20/06/2012

With vacancy rates at razor thin levels across much of the country, landlords may as well just sit back and enjoy the good times of strong rents and their pick of best tenants, right?

Well not so fast… The rental market is a notoriously fickle beast, and 10% annual rent increases can disappear real quickly. Smart investors are always on the lookout for ways to manufacture a rent increase, and while renovation may be the more typical strategy, property managers say going after the furnished market can be a dependable, if often overlooked, strategy as well – if you do it right.

Craig McGuire, senior property manager at Charles & Stuart in Sydney, says like most things in real estate, location is key. Chances are, he says, if you’re close to the CBD or a university you may want to consider fitting out your rental for the furnished market. He says landlords can generally count on a big boost in rent if they do it right.

“You are attracting two types of clients typically with the furnished market – either the student market or the corporate client where the corporation or the business may be funding their stay”

Also, owners in mining centres may want to consider furnishing their properties to better accommodate temporary workers, though demand is running so hot right now in many of them that landlords could likely rent a place without windows.

But when the oomph starts to come out of the boom, landlords may want to consider furniture in order to go after the corporate market.

But, of course, owners do face several trade-offs when they consider going after the added cash that comes with fitting out a rental.  McGuire says that landlords need to be prepared to deal with higher vacancy rates associated with shorter rental periods. The corporate and student markets, he says, tend to be short term tenants, rarely signing on for a full year.

But the added vacancies and hassle of short term tenants may pay off in the end if your property fits the bill and you have the right property managers. While that could be you, most experts agree that you’re probably best off getting a professional to manage a furnished property because of the added work associated with keeping it filled.

Does your property fit the bill?

Mcguire says there are two main types of properties that immediately come to mind as possible candidates for a furniture makeover. Properties, usually units, close to the CBD or to a university fit the bill because of the easy access to likely tenants looking to set up home without much to set up of their own.

“It just needs to be fully furnished and equipped so that somebody could walk in with just their suitcase, hang their clothes up and they’re comfortable,” says Kerris Hodge of The Apartment Service a Sydney area rental agency specialising in corporate accommodation. The company has about 400 mainly one and two-bedroom apartments on its roster of both short and long term rentals.

The company features apartments throughout the city, with some in affluent suburbs as much as 25km from the CBD. She says proximity to the CBD is often less important to corporate clients than access to transportation and amenities like good restaurants and attractions.

If you’re considering going the furnished route, be sure to get multiple estimates from reputable property managers specialising in the furnished rental market. Remember, just like seller’s agents, property managers are aiming for your business, so you should remember that their advice is not objective. Beware of inflated numbers and check rent.com.au or other websites for comparable furnished rentals.

Drawbacks

While the promise of a boost in weekly rent will be enough to pique the interest of most investors there are several key drawbacks investors should weigh  before heading down this path.

First thing to consider, McGuire says, is the fact that those rent cheques may be a little more sporadic. “The owners first need to weigh up whether  the balance between receiving a higher rental return offsets  the fact that they’ll have higher vacancy rates given the higher changeover of tenancies,” he says.

Both student and corporate tenants tend to be shorter term with tenancies rarely lasting more than a year, and often much less. So, you can bet you or your property manager will spend more time, and money, hunting down the next student or corporate titan to take over.

Hodge says her agency offers both short and long term apartment rentals, but acknowledges that the short term is far more the norm. More than three-fourths of the nearly 400 properties on their roster are offered on a short term basis, with six to eight week stays the norm.

Corporate clients tend to like the flexibility and often, she says, her owners do as well. “This could be a property they purchased as an investment, but they live up in the blue mountains and they come down to Sydney two or three weeks a year and they want to stay in their property, so therefore they will want to have it on the short let market.”

While short term comes with added vacancies and higher commission – around 15% at The Apartment Service – Hodge says her agency will often get as much as 40% more for a short term rental. So the math, she says, often works out in the owner’s favour.

But property manager McGuire says investors need to also remember that they will have a whole lot more stuff to maintain. “The replacement costs can be high,” he says, “because the owners are required to obviously maintain the new furnishings inside the apartments.”

This means that in addition to getting calls about a leaking faucet, owners may have to send someone out to fix a broken bed leg or a shorted lamp. If it was there when they moved in, it is expected to be in working order until they move out, and the more you put in the apartment, the more that can go wrong.

It does not stop with just replacing the broken items a tenant has decided they cannot do without either. McGuire says you also need to worry about replacing worn items in order to boost a furnished apartment’s appeal – especially if you are counting on a well-heeled clientele.

Shop right

So if you have done the math and weighed it out, and you think entering the furnished market is the way to go, just where should you go to get the right furnishings to attract the right tenants?

“Aiming your furniture to the type of market that you’re trying to attract is key,” says McGuire. “A lot of the dorm accommodation or furnished studios that are in a close proximity to the universities can be fit out with minimal expense as long as they are offering the basic necessities in the way of computer desk, and table for the tenant to work at.”

Consider some of the middle range furniture outlets that specialise in sturdy and affordable furniture. 

“There is no point in putting $15k – $20k in furniture into student accommodation because you’re not going to see the return for it and you’re probably going to see a certain amount of wear and tear on it that might not be covered by the 4-week bond,” he says.

“But obviously if you’re aiming for a corporate clientele then they are going to expect to go in there and if they are paying rents in excess of $1,000 per week, then they are going to expect the good quality furnishings.”

Bernadette Ferrari, a Brisbane area interior designer, says Ikea and other outlets specialising in pressed-wood style furniture should be avoided no matter what market you’re going after. “That chipboard stuff just doesn’t last,” she says. “It’s much better to stick to real wood furniture when you can, or glass or metal, because otherwise you might find yourself replacing things on a yearly basis.”

She says glass tables should be a mainstay because they do not chip very easily and are tough to scratch. Another key tip she says is to go for leather sofas and chairs, as opposed to fabric because leather cleans up much easier. “Fabric sofas, especially, wear very easily, and they stain and sag and look pretty [badly] when you spill something on them,” she says. “Once it’s stained that’s it.”

Hodge from The Apartment Service says neutral colours are key. Also, she says, owners should aim for the middle of the road when it comes to furnishings. “You’re looking for a sort of a Freedom-standard of style and above,” she says. “You don’t need to have the really luxurious furniture, though you don’t want it to look like a Freedom showroom either, so you need to pull in other pieces.

“It’s important to finish it off so that you’ve got artwork on the wall and floor rugs in the lounge room just to pull it all together.”

Ferrari agrees, and says she understands if landlords want to hit Ikea for the smaller stuff. “It’s OK to accessorise with stuff from Ikea,” she says. “Get your lamps or stuff like that – they can look good and they can save you some a few bucks.”