One thing that all successful property investors possess is the ability to remove emotion from their decision making process. Cate Bakos says this is a big plus.
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.