18 Dec 4 essentials for investment selection – Cate Bakos
In today’s show Cate Bakos, a buyer’s agent from Melbourne, gives us her 4 essentials for investment selection and why we ask the wrong questions.
Kevin: My guest this time is Cate Bakos. Cate is a buyer’s agent from Melbourne. Cate left a career in chemistry to go into the property industry back in 2003 and in 2013, was a finalist in the Telstra Business Woman of the Year Award and a finalist in the REIV Buyer’s Agent of the Year Award.
Hi, Cate. Always good talking to you. How are you?
Cate: I’m well. Thanks, Kevin. Thanks for that lovely intro.
Kevin: And you were a chemist, were you?
Cate: I was – an industrial chemist.
Kevin: Okay, well, what a change to property. It just seems like a natural fit. I love the way you think, Cate, and I particularly want to talk to you about a topic I heard you talk about, which was the essential elements for successful investment selection. We’re asked all the time – aren’t we – “What should I buy, what can I buy if I had $500,000, and what are the next hot spots?” Are they the key questions? Are they the essentials, Cate?
Cate: They’re the common questions, but they’re not the right questions.
Kevin: Okay, well tell us. What are the elements you look for?
Cate: Right. Well, I think, for me, there are four essential elements, and if you can get all four, you’re on a really successful journey. It is simple, but it’s not easy getting all four, but once you understand them and you search for them before you put pen to paper and sign a contract, you better insulate yourself for a good journey.
The first one is the obvious one. It’s the element that everyone wants to achieve. It’s capital growth. We always aim for outperformance capital growth, but capital growth isn’t the only facet that we should focus on. The most important one that we really should pay attention to is actually the rental yield equating to the yield that the investor needs.
Kevin: Just on that point, is there an ideal number?
Cate: Yes, the ideal number is the amount of surplus income that that investor is happy to put towards the property in terms of outgoing out-of-pocket expenses. We can take into account tax deductibility and other benefits, but I try to run the raw numbers, and I look at purely what the outgoings are and what the anticipated incoming rent is. If that differential is a higher figure than that investor can comfortably cover, then they’re biting off more than they can chew, and this is probably the facet out of all four elements that can bring a good investment strategy undone.
Kevin: Okay, so that’s two. What’s number three?
Cate: Number three is going for a property that is most likely going to have ongoing tight vacancy rates. If you’re going to an area that has plenty of vacant properties sliding around it, then you are destined to have a bit of hardship when it comes time to finding a tenant. Obviously, having weeks of no rent ticking by unravels the profit that you can make in that property.
Kevin: Okay, and the fourth one?
Cate: The last one is quality of tenant. You have to look at the target tenant you’re likely to attract in the property that you’re choosing, understand exactly what those kinds of tenants are looking for and what they value, and make sure that the type of tenant you’re likely to get is one who fits comfortably with your profile.
If you’re going for a more eclectic blend of tenants or tenants who are likely to have financial hardship or students, you need to be prepared to deal with all that goes with that type of tenant.
Kevin: The four are capital growth, rental yield, a tight vacancy rate, and tenant quality. Now, you said at the outset, “If you can get four, that’s fantastic; if you can get three, that’s great.” Would two be sufficient to get you across the line, or is that a bit suspect?
Cate: It will make it a really bumpy journey. Particularly, if that rental yield element is not fitting well, that will mean that the property will cost the investor more than they’re prepared to spend on it, and ultimately, they’ll want to fire sale it and they’ll feel that they had a property that didn’t perform well or they’ll feel really negative about the whole experience.
Kevin: Tough question now without notice, Cate, but if any of those were not negotiable, which one would it be?
Cate: The second one. I always say to everyone, calculate what sort of yield you need first and then with everything else that remains on the table, pick the strongest capital growth performer. But if you do it the other way around, you might find that you’re taking on a property that you can’t afford in the long term to hold.
Kevin: The second one you said was rental yield?
Cate: That’s right.
Kevin: Yes, so rental yield is not negotiable. Would capital growth, therefore, be the second most important?
Cate: Yes, I think capital growth is because if you can weather the storm with vacancy rates or you can handle getting bad tenants or challenging tenants, then your property will still perform.
Kevin: Makes sense. Those last two – that is, tight vacancy rate and tenant quality – probably go a bit hand-in-hand really, don’t they?
Cate: Not necessarily. You can go into some areas that have very, very tight vacancy rates and the quality of tenant is not one that would suit every investor out there.
Kevin: Very good point. Always makes sense, Cate. Thank you so much for your time. Cate Bakos, a buyer’s agent, Cate Bakos Property in Melbourne.
Thanks for your time, Cate.
Cate: Lovely to chat, Kevin.