Investing in real estate isn't for everyone. However, here's something we can all agree on: buying a property is expensive. That's why anyone looking to invest in a home or apartment wants to make the right choice.

In this episode, we are exploring the big property questions with Cate Bakos, author of "The Buy Right Approach to Property Investing”. Cate is a multi-awarded Buyer’s Agent and Qualified Property Investment Adviser. She also owns a property investment firm serving a client base across Melbourne and several Victorian regions.

Here’s a quick rundown of everything we tackled:

• How housing auction works in Australia
• What is the role of a buyer’s agent?
• Underquoting in Australian property auctions, and what’s being done about this
• "The Buy Right Approach to Property Investing"
• Thoughts on buying an apartment as investment
• How changes to negative gearing can affect property investments
• What to do with your property after a divorce
• Advice for first-time homebuyers/property investors

Just remember: this property discussion is meant to inform and guide your own research. Every piece of advice is general and does not consider your specific financial circumstances, goals, or needs. So, if you’re not quite sure how a concept applies to you, don’t hesitate to chat with a licensed professional.

How do housing auctions work in Australia?

Housing auctions can be bewildering for those of us not versed in them. It’s helpful to know what you’re walking into, whether it’s your first auction or you’re looking to brush up on your strategy.

First up, there’s the standard auction. Most of us are familiar with traditional auctions where we see the other bidders and everyone makes their offers openly. This could happen in a real estate agent’s boardroom or online via something like Zoom. It’s all out in the open, and watching the bids go up can be quite the experience.

Then there’s the blind auction, where you don’t see what others are offering. Here, you give your best offer right from the start. It’s crucial to know your maximum limit because you won’t have the chance to see others’ bids and adjust yours accordingly.

Now, outside of auction scenarios, you might encounter something called the 'last right of refusal.' It's not as widely accepted everywhere, but it’s worth exploring just in case.

Here’s how it works: if you’re the first to make an offer, the agent might let you have the last say to match. Alternatively, everyone might be asked to beat the best offer by a certain deadline. Or, sometimes, all potential buyers are asked to put in their final bids at once, which really turns up the competition.

Of course, there’s more to auctions than the basics above. Each agent can often set their own rules. While some parts of the auction process are standard, a lot can change depending on who’s running the show. For instance, they may well choose to adapt the auction to the property type and market conditions.

That said, having a buyer's agent can be incredibly helpful in these scenarios. Think of a buyer’s agent as a guide or a coach who knows all the rules of the game (including the ones that aren't written down). They can help you understand the specific auction process for the home you're interested in. And they can also advise you on your bidding strategy, especially if the rules are a bit unusual.

We’ll dig deeper into this in the next section…

What is a buyer’s agent, and what do they do?

In Australia, buyer’s agents are the professionals who guide you through the process of buying a home. And their help starts way before you even think about making an offer.

They're the ones assessing the property, talking to agents, and conducting all the due diligence that you might not even think about. This includes ringing up the council, strolling around the neighbourhood, and consulting with building and pest inspectors. All this groundwork is laid before you ever raise your paddle to bid.

But, their role doesn’t stop at research. When it’s time to buy, the buyer’s agent guides you through the bidding war or during negotiations. They even help you figure out exactly what you're looking for in a home, which can be helpful if you're buying with a partner and you aren't on the same page. This way, you're not aimlessly touring every open home across whichever area you're property-hunting in.

In short, a buyer’s agent helps you plan, makes the buying process simpler, and takes charge when it's time to make moves. If the house hunt feels overwhelming, they're the ones who can bring clarity and direction.

Underquoting in Australian property auctions

In property auctions, there's a not-so-small issue that could really throw you for a loop if you go in without a buyer’s agent help. We’re talking about ‘property underquoting’ – a practice that’s been going on for a while in Australia.

Underquoting happens when real estate agents advertise a property at a price that’s lower than the minimum bid they expect at auction. This can lead potential buyers to think a property is within their budget when it really isn't. And it can leave anyone feeling gutted and betrayed.
To be clear, though: not all agents do this, and many are straightforward and honest. But, knowing this can save you a ton of stress.

What’s being done about this?

The good news is there have been some big actions taken to tackle property underquoting, especially in NSW and Victoria . In 2023, NSW Fair Trading put together a team specifically to handle underquoting complaints. Since then, they’ve handed out 161 fines for underquoting and related issues, with each fine costing the offender $2,200.

Since 2022, Consumer Affairs Victoria has gotten over 2,900 reports about underquoting. Most of these tips came through a dedicated website form, which makes it easier for folks to flag suspicious pricing. Consumer Affairs Victoria has kept an eye on more than 700 auctions, and they have handed out fines totalling over $1.1 million to real estate agencies that didn't stick to the rules.

If you ask Cate, the solution is simple: make sellers declare their reserve price right from the start. Suddenly, everyone knows exactly where they stand. If a property has premium features, it might still fetch a price beyond the reserve. But at least the bidding starts on a transparent note. And it would save a lot of heartache and wasted effort.

In the meantime, is there something property buyers can do to avoid underquoting? There is, and it starts with treating the purchase like planning a major holiday. You wouldn’t book the first flight you find without checking if there’s a cheaper option, right?
Apply the same diligence here. Don’t just go by the advertised price. Check out recent sales in the area, hit up some local auctions, and see for yourself what homes are actually selling for. Keep your eyes and ears open at these auctions. Listen to how auctioneers describe properties. Watch who’s bidding and how much they’re willing to pay. This first-hand insight can help you figure out the real going rate, so you’re not caught off-guard.

What is ‘The Buy Right Approach to Property Investing’?

Remember that John West slogan about choosing only the best fish? Well, Cate applies a similar filter to houses and apartments. According to her book, "The Buy Right Approach to Property Investing,” it’s the properties she rejects that make her portfolio the best.

While searching the market, Cate finds that only about 2 percent of properties make the cut. The rest? They’re swiftly passed over. But, what exactly does she skip, and why?

1. Busy location

Properties on busy roads or above shops are generally red flags in Cate’s book. These properties come with noise and less privacy, and lack the residential feel that many home buyers seek. They are often a harder sell when you’re ready to move on.

Another thing she avoid is a south-facing property. Since Australia is in the Southern Hemisphere, our sunlight mostly comes from the north throughout the day. This means south-facing properties get less sunlight, which can make them darker and potentially colder. The ambiance is less inviting overall, and the higher heating costs can turn off potential buyers or renters.

2. Property in a non-residential zone

The zoning of a property can significantly impact your loan approval process. For example, banks will treat a property as commercial (even if it looks residential) because it sits in an area designated for business. In the eyes of lenders, commercial properties carry higher risks and different financial requirements. So, it’s entirely possible for the bank to say no to a loan application that doesn’t qualify for a residential loan.

Instead, the bank might give you the option to apply for a commercial loan which typically requires bigger deposit, higher interest payments and shorter loan terms. Even then, the bank can’t guarantee your approval if they think you can’t service a loan.

Hence, Cate suggests to look for properties in residential zones that are highest and best use (with rental income potential). In Victoria, for instance, such properties are more likely to receive a bank’s approval for a residential loan (assuming you meet other criteria).

3. Tiny spaces

Banks tend to be cautious about financing properties under 50 square metres, as these are considered less marketable. That is, they might be harder to sell or rent out if the bank needs to foreclose the property.

4. DIY or converted spaces

Lastly, we all love clever use of space, but Cate says it shouldn’t be at the expense of liveability. It’s tempting to fall for a two-bed property cleverly converted into a three-bedroom space. But if the living areas feel cramped or the backyard has disappeared, it will most likely turn off potential buyers.

So, if you’re hoping to sell your home someday, consider functionality and appeal to any future buyers. After all, when folks are house hunting, they're picturing their life in that space, not just counting the rooms.

Thoughts on buying an apartment as an investment

There's a lot to unpack here, but Cate says apartments aren’t always a terrible investment for passive income. As of writing, demand for apartments is showing a generally increasing trend. And it’s expected to continue in most cities like Perth and Melbourne, barring a few exceptions like Hobart and Darwin.

Why this sudden interest in apartments? Well, it all boils down to affordability. With rising interest rates, many homebuyers and investors are not as active as before. The squeeze on borrowing capacity has shifted some focus towards apartments.

While there’s not a lot of supply at the moment, apartments are still generally cheaper to buy than houses (depending on location) . And, historically, apartments usually offer stronger rental yields (though houses are often favoured for long-term capital growth). This means investors can probably hold on to them over a longer period.
Let’s break this down further: apartment tenants rent the space, not the land. A well-positioned two-bedroom apartment can compete on rental returns with a two-bedroom house. The only difference is that the terrace sits on more land, which typically drives up its purchase price. Given that houses are getting more expensive, it’s not impossible that smaller budgets will carry folks towards apartments.
(Side note: these are just general takeaways based on the latest information we have. It’s worth remembering that our real estate market, as in many places, moves in cycles and is influenced by economic factors.)

It’s fair to say, then, that investing in a property is one way to diversify an investment portfolio. The truth is no investment is universally “good” or “bad” without considering personal situation, goals and financial needs. Hence, we always recommend consulting with a professional adviser before making any property investment decisions.

With the public push to change or remove negative gearing, is property still worth investing into?

For many years, there’s been an idea floating around about tweaking or even scrapping negative gearing, especially for older properties. This could shake things up big time for investors.
But, it's important to note that history has shown a reluctance to actually make any bold moves here. Politicians have tried, and it swayed voters one way or the other. So, even though the conversation continues, actual changes might not happen anytime soon.

Essentially, negative gearing lets property investors deduct any loss they make on rental properties from their overall income. This can be a big win for investors, especially those in higher income brackets. This is because, in essence, it means they pay less tax.

However, it’s a political hot potato because while it's great for those investors, it also means less tax money for the government. This is extra money which could have been used for public services or infrastructure. Plus, some people argue that negative gearing pushes up house prices by limiting supply. And that makes it harder for first-time buyers to get into the market.

At a glance, keeping negative gearing might seem selfish because it mainly helps the wealthy to save on taxes. To be fair, though, the government has to think twice about removing it because it could have major ripple effects.

If they remove negative gearing, it could cause house prices to drop suddenly and see fewer investors buying or building new properties. In turn, this could tighten the housing market further and even impact the broader economy. So, they're cautious about shaking things up in ways that might hurt a lot of people, not just the rich investors.

Put another way, there’s no obviously easy way for politicians to handle this $2.7 billion issue . They risk upsetting one group or the other no matter what they decide. Again, for the investor, that means changes to negative gearing isn’t probably going to happen (or at least in this political climate).

What if changes to negative gearing do happen?

If negative gearing were scrapped, theoretically it might mean investors might start focusing more on buying brand new properties. It’s based on the idea that investors might look for other tax advantages (like those available for new constructions) to make up for the loss of benefits from negative gearing.

It’s not a guaranteed outcome, and whether that actually happens depends on many factors. In any case, this shift isn't always the best move because of something called the land-to-asset ratio.

Here’s how everything ties together…

Negative gearing can help investors save on taxes when their investment property costs are more than the rental income. It's especially helpful when they buy older properties. Despite such properties needing more maintenance, the land has probably higher value compared to the building. So, actually, a significant portion of what you're paying for is the land itself.

This is what we mean by a high land-to-asset ratio. Older properties can therefore sometimes offer better long-term returns because it’s the land’s value that grows (and potential tax savings).

As we mentioned, if negative gearing were gone, investors might shift to buying new properties instead, where the land-to-asset ratio is usually lower. This means they're getting less land compared to the value of the new building.

New properties might look shiny and require less upkeep. However, they don’t always increase in value as much because a big chunk of what you're paying for is the building itself – not the land. And, generally speaking, buildings depreciate over time just like new cars.

Then again, you shouldn't just take our word for it. It’s true that depreciation is a general concern for newer properties. But, how much or how quickly a property might depreciate entirely depends on many factors. The property’s location, the quality of construction, local market demand and economic conditions are just some of them. None of which we can assume to be equal for every property. There's also the fact that, as we hinted at earlier, maintenance costs for older houses are bound to be much higher.

We know – conversations about buying a property is bound to be massive, complicated, and easy to get lost in. This is why talking to real estate experts or buyer’s advocates like Cate is incredibly important. These folks are actively buying, selling or managing properties every day. They have the latest insights and practical experience that your chatty uncle at a barbecue simply doesn’t.

Another tip from Cate is to really do your research. Read up, listen to podcasts, grab some books like "The Buy Right Approach To Property Investing" . Do whatever it takes to get a solid understanding before you dive in.

“I’m filing for divorce. Should I keep or sell in the market?”

When going through something as tough as a divorce, deciding what to do with your home can stir up a lot of emotions. Cate really understands this, and she speaks from a place of empathy and concern.

If your home has been a sanctuary during better times, keeping it might offer you the comfort and stability you need right now. It’s like holding onto a piece of your past that feels safe and familiar. This can be incredibly important when everything else feels like it’s shifting.

However, Cate also acknowledges that sometimes, the best way to heal is to make a clean break. This might mean letting go of your home, even if it means accepting a financial loss for a new property. It's a tough decision. But if it feels right, it might just be what you need to feel the warmth of the sun again.

So, if you’re thinking about selling, Cate suggests getting your home appraised first. This means having an expert determine how much your home is currently worth. Knowing this can help you understand how much money you might lose. This way, you can avoid any surprises that could make an already difficult situation feel overwhelming.

And if you do decide to push through, she advises checking in with an accountant. They can help you understand how to handle the potential financial loss, possibly including how to deduct it on your taxes. Every bit of support counts to help you survive and thrive through this life change.

Some advice for first-time homebuyers

First up, Cate’s perspective might stir the pot a bit or come across as a bit of a curveball. To be clear, we're not pushing any agenda here. But, our podcast aims to welcome different perspectives about money. Our role is to give you a bit more to chew on before you decide what to do or, in this case, where you stand.

Property investing has its critics, especially with the housing crisis many are feeling. Some folks say it feels all shades of wrong to own more than one home when so many are struggling to get their first. So, it’s easy to see why some folks feel hesitant about investing in a property. They don't want to be seen as part of the problem.

On the contrary, Cate says it’s not a “dirty word” to secure your financial freedom through a property. In the spirit of being balanced, she’s not saying everyone should rush out and buy several homes. She acknowledges that people worry about investors potentially driving up property prices. And they’re not completely wrong here.

However, she suggest that if anyone’s financially stable, they won’t rely as much on government pensions or social housing. They might even have enough to pass on to future generations and help them stand on their own. She believes this will ease the pressure on state resources, and there will be more for people who need it.

On that note, not all property investors are super-rich, as Cate explains. In fact, 91% of rental properties are owned by every day Aussies . These are folks just trying to secure a bit more for their future and their families’. If policies pushed these people out, we might end up with even fewer rental options. And this could drive up rents or make it even harder to find a place to live.

(For context: the government projects a need for 1.2 million homes by 2029 . However, we're far behind with only 170,000 homes built last year.)

In Cate’s view, simply urging investors to "give up their homes" doesn’t directly translate to more homes for first-time buyers. Because the challenge, as she sees it, goes beyond just availability. It's also about the lifestyle choices people make.

She observed this after the pandemic, when people bought second homes without selling their country properties. Even if regular investors give up their home, there’s a chance that the supply will go to folks who can already afford a place in the area. So, while the sentiment is understandable, the actual market dynamics and buyer behaviour make the entire discussion nuanced.

You’d be forgiven for thinking that avoiding property investing is a straightforward solution here. We all want to do our part to make the situation better for all of us.
In the end, though, property investing has a place in the whole economy and in how we serve our communities. Cate is not saying everyone should invest in property. But, there are some points worth considering about why people do it and what could happen if that changes drastically.

Where to find Cate if you need a buyer’s agent

And that’s a wrap to our property chat! If you're stepping into the property market, Cate Bakos might just be the ally you need. Check out her website ( catebakos.com.au ) where you'll find practical insights and ways to reach her for tailored advice.

As we mentioned, Cate and Pete Wargent have also put together a book called “Buy Right Approach to Property Investing” . They even run a Facebook group where you can connect with other investors, share experiences, and learn together. Plus, there’s more to explore about the book and beyond in their interview series .

If you enjoyed this episode, we’d love for you to stick around. Give us a thumbs up, drop a review, or share this with a friend. And if you’re just starting in long-term investing, make sure to catch up with our first 10 episodes. Follow us for updates at @getrichslowclub or @tashinvests and @anakresina .

Happy investing!

Tash and Ana