Why flipping does not work in all markets – Cate Bakos

One of the flawed assumptions that I see investors make is that they think that property value will always go up.  Another one of the things that I’ve heard quite often is that renovations and flips always pay off.   Those are just two of the assumptions we will discuss today with Cate Bakos.
Kevin:  Quite often, I receive e-mails from people with what seem like fairly basic comments or questions, so we’re going to deal with a few of those today as I talk to buyer’s agent Cate Bakos from Cate Bakos buyer’s agency.
Good day, Cate. How are you doing?
Cate:  I’m good. Thanks, Kevin. How are you?
Kevin:  Good. One of the flawed assumptions that I see investors make is that they think that property value will always go up. What’s your reaction to that?
Cate:  That is, indeed, a flawed assumption because we can’t anticipate that properties just go up on a linear curve and without any kind of bumps. The first thing to state is that property markets do have movement. When you scan right in on the chart, you can see that there’s up and down. And that can be cyclic or it can just be seasonal.
There are other reasons why property values don’t necessarily always go up. One might be that you over-paid for the property at the start, which is a bit of a disappointing thing to find out, but if that was the case, then you need time in the market for that over-payment to erode.
The other one that people often overlook is when we have a brand new property and the component of the price tag that you paid that relates to the dwelling itself was over-represented. In other words, the building is brand new and it’s quite expensive and the land is not as valuable.
So, if the depreciation of that building eclipses the appreciation of the land growth, then we’ll have some negative movement for a little while there as well.
Kevin:  Once again, it highlights the fact that there is no one market around Australia. They’re all different, and they call change and move around from time to time. You have to stay on top of it.
Another one of the things that I’ve heard quite often is that renovations and flips always pay off. I do know that that’s not true.
Cate:  No, it’s not. I’ve seen people do it very successfully, and I know that there are a lot of programs out there and there’s lots of support for people who want to take that strategy on board, but assuming that every renovation and flip pays off is really naïve, because you could be working against a market that’s moving downwards or you could have some cost blow-outs or some time blow-outs. So, people have to factor in the holding costs of the property a well.
If they have some time delays or they have an issue with planning or whatever they’re doing, they can be holding their property without any [2:18 inaudible]. And without a tenant paying them any rent, it can really bite.
Kevin:  Another one that I’ve heard from time to time… And this one is very personal because this actually happened to me. All of our investments have always been 600 square meters plus – 620, 800. And that is that a block of 600 square meters plus with side access – in our case, we bought it on a corner – is going to be sub-dividable. But I do know that that’s not true.
Cate:  No, it’s not a golden rule to rely on at all. There are so many moving parts to this process. And it relates to town planning. You have to look at the title as well and understand if there are any restrictions there. You could have covenants. You could have easements. You could have a really restrictive council with neighbors who might object to what you’re wanting to do.
There are that many things to take into account about the side clearance and sub-dividable minimum rates. Most councils will say that it’s a case by case basis, and 600 is not a guarantee to be able to subdivide.
Kevin:  Yes, once again, do your due diligence right at the start. We talked about values not being uniform in markets all around Australia. That brings me to my final point that I want to discuss with you, Cate. My guest is Cate Bakos, buyer’s agent. That is that rental yield and rental demand is consistent in the capital cities.
Cate:  Not at all. It’s a really good one to myth-bust, because our capital cities have very different rental yields from each other. Being Melbourne-based, I often field phone calls from interstaters who are a little bit aghast at the rental returns that I cite them from the Melbourne market. And we are a market that doesn’t boast our rental yields; in fact, are some of the lowest out of the capital cities.
But also assuming that rental yield is consistent across dwelling types and across cities themselves. It’s not the case at all. So, demand and yield is obviously a factor of supply and demand, that you have areas that are over-represented – it might be apartments – then you could have a bit of a hard time getting the right amount of rent straight-away for your apartment because it will be competing with other apartments.
So, again, due diligence and talking to people who can genuinely cite you a rental return is really important, and that should be a property manager rather than the sales agent who is selling a property.
Kevin:  Very good. We’ve covered four really good points here with Cate Bakos. Cate is a buyer’s agent out of Melbourne and always very reliable with her information. Next time we have a chat in a couple of weeks’ time, there are some misunderstandings around finance I’d like to catch up with you on as well.
Cate:  I love this one.
Kevin:  Yes, good on you. All right. We’ll talk to you about that in a couple of weeks’ time. Thank you.
Cate:  Thanks, Kevin.

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