Potential Property Strategy - What do you think?

[watchful]

Hi all,

Have an idea that may help out some PIs. I am not fussed about sharing info so appreciate any comment on this.

Originally came up with the concept for a small two bedroom apartment my wife and I used to own. One major problem we had was attracting permanent tenants vice many transients (students) that you tend to get with these.

Anyway, I tried to figure who my target market was and how I could get them to stay longer. Target market was invariably young (18 - 25 yrs), ambitious (paying $350 pw at that age shows ambition I believe), low net worth, Generation Y (a big consumer). Considering this, an idea sprouted in my head.

How about furnishing the property to reasonable high spec (nothing new there) but with highly depreciable goods as most gadgets are. The deal. If the tenant agreed to a long enough fixed tenancy period (say three years - ie a university degree) and contribute rent (at a level slightly above the norm but sufficiently high enough to cover costs of chattels less depreciation) that they could purchase the chattels at market rates upon the termination of the Tenancy agreement.

What's in it for the LL?

Long term fixed tenancy (stability) including traditional downtimes for APT tenancy (ie Xmas break)
Higher rent
Large Depreciation on chattels
Renewed and rejuvenated chattels at the end of the tenancy to encourage new tenants
Tenants taking better care of the chattels and therefore probably the property.

What's in it for the tenant?

Stable tenancy
A kick start of assets to own upon termination of tenancy
The newest, latest gadgets to wow your friends with,
Perhaps the ability to choose furniture and electronics up to a said value prior to commencement of the tenancy
A small gain in Net Worth at the end of the tenancy

Complications I see would be that early terminations of tenancies would have to have an appropriate clause appended to the standard contract.

Would appreciate any comments regarding tax implications also. As far as I see the good would be owned by yourself until the termination ended and onsold at market rates (or written off as a gain if you want to be really kind) so shouldn't break any existing tax laws. We didn't try it ourselves so can't comment on it's actual practicality.

Comments?

[Re@der]

This is a very common practice in Singapore with Expats. You buy the gadgets and furniture you want and buy it at prearranged depreciated prices at the end of your tenancy. The area of difficulty is the level of rent required to depreciate these assets. But your side benefits of care and length of tenancy are very real.

However in NZ Fixed length tenancies for residences tend to be treated very liberally and this would require a new replacement tenant to take on furniture and chattels, that they did not choose, at a high rent.

[watchful]

Good point re NZ tenancies. You would need to ensure the 'deal' would be advantageous for the tenant to ensure they honoured the tenancy and it's terms to it's full conclusion.

I had an idea the concept would've been used before. It seemed like a pretty logical thing to do to attract tenants.

[k1w1]

Another potential downside is that the wow factor of said gadgets would be faded somewhat after 3 years.

Technology and fads move so fast that in 3 years your student will be wanting the next new thing - not that old rubbish :-)

I guess that's one of the reasons why depr is so high on those articles.

[watchful]

True, however a 32" LCD and leather couches etc are still pretty good going for a student. I certainly didn't have that sort of stuff when I was at Uni, my student loan went mostly into beer chits which made paying it back all that more frustrating.
I personally think some/most depreciation rates would make this sort of transaction quite beneficial ie 48% P.A on a personal computer would render it virtually worthless in three years anyway.

[jporteous]

Target Your Market

Hi

Interesting concept.

Re: Students. I wonder if you should be pretty targeted at who you are marketing too? I have a mix of students. The younger ones (early 20s) are pretty hard on gear. However maybe targeted older medical students? who not only need to study harder (less partying) but are around for longer. I have a few medical students who are have started working at the hospital. I may be lucky with them but they have been brilliant. Lot less hassle than my other group of students down the road.

You could also approach one of the larger accountancy / legal firms in town with your concept. They might be keen to recommend their new grads / younger employees to your accomadation - esp if high spec. These people would be a step up on the students. It also benefits the company as their new employees are happy & are locked in for 3 years.

Just a thought

jono

[Bob Da Builder]

providing that the tenants don't do a runner after you sign them up for 3 years with their newly found TV, sterio couch bed ect sounds like a great idea.

Similar to selling a furnished apartment ect.

[watchful]

providing that the tenants don't do a runner after you sign them up for 3 years with their newly found TV, sterio couch bed ect sounds like a great idea.

Similar to selling a furnished apartment ect.

Yep, theft of your gear is possible in any sort of 'furnished premises' type arrangement. As mentioned I expect you would need to retain ownership of the items until the fixed term had expired, that way the goods are your own for depreciation purposes. Then hope you haven't tenanted the West family. Love that show on TV3.

Am not planning on using the strategy myself (our IPs wouldn't suit that type of structure - and not planning on any CBD APT purchases in the short-mid term), but just thought I'd throw it out there. Hopefully it may help someone to stay afloat in our current environ.