It pays to furnish rentals
A furnished rental property can provide the investor with generous tax perks
If you furnish a property with brand new furniture and fittings and lease it out, the depreciation benefits can be huge, says leading quantity surveyor Tyron Hyde, CEO of Washington Brown.
But the trap is that since depreciation rules changed on May 9, 2017, you can’t claim for furniture or other plant and equipment, such as ovens or dishwashers, if they’re not brand new. This means investors considering furnished rentals should buy an apartment or house and furnish it themselves with new items. The property’s age doesn’t come into the equation. For those who want to buy new, some developers offer furniture packages.
The demand for furnished rentals is growing, given the rise and rise of short-term letting facilitators such as Airbnb, which caters mainly to our growing number of tourists but also to a corporate market. Student accommodation is another area where the demand for furnished rentals is high.
With rental vacancies rising in key cities, leading to lower rental income, furnished rentals are likely to gain popularity among investors looking to boost their returns. For example, if an investor furnishes their house with a $50,000 furniture and fittings package, depreciation benefits in the first year would be $13,500, says Hyde.
Washington Brown has compiled the table showing the benefits available for different dollar amounts of furniture and fittings over three years.
Why three years? “A lot of items may be able to be written off as they are under $300 or can be put into a low value pool and claimed at 37.5% a year. Essentially, you’re fast-tracking the depreciation,” says Hyde. It will take 10 years overall to claim depreciation on the total value.
Of course, no one should ever invest in a property just for the tax benefits, which should just be the icing on the cake if a property stacks up in all other ways.
Location is vital. Cities and inner-city areas are the prime places for corporate rentals, student accommodation should be near universities or other large educational institutions and short-term holiday rentals perform best in areas that attract tourists.
The ability to attract a premium rental for well-furnished property is one of their attractions. But a downside is shorter leases, leading to higher vacancies and more costly letting fees. If your property appeals to the corporate market you may be able to secure a longer-term lease to a large company to accommodate its visiting executives who prefer not to stay in hotel rooms.
Accommodation that is furnished and fitted out to suit its market will perform best. The corporate market demands highend finishes, sleek and modern, so you may have to invest more to secure these types of tenants. Student accommodation requires more basic fixtures but must include desks with good lighting and electrical connections. Tourists are generally looking for more casually furnished accommodation to generate a relaxing ambience. Good wi-fi is a must for all types of tenants. Smart TVs also add to a property’s appeal.
No matter what type of furnished rental you supply it’s important to update it regularly, in particular replacing broken or damaged items immediately. These types of investments are much more hands-on than non-furnished rentals but you can get help. The growth of the short-term rental market has spawned a whole new industry providing all the services you need, including cleaning, changing the linen and taking care of small maintenance issues. Of course, this comes at a cost and needs to be factored in when calculating returns.
Furnished rentals also suit owners who may want to use their city pad or holiday haven for short-term stays between tenants. But make sure you understand the tax implications – if a property is not available for lease for chunks of time you will not be able to claim deductions for those periods.
If you’re not sure if your property is suitable to let out furnished, you can advertise it as both furnished and not furnished. If there is demand for it furnished and the return is better, go for it!