Landlords have traditionally been the wielders of power in Australia’s residential rental landscape. There’s always been a rather deep pool of tenants and of course we’ve enjoyed a relatively high rate of home ownership when compared to property investment activity.
Of course that all got turned on its head recently, as affordability barriers saw the emergence of a new rent-vester generation and low interest rates compelled more mums and dads in pursuit of future financial freedom into the market.
Now, the power seems to be slipping in many of our larger capital cities however, with key parts of the rental market starting to weaken.
Analysts have good news for tenants, predicting this trend will continue into 2016 on the back of a significant construction boom across the Eastern seaboard in particular.
But this means bad news for landlords, who’ve already watched average rents drop to their slowest pace in 20 years for the December 2015 quarter (ABS), with a rise of just 1.2 per cent. No prize for guessing the slowdown has been most notable in the apartment market.
When market reports around rental statistics come out with this type of unfavourable data, it’s not uncommon for property investors who are easily spooked, or have perhaps backed themselves into a bit of a financial corner, to start looking for creative means to boost their returns.
Many will contemplate the idea of furnishing their rental, believing this will automatically mean an increase in the asking rent. But this isn’t necessarily the case.
In order to determine whether you should deck your investment out as the ultimate turnkey solution for tenants, here are four questions to ask yourself…
- Is it ‘the right type’?
Fully furnished lets suit a certain tenant demographic, namely ‘short termers’ such as students, young first time renters fresh from the family nest and long stay corporate travellers looking for something more homely than a hotel.
Properties within close proximity to popular holiday destinations, such as coastal and country retreats, or near major business hubs and tertiary institutions will be more relevant to the fully furnished accommodation market.
While accommodation in these types of select locations can command a premium of $100 to $250 in additional weekly rent, it’s important to keep in mind the downside can be more frequent, extended vacancy periods.
- Is it in line with your strategy and objectives?
If you like set and forget type property investments for the long term, chances are furnishing your rental property will hold little appeal.
Remember, if you plan to lease a dwelling with extras like furnishings, and charge above the going market rent for these additional items, it’s expected that you’ll maintain them in good working order for the term of the tenancy.
That’s a fairly hefty responsibility when you consider the normal wear and tear say, three young children or the family pet, can inflict on a nice sofa. Not to mention the cost to repair and replace things frequently.
If it all seems a bit too risky and uncertain for you and just doesn’t align with your investment plans, then maybe you should consider another way to boost cashflow.
- Will it benefit your bottom line?
You might have already started counting the extra dollars a nice sofa and washer/dryer combo could rake in for your rental property.
But it’s important to bear in mind that today’s tenants are generally quite discerning. A budget barstool from the local op shop won’t cut the mustard in a modern fully furnished rental. At least not one you expect to charge a premium on.
The initial cost of furnishing your investment could run as high as $50,000, when you consider the price of appliances alone. Quality tenants expect quality finishes and won’t pay top dollar for anything less.
Can you afford the ongoing cost to maintain such a high standard of furnished accommodation? This, along with the potential for extended vacancies, needs to be factored into the equation when considering whether this strategy will help or hinder your overall cashflow position.
- How far do you need to go?
The other option that you might like to explore, if you’re not particularly comfortable with the thought of a ‘couch and all approach’, is to offer the market a few little extras to ensure you can attract and retain quality tenants.
Rather than chasing a few extra dollars by spending thousands, you could consider gaining that competitive edge in the marketplace by throwing in things like a fridge/freezer or a washing machine.
Storage is always at the top of a tenant’s wish list, so if bedrooms are lacking in wardrobe space consider installing built-ins or providing freestanding robes and shelving.
While a number of potential tax benefits are associated with furnished rentals, including the capacity to claim additional depreciation, it’s important to remember that no property investor has become wealthy just by minimising their tax bill.
However, if your property fits the fully furnished market and the potential upside is higher than the downside of additional vacancies and maintenance costs, then this could be an option worth exploring to get you ahead of the game.
About the Author
Since 2008, David Thomas has built a business aimed at servicing the needs of property investors, owner occupiers and small business owners. David is recognised as one of the top 10 independent mortgage brokerages in the country, David and his team have settled almost billions of dollars worth of residential and investment loans over the last decade.
Known for his straightforward, relatable style, David believes by educating people about property funding; they fare better in the market. By sharing his expertise openly, some of the people he educates will likely become his clients. It's a win-win approach.
David Thomas is a credit representative (Representative Number 506153) of BLSSA Pty Ltd, ACN 117 651 760 (Australian Credit Licence 391237).