11 Dec Would you live in a house smaller than a master bedroom? | 2016 Hotspots | Australian houses of the future
In putting the show together for this week, I asked Michael Yardney if he could detail what he thinks are going to be the property “hotspots” in 2016. Those who work with Michael, will know his response to that question. Not quite what I expected and you might be surprised as well.
Cate Bakos gives us her 4 essentials for investment selection and why we ask the wrong questions and Damian Collins looks at what’s ahead for Perth property.
The recent wave in the Sydney market is one that every investor would love to have known about before it happened but that isn’t the only place in Australia where gains are happening. Tony Coughran points out the areas on Queensland’s Gold Coast he thinks will boom next.
The tiny house movement originated in the United States in the late 1990s. Typically these small homes aren’t larger than 46 square meters with some as small as 11 and half square meters. That is smaller than most master bedrooms. The movement has since spread to New Zealand, Canada and Australia and today we talk to someone who has built one and is getting so many demands to build more she is starting a business building them.
Further to that, I talk to KPMG Demographer and social commentator Bernard Salt about this tiny house movement and the future of Australian housing.
Kevin: As we look around Australia, it’s just so interesting to watch all the different markets, and we’ve seen a bit of a topsy-turvy market in Western Australia, specifically Perth, in recent times. Let’s head that way now and get a bit of an insight as to what’s happening in that Perth market. If you’re an investor there, you’re going to be hanging off the words of Damian Collins from Momentum Wealth in WA.
Damian, thank you for your time.
Damian: Pleasure, Kevin.
Kevin: Would it be too rude to say that Perth is a bit of a cot case?
Damian: I think that’s on the harsher side, Kevin. Look, it’s definitely a market that’s had a pretty average year. You’ve found that the rental vacancies have gone up and prices have come back. Depending on the properties in the areas, some areas have actually flat-lined and even marginally gone up, but a lot of areas have come back 5%, and you get some of the more extreme areas that have come back between that 5% and 10%.
It’s certainly been an impact of two things. Obviously, the mining downturn has meant fewer people coming into Perth. We haven’t seen a huge amount of people leaving. There have been some, but by and large, it’s just been less of an influx.
What’s caused the biggest issue for the over-supply is the government threw a lot of money at first-home buyers and we had record building over the last 12 to 18 months and that’s what’s caused, I guess, a lot of extra supply in the market and also caused the rental vacancy rates to rise with first-home buyers taking advantage of all the free money from the government and going and building new homes.
Kevin: I was in Perth not too long ago, and I noticed a lot of work happening down on the foreshore there. There was a fairly big development. I just can’t recall the name of it, but I understood that there are a lot of units being built in there, as well, Damian.
Damian: That might have been Elizabeth Quay, Kevin, right on the water in the city.
Kevin: That’s the one.
Damian: There are a lot of units planned for there. There’s a hotel. Also Chevron is going to build an office down there, albeit that’s been put back for a couple of years.
What you’ll find with a lot of the inner city apartment supply is that because the market’s a bit softer, it’s not all going to get off the ground. It’s all very well to advertise and promote it, but if you don’t get the pre-sales, the banks generally won’t fund that project.
There is a bit of development happening, and Perth certainly is a good 15 to 20 years behind Sydney and Melbourne in terms of apartment and inner-city living. It’s all still relatively new. I think we’ll never be as dense as Sydney and even Melbourne, but I certainly think longer term there is some good potential. We will see certainly more people in WA drifting towards living in apartments.
Kevin: Of course, WA is more than just the Perth market – quite an interesting market how it actually follows and hugs the coast there too. Looking up and down the coast, are there any areas that you think hold great potential as we move into 2016?
Damian: Overall, the WA market in 2016 is going to be very similar to what we’re seeing in 2015, in that prices in the market could marginally rise next year, it could marginally decline. Really, no one can know with exact certainty. The rental vacancy rate, I think, is peaking. It’s about 5.5%. We might see it hit 6%, but I don’t see it going much more than that because we’re certainly seeing at our end – we manage a substantial rental portfolio – that the tenants aren’t running and going into home ownership anymore. They’re happy to stay.
I’d expect it to be much of the same as 2015, and none of the regional areas are likely to particularly outperform at all, Kevin. I think we have a still a declining market in the Pilbara, and I feel sympathetic for people who bought up there at $1.2 million, $1.3 million but they still have many years of pain up in that region, just a lot of over-supply.
All in all, if you’re trying to make short-term profits in WA, 2016 is not the year. It’s really about if you’re looking for getting a great long-term investment at a really good price, that’s what 2016 is about. You may not make a huge amount of money in 2016 because you’re not going to grow property.
I’m still confident that, longer term, WA property, particularly Perth, is going to do quite well, but you have to get used to the Perth market. It’s more volatile than the east coast. But having said that, the fundamentals are still great for the long term.
Kevin: We’re going to give you a break for a few weeks, Damian. We’ll come back in about four weeks’ time, early in the New Year. The 16th of January, we’re back and I might just get your impressions then on the Australian market, and we’ll try to delve a little bit deeper into the Perth and WA markets, as well.
Damian Collins from Momentum Wealth, thank you so much for your time, mate.
Damian: Thanks, Kevin.
Kevin: I wonder if you’ve seen a show on Foxtel about tiny houses. It’s called “Tiny House Hunting,” and it’s all about people who are looking for their perfect tiny home. Now, these homes aren’t just small; they take tiny to a whole new level. Typically, they’re small homes. They’re no larger than about 46 square meters, and some transportable tiny homes are as small as 11.5 square meters – and that’s smaller than most master bedrooms.
I conducted an interview on our consumer show on Real Estate Talk on radio recently and spoke to Lara Nobel, who joins me now. Lara and her partner have gotten together. They were architects, and they’ve taken up a whole new trade, which we’ll talk about in just a moment, just so they can build their tiny house.
Hi, Lara. Thanks for your time.
Lara: Hi, Kevin.
Kevin: That was a big move. You’ve moved from being an architect; you’re now almost a qualified carpenter. You’re doing an apprenticeship, are you?
Lara: Yes, that’s correct. I was a graduate architect, so I’d done all the study, and now I’m almost a qualified carpenter.
Kevin: What sparked the interest in tiny houses? What’s the attraction for you?
Lara: There are lots of factors that attracted us – and also, Greg, who is part of the project – to the tiny house movement. We even went over to Portland in America to the Tiny House Conference earlier this year.
Some of the factors are to do with affordability and what kind of a lifestyle you can lead with a massive mortgage, downsizing in terms of how much stuff you need to own, and also sustainability issues about living off the grid. Those are some of the reasons that drew us towards it.
Kevin: You and your partner, Andrew, have recently completed the construction of your own tiny home. Tell us a little bit about that one.
Lara: We started designing earlier in the year and teamed up with the crew that I work with, that I’m doing my apprenticeship with, so there were a couple of other guys helping us heaps on the build.
The design is built on a trailer, which is about 7.5 meters by 2.5 meters. It’s less than two car parking spaces, and it has pretty much everything you need – well, everything we think we need. It has two spaces where you can fit double mattresses, so a loft space and a bed that lowers down from the ceiling. It has a little bathroom, shower, composting toilet, kitchen, laundry, and it also has a deck that packs down.
Kevin: You say this has got everything that you need, and no doubt, it does for you and Andrew. I imagine they’re great for couples. What about families? Do you think that a family could actually fit into one of these?
Lara: I guess it depends on the family and their lifestyle to a certain extent. Most likely, a couple and a small child would easily cope very well in the tiny house, especially, in Queensland, because we can spend so much time outdoors and on the deck and in the garden. We’ve got a very good climate for it.
Realistically, in such a small space, a larger family would have to make bigger compromises – not to say, they couldn’t do it. I’ve heard of families traveling around in caravans with three kids, and that’s also cool, so it just depends.
Kevin: The tiny house movement itself originated in the States. I know that you have traveled to Japan and Berlin. What are some of the influences that you brought back to put into your property?
Lara: When I was traveling in Japan, one of the focuses of the study trip was on small spaces and micro housing. In Japan, there are a lot of smaller spaces, and they have different techniques that they use in order to organize those spaces – whether it is tatami mats or rolling beds out at night and packing them away during the day. I learned a few strategies from that.
Also, we got to visit a couple of architecturally designed small houses that were very tall. I learned a bit of strategy about stacking spaces and multi-use of the one space – so a bedroom that’s also a living room that’s also a dining room. There was a lot of influences from that, and also, of course, a bit of Japanese joinery and my love of timber.
Kevin: I understand you’re taking this to a whole new level starting your own company to build these – the Tiny House Company. How’s that going?
Lara: Well, we have a lot of interest. It’s amazing. A lot of people are excited about the idea. We haven’t got a facility yet where we can build, but that’s going to happen early next year. We have some very interested customers, and we’re embarking on that most likely early in the new year.
Kevin: What prices will they come in at? Is there a price point at all, Lara?
Lara: It depends. We’re looking at a range of prices. There has been a lot of people interested in the DIY side of it. They’re interested in building their own, but they don’t really know where to get started, and they’d like the help from qualified carpenters and trailer makers to get them off the ground, so to speak – so kind of a shell, which they can fit out themselves.
Then we’re looking at anything between… The trailer that we built ours on was over $10,000. I think some people in Australia see some of the stuff online from America, and it’s people claiming that they’ve built a tiny house for under $20,000. Realistically, they’re a lot well over what we’re making, more like around the $100,000 mark, depending on what you want.
Kevin: I understand. Have you got a website for the business yet? Is that operational?
Lara: Yes, we do. It’s www.TinyHouseCompany.com.au.
Kevin: That’s pretty easy to find – TinyHouseCompany.com.au.
My guest has been Lara Nobel. Lara, thank you. All the best for the future, and stay tiny.
Lara: Thank you, Kevin.
Kevin: Always around this time of year, many people want to know what’s going to happen next year. As we head into 2016, a good topic – and it’s a topic we’re asked to address – is about hot spots. We’ve got a particular feeling about that. Michael Yardney from Metropole Property Strategists joins me.
Michael: Hello, Kevin.
Kevin: Do they exist, firstly?
Michael: Well, Kevin, every year people try and find the hot spots for the next year. You’re right. Around this time of the year, you’ll see lots of articles about that.
I found it interesting looking back at some of the previous ones online and in the magazines, and those areas that were so-called hot spots have actually performed pretty poorly over the last little while. Many of the outer suburbs, the regional suburbs, the mining towns, which were flavor of the month for a short time, were not hot spots at all.
Maybe we should look at what is likely to drive our property markets over the next year.
Kevin: Interesting. I was talking to Dr. Andrew Wilson from Domain about this just recently, and his comment was that by the time it’s identified as a hot spot, it’s already finished. It’s over. It’s gone.
Michael: Well, it’s all so short-lived. What I think investors should be looking at is more long term. Yes, I know the concept that it would be nice to time the market, but I’ve found it’s harder and harder to do at the moment. There are too many factors.
Kevin: What are those property markets going to look like, and what’s going to drive them next year?
Michael: I think the drivers next year are going to be Australia’s economy. That’s slowing, and how that pans out and how the Reserve Bank is going to respond with interest rates will clearly be a major impact on our property markets.
Another big factor over the next 12 months is APRA’s regulation targeting investors and now even more recently owner-occupiers. This is going to slow demand down. Particularly for investors who are marginal and having difficulty getting loans, or investors with very large property portfolios who are rent-reliant, they’re going to have more difficulty getting finance, and I think that’s going to slow the market down a bit next year.
Michael: Population growth was one of the big drivers. You’re right, Kevin. But that’s slowing a little bit, and where it’s going to is mainly going to be the two big capital cities, Melbourne and Sydney, where growth in service industries is creating the biggest jobs.
Interest rates are going to be an interesting factor. I think they’re going to remain low. If you put me in a corner and said, “What’s going to happen?” I’d say, “They’re probably going to drop once or twice more over the next year because our economy is faltering a bit.”
Kevin: It’s one thing to have lower interest rates by the RBA, but it’s just a matter of whether the banks pass it on, Michael.
Michael: Exactly right. I think we’re going to get a two-tier system where businesses are going to be getting the lower interest rates but the banks and home-owners are not as much. But that’s interestingly leading to business confidence. They’re feeling more confident now that we seem to have a stable federal government and stable state governments, and business confidence translates to more investment, to more jobs.
That’s also creating consumer confidence. Consumer confidence is the highest since Malcolm Turnbull was elected. In fact, it’s the highest it’s been in two years recently, so consumers are happy because they’re getting more jobs because unemployment is under control.
I think the combination of these factors means 2016 won’t be as good for house price growth as 2015 was, but we’re not going into reverse. We’re not going backwards. The strong Melbourne and Sydney markets have probably dropped from fifth gear to third or fourth gear, Kevin.
Kevin: Interesting. So steady as she goes, 2016, Michael?
Michael: Probably a little bit slower than it went last year. It also means that you’re going to have to be very careful with property selection, because capital growth isn’t going to cover up mistakes.
I think, as always, it’s really going to be demographics – how we live, where we want to live. The sort of people who have got a bit more income are the ones that are going to push up property values, because I see as our economy is bumbling along, there’s going to be very little wages growth in many of the manufacturing and blue-collar areas. I think the high end of the market is probably also going to suffer a little bit, Kevin, because you don’t need those big trophy homes in Sydney, and Melbourne, and Brisbane when the economy is faltering a bit.
But there are lots of people who are still getting married, getting divorced, having babies – maybe not in that order, Kevin – and what’s going to end up happening is they’ve still got to live somewhere. They’re still going to move. They still have jobs, and they’re still buying or renting properties, Kevin.
Michael: My pleasure, Kevin.
Kevin: Don’t forget you can get a copy of Michael’s new book, too. There’s a link on our homepage at RealEstateTalk.com.au.
Michael, we’ll talk to you again next week. Thank you.
Michael: My pleasure, Kevin.
Kevin: Every investor I’ve ever spoken to always wants to get ahead of the curve, to get on the wave, to work out where that wave is going to be. The recent wave that we saw in Sydney, well, that’s one that every investor would love to have been on and known about well before it happened.
But Sydney is not the only place in Australia where we get those big peaks. Take the Gold Coast as an example. In the latest Australian Property Investor magazine, Tony Coughran from Gold Coast Property Advisors points out the areas on the Gold Coast he thinks are going to boom next. He joins us.
Hi, Tony. Thanks for your time.
Tony: No problems. You’re always welcome. Thank you.
Kevin: Tony, what are the areas that you’re watching most on the Gold Coast right now?
Tony: We’re taking particular interest in the lifestyle suburbs of Burleigh Heads, Nobby Beach – that’s located at Mermaid Beach – Paradise Point (a Broadwater suburb), and Chirn Park in Labrador.
Kevin: What specifically do you like about those areas?
Tony: Absolutely love the huge shift in demographics. They were once tightly held areas, and now things are changing for the baby boomers, and it’s giving great opportunities for the next generation.
Kevin: Those areas that you talk about, are they areas where you could actually go in and enhance the value of the property by making some changes, some renovations to it?
Tony: Absolutely. A lot of those homes were built in the 1960s and 1970s, so there’s actually a huge amount of construction work happening in these areas right now, whether they be knock-downs, full renovations, or just a comfortable budget renovation.
Kevin: What gains are you expecting in those areas, Tony?
Tony: Let’s take a look back to late 2012 where the market had lost a lot of traction at the Gold Coast. Right now, the market has gained great momentum and is performing very well. For example, in Burleigh, on average, we’ve seen almost 15% growth in median prices, as opposed to 5% across the coast. If you buy right and you’re well informed, you could get another 10% or 15% capital growth over the next 12 to 24 months.
Kevin: Some of those suburbs you mentioned there are fairly well established – Mermaid Beach as an example. Do you think those suburbs are going to achieve better than what we’ve seen in Queensland in recent times, averaging each year around about 6%? Do you think we can get better than that?
Tony: It certainly does come down to knowing the values and being well informed. If you’re buying well, then you can curve greater growth than the average punter.
Kevin: What would you be looking for in those areas, what type of properties?
Tony: I’d be looking for properties that you could knock down and rebuild, build that lifestyle home and see some significant growth, or I’d be looking at buying and holding for a couple of years, waiting for the market to pendulum even further in your favor, and then doing your renovations and prosper.
Kevin: How’s the Gold Coast faring overall?
Tony: Due to our demand here in the Gold Coast, stock has certainly tightened up over the last 12 months. We do have a lot of frustrated buyers that are lining up to secure properties. We’re big advocates for houses and duplexes that don’t have those body corporate fees. They’re the best capital growth generators.
We do hope to see a shift in the New Year of 2016, seeing more vendors looking at putting their properties on the market.
Kevin: What about the forthcoming Commonwealth Games? Are you hearing much in the market about that? Is that having any impact at this point in time?
Tony: Most definitely. We’re seeing big dollars being spent on the coast – city infrastructure, new sporting facilities, the upgrades to major retail centers. New high rises are popping up all over town. The new light rail is in operation. Good news, we have the green light for the second extension, which connects to the heavy rail.
Look, the economy is alive and well. There are more jobs, more people coming to the coast and creating a greater demand here on the coast.
Kevin: Yes, good news there out of the Gold Coast. I’ve been talking to Tony Coughran from Gold Coast Property Advisors.
Tony, thanks for your time.
Tony: No worries. Thank you, Kevin.
Kevin: Earlier in the show, I was talking to Lara Nobel about the tiny house movement, which has recently taken off in Australia, and the move toward smaller and more affordable eco-friendly homes.
Now, if there’s anyone who knows a thing or two about modern houses compared to the typical weatherboard, three-bedroom, one-bathroom home of the 1960s and 1970s, it’s KPMG’s demographer and social commentator, Bernard Salt, who joins me.
Bernard, thanks again for your time.
Bernard: Hi, Kevin.
Kevin: Hi. Bernard, is the tiny house movement indicative of a change in attitude to housing and accommodation in Australia?
Bernard: There is no doubt that there has been a shift in attitudes towards housing. I’m not convinced that this is a mainstream movement. I think the mainstream is still focused on bigger houses. In fact, the four-bedroom, two-bathroom product is still popular with the mansion set on the edge of town.
But there is sizable community that is now concerned about sustainability issues and that also wants access to the city’s center at an affordable price, and the only way you can do that is by having a smaller apartment or, in fact, a smaller house, so yes, this is important. It does touch base with a rising segment of the community, but I don’t think it means that all of Australia is going to forsake the quarter-acre block and cram into tiny houses. I think we’re a long way from that as yet.
Kevin: What does a typical Australian home look like? Is there a typical Australian home?
Bernard: In fact, I don’t think there’s an average anything in Australia. Because we are such a vast continent and 24 million people, we have a whole range of averages, a whole range of tribes and behaviors that make up the Australian population.
In fact, there is the lifestyle thing. Certainly, Queensland do particularly well with the Gold Coast, Sunshine Coast and so forth. There is middle suburbia, the three-bedroom quarter-acre block product that was developed in the 1950s and 1960s. Then, of course, you have the mansion product, which we talked about before. These are very large houses on the edge of town in sort of tree-change locations, in fact.
Then you have the apartment product, which has really had an impact on Brisbane over the last ten years. You can see that around Woolloongabba and West End in particular, where you have that inner-city hipster as well as many corporates and others who simply want to live that Manhattan lifestyle close to all facilities downtown.
Kevin: You mentioned Brisbane there. Are there other places around Australia where that’s also the case?
Bernard: There’s no doubt that Brisbane is very much in line with trends that are happening in Melbourne and Sydney. As a Melbournian, I can certainly cite the instances of Manhattan high-rise apartments in St. Kilda Road, Southbank, and Docklands, of course, and then dotted around Sydney, as well.
These trends, I think, really kicked off from the middle of the 1990s in Sydney first, then to Melbourne and then to Brisbane. Brisbane took a while to jump on board, but it’s fully on board now, and anyone looking at the skyline of Brisbane would know that the Manhattan-ification of Brisbane is underway.
Kevin: What’s the prevalence of multiple generations sharing the one home?
Bernard: Well, in fact, multiple generations sharing the one home is not really a trend that you see in traditional Anglo Australian-born households. These are certainly popular; multiple generations in the one home are very popular amongst some migrant communities. In fact, Chinese, even Indian communities, particularly see this as a continuation of traditional ways of living, I suppose.
There was also some evidence of this in the 1950s, 1960s and 1970s with the Italians and the Greeks. However, based on the evidence of how the Italians and Greeks have evolved, I think that the multi-generational households that apply to some migrant groups, by the second generation, we tend to Aus-ify them and they adopt Australian values where each generation pretty much gets its own household.
We like our family, but we like our family at a distance is what I would say in comparison to many other communities around the world.
Kevin: But is home ownership still an Australian dream? In your view, is it achievable by young Australians?
Bernard: Certainly, home ownership is still achievable in Australia. It may not be achievable in the city or, in fact, in the suburb that you want it to be achievable. I think this is often an issue with Generation Y and particularly, in the major capital cities, be it Sydney, Melbourne or, in fact, Brisbane.
It may mean that you have to go to a provincial city or, in fact, to a location further out from the city’s center. Of course, many Generation Y’s don’t want that. They want to remain around the hipster edge of the inner city and look for an apartment or a house in that area. Of course, that’s the most highly prized and therefore, the most highly valued real estate in any capital city.
But I do think you can. You just have to be prepared to relocate, in fact, perhaps even to a different city in order to get into the home ownership market.
Kevin: Are there other things that are affecting housing affordability these days?
Bernard: In fact, you would have to argue that interest rates are extraordinarily low at the moment, so that should be having a positive impact. But strong levels of population growth, competition, of course, for housing from the international market – I’m thinking particularly China – and also a preference these days by Australians for access to the city’s center and infrastructure, the likes of which you would get within a 10K radius of the city’s center.
Plus, I would add also to this the shift towards knowledge work – any job that requires a university education, for example. Many of those jobs are not in, say, car-assembly plants out on the edge of town; they are in the CBD or in the suburbs. That means that apartment product or housing product within striking distance of the CBD or inner suburbs are really going to be most highly prized and therefore, have values increase the most.
Yes, there is a competition factor that is pushing up property values in some parts of our capital cities.
Kevin: Yes. Any predictions from you as to what the future of housing will look like?
Bernard: Well, the question I often get is around bubbles. Surely, everything is going to collapse. I’m a positivist when it comes to Australia, firstly, and also to the Australian housing market.
Yes, there have been times in history where property values have decreased – but not plummeted. In fact, they tend to maybe soften somewhat, or move sideways, or freeze for a couple of years, but for a young, vital, vibrant country importing 250,000-odd people per year and growing the country as well, there is still quite some demand for households and for housing in Australia that would take up the slack in any market at the moment.
Kevin: I’ve been talking to KPMG demographer and social commentator, Bernard Salt. More about Bernard, if you’d like, at his website, BernardSalt.com.au.
Bernard, thank you so much for your time.
Bernard: My pleasure.
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.