer’s agent, to become too defined in the type of property they’re looking for? The first couple of standards you gave us there were all about the marketplace, its performance, and the finance. So, if you went armed with those two steps and then worked with a buyer’s agent to help you identify the type of property, Cate?
Cate: Yes, that’s absolutely right. Once I’ve defined the type of property and the areas that offer that, it does become a bit of a black-and-white approach, and a good buyer’s agent will challenge a buyer that has some firm ideas in their mind that aren’t linked to any financial logic.
For example, if I have someone who’s telling me they want to stick to a particular set of suburbs because it’s close to their home and they know them, I will challenge them on that. And in a lot of cases, that could be the wrong suburb for them.
The same goes for particular elements of a property that they think are appealing to them. There’s no point going through something with a large garden or something with an elaborate dining area if the target tenant doesn’t want to look after a garden or dines out all the time.
Kevin: When you take on those sort of responsibilities, those large gardens, you actually add a whole new layer of expense to your investment property, as well, Cate, don’t you?
Cate: Absolutely. That’s so true.
Kevin: I guess it could be highlighted, if you were to go into a marketplace, say near a university as an example, the style of property that’s going to appeal to a university student is not one that’s going to appeal to a family.
Cate: Absolutely, and you also have to recognize when you’re going to areas where the families are the dominant tenant type, because if you’re an area that’s just young professionals or couples, then you need to reflect that.
Kevin: Yes, wonderful stuff. Cate Bakos always makes a lot of sense, a buyer’s agent from Melbourne. Her website is CateBakos.com.au.
Thanks for your time, Cate.
Cate: Thank you, Kevin.
No cash – no problem! – Nhan Nguyen
Kevin: So, you’d like to get into property, but the problem is you don’t have the money to do it. Well, how do you go about doing that? There could be an answer for you. Nhan Nguyen from AdvancedPropertyStrategies.com has spoken to us on a number of occasions about getting into the market, how you get in, what are the opportunities?
Nhan, I know you’ve done a number of seminars and you’ve trained a lot of people all around Australia about getting into the market when they have a shortfall of cash. Hello, and welcome to the show.
Nhan: Thanks, Kevin. Thanks for having me.
Kevin: Now, tell me about some of these strategies. How can we do it?
Nhan: When I started out, I bought my first property and I ran out of money, so I had to figure out a strategy on how to buy more property. This was back in the early 2000s. I had $4000 saved, I maxed out my credit card, and bought a property for under $100,000 when you could do that in early 2000. And the strategies I came up with, there were two actually.
One was the typical joint venture strategy. I like to call this the money partner strategy. You basically find someone to put up all the cash and all the funding. So, you might find a deal. Let’s say you’re out there, you’re talking about agents, doing market research, going to open homes, putting in offers, and you may not have enough cash or enough borrowing to do a project. This is one way you can do it. You find a money partner who funds everything.
One of my first money partners was a guy named Simon. He worked for an airline, and he earned about $65,000 a year. Back in 2000, that was a substantial amount, and he could borrow significantly. Another partner I had for the last few years was a guy named Dr. Lee. He’s a cosmetic doctor, owns medical centers, has substantial income, substantial serviceability, substantial cash, and he funded approximately $2 million of my projects back in the early 2000s. That’s really one way you can do it.
Another way you can do it, and this really depends on if you can borrow or not. I call this getting the cash partner only whereby if you can borrow… Let’s say a property is $500,000, you can borrow $400,000 from the bank. You have that serviceability, you have that capability, but you may not have all the cash.
So, the other opportunity is to find a partner who just tips in the cash for, let’s say, the deposit, stamp duty if you’re doing a development, if you’re doing a renovation, those particular costs. Effectively, the bank is putting up 80% of the purchase price, the investor puts up the balance of the purchase price, and the investor puts up the rest of the required funds as well.
Kevin: I imagine with all of these things, you have fairly solid agreements that you go into with these people. Because it’s a joint venture, it could quite easily go wrong, Nhan.
Nhan: Yes, absolutely. Look, I’m giving you just the broad strokes and the bigger picture, that 30-second summary of how you can do it. There are many sophisticated instruments you can use, whether it’s unit trusts, joint venture agreements, shareholders agreements. And I do suggest definitely talk to your accountant, definitely talk to your solicitors and finance brokers, actually.
Those three key parties are very, very important just because each has their own requirements, and there is an overlap. Sometimes the advice you get from your accountant might conflict or not address some of the issues that are required by your finance broker.
So, definitely talk to some professionals about that, but that’s just a concept on how to do that. I know it’s very easy, especially in this APRA environment, you can run out of deposit very quickly. After two or three loans, you can run out of servicing very quickly. You have to prepare yourself for the future, especially if you want to ongoingly do deals.
Kevin: That first strategy you mentioned to us in this chat where you obviously had the expertise and you wanted to find people who were probably too busy to do it themselves but wanted to get involved in it, that’s a matter of what you bring to the table and what they bring to the table, isn’t it?
Nhan: Yes, absolutely. For some of you, you might be starting out and you might think “Gee, I don’t have much skill or much knowledge,” but what you do have is you may have time. You may have to be able to fulfill on doing market research for a particular investor, and the investor may not have the time or the interest or the geographical location. He or she might be close to town. He or she might want to be looking at a property out of town in a particular suburb, in a particular zoning, with a particular development opportunity or development factor.
So, you really want to talk to other potential time-poor, cash-rich with a lot of disposable income so that you can create opportunities for yourself, as well.
Kevin: There are always opportunities out there, that’s for sure, just if you need to go looking for them.
Nhan Nguyen has been my guest. Nhan is from AdvancedPropertyStrategies.com and a very clever man. Nhan, thanks very much for your time.
Nhan: Thanks, Kevin. I really appreciate it.
Women power in property – Vanessa Jones
Kevin: When it comes to property, men have a higher tendency to gamble and are more easily manipulated while women are usually extra cautious, seeking low-risk, long-term sustainable capital growth. They are not my words – I’m a male; I guess I agree with that – but that’s according to Risk-Wise Property Review. Vanessa Jones from Risk-Wise joins me.
You’re a woman; you’d have to agree with that, Vanessa, wouldn’t you?
Vanessa: As a woman, I can absolutely say yes.
Kevin: Yes, good on you.
Vanessa: Research has shown that men have a significantly higher tendency to gamble and they’re more easily manipulated by marketing ploys. This is also the case with property; it’s no exception. Risk-Wise Property Review has found that property marketers often use enticements by appealing to men’s visual senses.
I’m not sure if many people know this, but there is a common practice of female models being hired to stand at professional salespeople’s booths at property expos. And this actually increases traffic to the booths by about 50% to 100%.
Vanessa: Yes, it’s a lot. With a similar increase in the rate of high quality sales leads, so they convert them, which is really interesting. Examples of such transactions are units and high-rise buildings in Brisbane, for example, that carry a high level of risk and deliver poor and often negative capital growth.
Kevin: And they use women to sell those. I guess the men are sort of attracted to the attractive women there and they want to impress maybe. I don’t know.
Vanessa: I think they’re attracted to a pretty face, and they’ve actually found that when the models go away from the booth, that in some cases, the traffic to those booths drops by 100%.
Kevin: Wow, how shallow are males, hey?
Vanessa, how would you characterize women as property investors?
Vanessa: Women are usually very cautious. They’re seeking low-risk and long-term sustainable capital growth, and there is also a rising trend of young women taking control of their financial futures through real estate. They are much more aware of the risks, and they seek tools to manage them. For example, 58% of our website traffic is generated by women, and the age group of them is usually between 25 to 44.
Kevin: I know this is a general question, but do you think that women are more suspicious because of the way maybe they’ve been treated by male advisors, agents, and the like?
Vanessa: I don’t necessarily think so. I don’t think that’s the case. I do think men are just more over-confident and they have a higher tendency to gamble. They’re more likely to look at high-risk ventures, and that, of course, can have devastating consequences.
Whereas women are more likely to look for risk-mitigation strategies, in fact, 38% higher than men. I think probably because they’re moms and they have families, they’re not willing to put all of that at risk. They’re more concerned about gambling on things like the property market.
Kevin: Yes, it gets back – doesn’t it – to that attitude we talked about right at the start about men being more gamblers and more attraction to the get-rich-quick schemes. I guess the bottom line here, does that mean that women are better property investors than men?
Vanessa: Well, I could be biased, but I would say yes, in general, obviously. I can’t generalize too much, but yes, property investment like any other investment is about effectively undertaking risk management. An investor who invests in low-risk properties that deliver solid returns is obviously a better investor.
Kevin: Yes, because you can’t beat the double whammy, can you? A good husband and wife combination, with each of them having some input into what the final decision is going to be, makes it a pretty powerful combination, really.
Vanessa: Yes, hopefully. You would think men would think with their heads and women would think with their hearts, but I think when it comes to property investment, perhaps it’s the other way around. The combination of the two is obviously going to be the better outcome, but we just stress that research is essential.
Kevin: Indeed. Off topic just for a moment, but in real estate, it’s fairly common that women are the ones who will decide on the agent and the male is the one who will decide on the method of marketing, and mainly because women are a little bit more intuitive. They pick up on the signals given out by agents.
Vanessa: I would agree with that. Yes, absolutely. I think men don’t dig beneath the surface sometimes. It sounds terribly sexist, doesn’t it?
Kevin: You know, the interesting thing is my wife, Carol, and I have talked about this on a number of occasions. I’ll go ahead and have coffee with someone, and then I’ll come home and Carol will ask me a question about the person or the family that I didn’t even think to ask. I think women just ask more questions related to the person whereas me, as a male, I just really want to know what the bottom line is. And “How you’re going?” If they answer me with a whole lot of problems, I probably really don’t want to know.
Vanessa: Yes, for sure. I might say my husband actually thinks I’m nosey, so I do ask a lot of questions. And perhaps that goes the other way into delving into doing your research and getting as much information as you possibly can before you sign that contract.
Kevin: Bottom line here is I guess if men want to become better investors, maybe they have to get a bit more in touch with their feminine side, so we’ll leave it at that.
Vanessa: All right. Thanks, Kevin.
Kevin: Good on you, Vanessa. Great talking to you. Vanessa Jones, my guest there from Risk-Wise.
What will happen to property prices at the end of the boom? – John Lindeman
Kevin: A lot of talk around right now – isn’t it? – about the boom ending. The good times may be over. The Sydney market is starting to slow a little bit. Indicators are that Melbourne might do the same thing. Have you ever wondered, as I have, what happens when this does come to an end? What’s the end result?
John Lindeman from Property Power Partners has been doing a bit of research on this and came up with some interesting figures, which he’s going to share with us now.
Good morning, John, and thanks for your time.
John: Good morning, Kevin, and hello, everybody.
Kevin: John, tell us what happens when these great times, specifically Sydney and Melbourne, will come to an end?
John: It depends to a large degree on the nature of the demand when you look at who’s been buying properties and where the demand for accommodation is coming from. So, what I did is I looked at every capital city and the number of rental properties and the demand for them, because what I’ve realized is that even though most of the people who make housing market predictions are looking at the buyer and seller market, and they tend to ignore the rental market, it’s actually really quite important because renters move a lot more frequently than owner-occupiers – on average, according to the Bureau of Statistics, about every four years.
It means that even though they’re only one-third of the total, because they move so much more frequently, it means that two-thirds of all the households moving every year are actually renters, and as listeners would know, most units are occupied by renters and owned by investors.
When you look at what’s happened, say, in Perth and Brisbane to some extent, where there have been low house prices, a lot of aspiring first-home buyers have moved out of rental accommodation and bought properties, and so what that’s meant is that the demand for rental units, particularly in Perth, has just collapsed. And it’s also a place where I suggest not the best form of investment right now would be a unit in Brisbane. So that’s increasing the demand for houses to buy.
But when we look at Sydney and Melbourne, it’s a totally different dynamic. You see, Melbourne’s intake of overseas arrivals is about 85,000 people a year, and nearly all of these are renters, and they have to rent for a number of years before they can buy properties. I looked at Sydney and three-quarters of the city’s annual population growth, which is 90,000 people, are overseas arrivals. And all of these people have to rent.
So, what I can see in Sydney and Melbourne, in particular, even though prices will stabilize and stop going up, we can see massive asking rent rises over the next few years, and that will probably lead, once again, to more investor interest. But at this stage, I can see that Sydney and Melbourne are likely to become the cash flow capitals of Australia in the next few years.
Kevin: Great opportunities here for investors – isn’t there – to switch from capital growth to a good rental return with that demand, John.
John: I think that’s what these numbers are telling us, that it’s going to be cash flow rather than capital growth. Whereas in the other cities, if you’re after capital growth, then you’ll be looking at cities like Brisbane, Adelaide, and Perth, all of which have been lagging behind and have got a lot of catching up to do as far as price growth goes.
Kevin: John, just before I let you go, the event coming up in Melbourne on the 27th, just a matter of days away. The event in Brisbane, and the event in Sydney, both sold out, great success, so we look forward to Melbourne.
If you want to get details on how you can meet John and get a good feel about what’s happening in the Australian property market in Melbourne on the 27th of February, go to the website 7Steps2Success.com.au.
They’ve been great successes, John, and no wonder because a lot of people are really interested in what’s happening with the Australian property market right now, too.
John: Yes, they are. I think the wonderful thing about property investment is there’s always opportunities somewhere, and as I said, if you can’t get capital growth, you can certainly see the cash flow increase. There are always opportunities; it’s a matter of being well-informed.
Kevin: That’s coming up on the 27th of February in Melbourne. Don’t miss it. The website again, 7Steps2Success.com.au, with John Lindeman from Property Power Partners.
John, thanks again for your time. We’ll talk soon, mate.
John: Thank you very much, Kevin, and I look to seeing your listeners at the event.
How agents set values – Chris Blakeley
Kevin: My guest is Chris Blakeley. Chris is the regional manager for Raine & Horne.
Tell me, how do agents go about setting a value on a property, because that’s the one thing that someone wants to know when they call an agent up, what my place is worth?
Chris: And I think it’s important just to note before we go into that that agents aren’t registered valuers. What an agent does is we look at the comparable sales for the area, so we try to find a home that’s very similar to yours with fixtures and fittings, block size, bedrooms, bath, car, and we try and compare that to yours. But then we also try and predict what’s happening in the market in the future for the next three months, what’s going to be happening with the buyers.
So, quite often, we will have an optimistic view about what’s going on compared to the valuer who’s just looking purely at historical data.
Kevin: One of the things that most agents… Well, I’ll talk personally now. One of the things that really scared me was going to do an appraisal and that expectation of the owner wanting to know the price. It almost becomes like a competition, because my experience is that most sellers want more than their house is worth. Everyone has an over-inflated opinion of value. They have a right to expect that, but they judge the agent based on the price they give.
Chris: And I think it’s at that point that you go back to the agent and test their knowledge and get them to justify why they’ve come up with that price. If they have the facts and figures there, I guess you cannot argue with that.
Kevin: It’s difficult to change a seller’s mind, though, if they have an over-inflated opinion of value. The value of the property is not the only reason you should appoint an agent.
Chris: No, definitely not. It has to be the skills. It has to be the plan of attack that they have around the property of how they’re going to market it to find the best buyer for your home. Price is just a small part of it. At the end of the day, it’s not the agent that’s buying. You’re not buying it. It’s the buyer who’s out there.
Kevin: Let’s talk about auction and marketing for a moment. With the Internet nowadays, most agents, most smart agents who have a fairly good database, they collect lots of data on buyers, people they meet who come to open homes and so on, is it reasonable to expect that an agent may do a little bit of soft marketing before spending any money? That is going to the database and saying “Well, let’s just see if I can find a buyer for you?”
Chris: I think it’s really important to do that before you hit the market full noise. You invite that database of buyers in for maybe a VIP inspection prior to the open market coming to it. But a good agent will hold anyone who’s interested in that little group of buyers over until it is released, and that’s just to create that competition. We all know that competition drives price. Let’s get those people through, get the interested ones, and then take it to the first open home and then put them in competition with the rest of the public.
Kevin: Is it a misconception to think that the agents who get the most marketing – these are the ones who are most dominant, in either the Internet or on press – are the ones who sell the most properties?
Chris: Nine times out of ten, they probably are selling the most property because they’re meeting the most amount of buyers out there and getting them through your property. I guess they’re just covering all bases to make sure that they know they have you the best price possible.
Kevin: So, shouldn’t the agent be paying for the marketing?
Chris: Well, it’s like when you go to the mechanic, I guess. Do you ask them to pay for all the tools and oil and everything to service your car? All the agent is doing is asking you to give them the tools to do their job properly.
Kevin: How much should someone spend on marketing their property?
Chris: There’s no hard and fast rule. I guess it comes down to your situation, and I think the agent needs to acknowledge your situation, too, So, if you are very budget-conscious and they need to work with what you can give them, they should know every tool available to them in the market to make sure that they can hit as many people as possible.
Kevin: Is it reasonable for a seller to want to take the cost of the advertising out of the sale proceeds when it’s settled?
Chris: The commission and the marketing are two different things. The commission is a service fee. You are paying the agent for the work that they’ve done. The marketing is the tool. So, I think you have to keep those two things separate.
Kevin: There’s been a lot of criticism of open homes. Neil Jenman, as an example, has come out and said you shouldn’t do open homes on your property because it’s a major security risk. Is it a security risk? And if it is, how can someone protect themselves?
Chris: It’s always important to make sure you do remove all your valuables from the property before you have an open home. But I don’t believe it is a security risk. Agents these days are asking for your name, e-mail address, phone number before you’re allowed to enter an open home. It’s purely a security thing. If anything does happen during that open home or afterwards and the police need to be notified, we can say “These are the people who attended the property.”
Kevin: I think most people are reluctant to give all that information for fear that the agent is going to follow them up, but really, there’s nothing wrong with that; that is the agent’s job.
Chris: That is the agent’s job, and most of those buyers are going to be sellers one day and they’ll want to know that the agent is going to do their job.
Kevin: That’s a good point you make, because that’s actually how you can pick a good agent as one who follows you up well as a buyer.
Chris: Absolutely. I would expect a good agent would have at least touched base with that buyer that afternoon and probably again early that week just to gauge their interest. And it’s just because they’re doing their job. They want to give that feedback to the seller and say “This is what the marketplace thinks of your home.”
Kevin: As an industry, we know that all agents should follow-up. You should follow-up every buyer that you do. But you only have to go to an open house, as I do, from time to time. I don’t necessarily do it to test people out. I generally want to know what’s happening in the market. But it is surprising how many agents don’t follow you up.
Chris: It’s appalling.
Kevin: Why is that, if we know, as agents, that’s that is how we build a database?
Chris: I always say if you going out to select an agent, you secret shop them first, anyway. You go to their open homes and if they’re not following you up, they shouldn’t be on the shopping list.
Kevin: That’s a very good way to pick an agent.
Chris: Absolutely. That’s the first step that I would do when I was picking an agent.
As an industry, I think we need to acknowledge that this is what people are expecting these days. They’re expecting the follow-up. They want to know what’s going on with their homes once it’s listed. We really need to get better at that. We need to be doing our weekly reports and saying “This is the activity that I’ve done, this is what it’s created, and this is the feedback from it.”
Kevin: Yes. There you go. Great advice and if you’re looking to employ an agent, make sure that you secret shop them. The best way to do it is to go and check out a few of their open homes, maybe even go to a couple of their auctions and see how they perform at the auction, as well. Lots of things you can do, but don’t just judge it purely on the price they give you or how you perceive them to be in terms of their own marketing in the area. Test them out.