Investing in fully furnished apartments can offer big tax benefits

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Investing in fully furnished apartments can offer big tax benefits

Real Estate

- Monday, 21 November 2016

ANOTHER season of the hugely popular DIY reality television show The Block is over, with the winners walking away with a near-record-breaking profit of $815,000.

But the interesting thing about purchasing one of The Block apartments — other than the fact it is famous — is that it comes fully furnished and ready to live in.

These types of properties are often referred to as “turnkey” homes, because all you need to do is turn the key in the door and you are ready to go.

This year, all of the apartments on The Block were auctioned off to investors, which begs the question: Do turnkey apartments make a good investment?

Fully furnished, ready to live in apartments are often regarded as a compelling investment option due to tax benefits. Investors are able to claim more in depreciation dedications as the furniture and fixtures, classified as plant and equipment, depreciate at a much quicker pace than the apartment itself.

An analysis from BMT Tax Depreciation suggests that the investors of The Block apartments this year could claim an average of over $2.2 million in depreciation deductions on each unit.

But while the additional cash flow property investors could receive from depreciation deductions is compelling, it isn’t necessarily the way to go.

Winners of The Block 2016, Will and Karlie, celebrating their $815,000 profit.

Winners of The Block 2016, Will and Karlie, celebrating their $815,000 profit.Source:Channel 9

TO FURNISH OR NOT TO FURNISH?

Bradley Beer, CEO of BMT told news.com.au that purchasing a turnkey apartment for tax benefits shouldn’t be an investment strategy.

 

“If [a property] has more depreciation then that is good but it is not what makes the property a good investment,” Mr Beer told news.com.au.

Yes, claiming more deductions can add to your cash flow after tax but there are also a lot of mitigating factors that an investor must consider for this to be worth it.

“A positive thing about having furniture is the fact [the property] gets more deductions. With plant and equipment you get to claim more depreciation on it. But at the same time you need to buy it. So buying the furniture to get a deduction — you don’t spend a dollar to save 37 cents.”

The more important question to ask, according to Mr Beer, is: Will a furnished property yield you greater rental returns?

“Effectively, if spending money on that furniture means you get enough additional rental return then it can be a good strategy. The difference is someone who doesn’t buy furniture will have to pay more for the place to live in.

“You buy the furniture if the rental return substantially increases over and above what the yield can be expected to be from that property otherwise.”

This means where you purchase the investment will determine whether or not investing in a turnkey apartment is a good strategy. The areas which can be lucrative investments are those where people are likely to be more “transient”, such as in the CBD (business travellers) or near universities (students).

“Actually choosing where that property is and then deciding to furnish it is the more important question,” Mr Beer told news.com.au.

The Block auctions got heated as investors vied for the luxury, fully furnished apartments. Picture: Ian Currie

The Block auctions got heated as investors vied for the luxury, fully furnished apartments. Picture: Ian CurrieSource:News Corp Australia

DEMAND IS GROWING

Nigel Napoli, Director of Savills Residential Project, said he has noticed rising interest in turnkey properties in CBD areas.

“In the West Village, Parramatta, as part of the release of the penthouses and sub-penthouses, the developer EcoWorld has partnered with interior design specialists Coco Republic to offer design packages to the purchasers of the remaining penthouses and the remaining three bedroom apartments,” he told news.com.au.

“Parramatta is a growing CBD with many international firms which is why this could be appealing to a number of international investors.”

Demand for turnkey properties is also seen in the owner occupier segment too, driven by downsizers.

“For buyers who are making a complete lifestyle change, for example buyers who are downsizing from a very large home with very large furniture, like the idea of a stylist being able to assist in choosing what will suit their new lifestyle,” Mr Napoli said.

“Styling has become a big part of the selling process and, moving forward, our obsession with designer furniture will see styling a part of the selling process.”

Another turnkey development marketed by Savills is The Golf House Residences in Surry Hills, which has partnered with Collette Dinnigan to “infuse her signature style and ethos for elegance into the interiors”.

The rise of Airbnb is pushing demand for turnkey investments up in holiday areas, said David Wood, real estate agent for Hockingstuart Albert Park, and selling agent of Ben and Andy’s apartment on The Block. But investors should be prepared for the volatility of the short-term rentals market.

“The downside of furnished rentals is you can have larger vacancies than with unfurnished properties that are traditionally a 12 month lease,” Mr Wood told news.com.au.

He also added that investors will often need to create a turnkey investment themselves, with fully furnished turnkey apartments available for sale being rare in the current market.

“They are very unique in regards to sale properties. Obviously with letting properties there are a number of properties that are fully furnished,” Mr Wood said.

Source: http://www.realestate.com.au/news/investing-in-fully-furnished-apartments-can-offer-big-tax-benefits/news-story/013fb55317afdf36e428e8530e42eba6