25 May What many investors overlook in a buy and hold strategy – Cate Bakos
Buyers Agent Cate Bakos shares her thoughts about why investors need to factor in holding costs for a long term hold and why a ‘buy and hold’ strategy can eliminate some concerns about any future volatility the market could present.
Kevin: A common question we’re asked is “Is this a good market to be buying a property, renovating it, and flipping it over, or should we be looking at buy and hold?” There are different strategies, different timings, and different markets. Cate Bakos, a buyer’s agent out of Melbourne has a particular bent on this.
Hi, Cate. How are you doing?
Cate: I’m great, Kevin. How are you?
Kevin: Good. Maybe “a particular bent” is not the best way to say it, but correction versus no correction, is this a time to buy and hold?
Cate: I think all the time is the time to buy and hold. That is my philosophy. It’s served me well as an investor, and it’s what I adopt with my clients.
I think trying to pick a cycle in the market is a really tricky thing, and I also think that property as an asset class is a very difficult one to make serious money out of in a short term. When you’re flipping, you have things associated with the selling costs that can make it quite difficult to make some money even when you’ve had a good gain and you’ve created some value. So, it’s not a favorite approach of mine at all.
Kevin: The market is very cyclical, and in fact, just recently, I spoke to the author of a book about creating wealth through property in any market condition. He made the point that property can be very forgiving, provided you hold on to it and it’s a long-term play. Would you agree with that?
Cate: I couldn’t agree more. I think that’s a really good point. I’ve seen properties that have been selected for a long-term hold and they might not have been the most perfect property at the time. I can certainly speak for myself in my early years. Before I was a buyer’s advocate, I was buying property, and I held them.
I look at some of those properties now and they weren’t the best properties I could have bought at the time. I’d probably focused on areas I was familiar with or went for properties that I felt would perform for various reasons. But property is forgiving. They’ve still performed. They’ve done well. It’s a really good point to make.
Kevin: In looking at the buy-and-hold strategy, are there any things that you find investors need to factor in or that they possibly could overlook?
Cate: Absolutely. I think the most important thing for buy and hold is provisioning for your holding costs and making sure that you understand the cash flows, so you know what the property’s rental value is. That might be different to the rent that it’s currently getting. You have to look at “What is the reasonable and long-term rental I can anticipate on this asset?” You need to make sure that that isn’t likely to change, so you’re not going into an area that has a really strong demand for tenants now for a short-term reason.
You also need to consider some of the ongoing maintenance items and provision for them. You can’t anticipate that a property will just swan along and not create any out-of-pocket implications for you with maintenance items, whether it be just regular repainting and gardening and all the rest of it or whether it’s items like hot water services and upgrades to appliances.
Lastly, I think people who are feeling nervous about interest rates and where they are and if they’re in a position where a rate increase could really hurt them, they need to think about fixed rates as well.
So, there are some things that people can do to mitigate the bumps in the journey.
Kevin: What sort of planning goes into when you’re sitting down with someone? What is long-term for you? Is it three years, five years, ten years, or is it a lifetime?
Cate: For me, it’s a lifetime. I like the idea of having the debt retired eventually and the property is an asset that’s held in your estate and it’s creating some passive income through rent. But for some people, long term might be 20 years.
I think anything less than 10 years, certainly anything less than a typical market cycle – which we all have a rule-of-thumb estimate for it being seven years; that’s a very hard discussion now because our cycles have not been all that predictable. But I think anything less than 10 years is not long term at all.
Kevin: Let’s have a look now at reviewing your portfolio. Obviously you’re not advocating that you would keep necessarily a bad performing one. And let’s face it, Cate, from time to time we do make mistakes. We put something into our portfolio that’s not going to perform.
How often do you review, and obviously what do you do with a dud property?
Cate: It’s a good question. I review all the time. I never really take the finger off the pulse. If it’s a dud property, if you’ve made a bad selection, and you’ve worked out the cost of letting go of it – there might be losses associated there – if you can do something better with that money and if getting rid of the property enhances your own lifestyle and your sense of happiness, then it’s probably a sound decision.
But when you’re tracking your properties closely and you’re getting agitated when they’re not giving you the same growth as others in your portfolio, you actually have to accept that cycles are different for different areas, different dwelling types, and it’s not necessarily a dud performer if it hasn’t done anything in a few years.
You really do have to look at its future long-term growth prospects, the growth that it might be giving you, and any maintenance issues that could become a lot more serious. They are things that can instigate a decision to sell.
Kevin: Would you bring someone in to help you make that decision, and if so, who would that person or those people be?
Cate: That’s a good question. Some people chat to their financial planners or their accountants. I certainly have people coming and chatting to me about their portfolio when they’re looking at rationalizing it – which one do they let go – or just getting a good understanding of which properties were good selections from the start.
A qualified property investment advisor could potentially help, and I think an accountant or a planner who is property-centric and interested and understands property is also a really good start.
Kevin: I think you make a very good point there, and that is that someone with a financial background who is actually an investor – because I’ve seen some pretty awful advice given by financial planners or financial experts who don’t understand property and don’t understand how a property can actually change from month to month or even year to year, Cate.
Cate: That’s right. They have to not carry any bias. They have to be able to look at it quite holistically and not have a preference for a particular side of town, for example, or the newness of an asset.
If you’re looking at an asset and judging it on the back of its potential tax benefits, I think that’s a disaster waiting to happen. I’ve seen some people sell really good properties and then buy young properties or brand-new properties in the quest to save some tax, and I think that’s not a good angle.
You have to look at their long-term growth drivers and the cost of holding it. Think about what your long-term plan is for that property and also how much time is it taking away from you if it’s a problematic property with either maintenance issues or a bad tenant?
So, there are quite a few questions to ask, and it’s not about tax benefits.
Kevin: Buyer’s agent Cate Bakos. It’s great talking to you, Cate. Thanks for your time.
Cate: Thank you, Kevin.