The Ultimate Build to Rent Guide
Date: 26th August 2023
Currently, at least one-third of Australians live in rental homes. The statistic continues to grow in our capital cities, with at least 70% of Sydney residents renting their homes.
Individual investors own most rental houses. So, unfortunately, this means that rental contracts are generally short-term, and under most contracts, landlords have the power to cancel the rental agreement and evict the tenant on 60 days’ notice.
The lack of rental security has resulted in at least 10% of all renters having had to move more than ten times.
But is there a solution? There could be!
Have you heard of “Build-to-Rent?”
Build-to-rent has become a highly discussed topic in the institutional investment space, with private real estate funds, developers and industry super funds all showing interest.
So, what is build-to-rent, and how does it work?
We have the essential guide to help you better understand this new way to invest in property!
What Is Build-To-Rent?
In simple terms, build-to-rent refers to a residential development in which all apartments are owned by the developer and leased out to various tenants.
So, instead of building to sell to multiple individual owners, only one party owns and leases out the residential development.
The benefit goes both ways: the developer owns and manages the units as long-term income-generating assets, and the average renter has much more rental security than they currently do, renting from an individual property investor.
This is because, as an asset class, build-to-rent has similar resilience to commercial office spaces and retail spaces.
So, What Are the Pros and Cons of Build-To-Rent for Investors?
As with any property investment, there are both pros and cons to the build-to-rent investment strategy.
Potential Advantages
1. New investment opportunity for investors:
Because the build-to-rent model is particularly attractive in the institutional investment space, especially with private real estate funds and superannuation funds, beginner investors have a whole new opportunity to invest in cities that would otherwise be too expensive.
So, instead of buying a property in the city, investors can invest in the trusts and funds developing the build-to-rent residential property.
As a beginner investor, this could help provide a stable income to finance future investments.
2. Build-to-rent projects are designed to attract and retain tenants:
Build-to-rent is all about keeping the tenants happy. So, the buildings are well maintained, have various amenities, and are very much community-driven.
Build-to-sell projects are often developed as quickly and cheaply as possible. On the other hand, build-to-rent properties are built with adaptability and durability in mind because the developers retain the premises.
All these qualities are attractive features for tenants looking for rental security. So, you’re likely to secure tenants a lot easier and for a more extended period of time, ensuring that investors are receiving a steady income.
Disadvantages
1. Possibility of vacancy periods:
While build-to-rent projects certainly have many attractive features like gyms and communal social spaces, there is always that possibility that finding and retaining tenants doesn’t always work out in your favour.
Being predominantly built in larger cities, these developments will likely attract younger tenants who enjoy the flexibility of renting. So, you should consider the possibility of short-term occupancy and covering the cost of vacancy periods.
2. You can’t reclaim GST from tenants:
According to the Australian Tax Office (ATO), build-to-rent developments provide residential rental accommodation. Renting out residential accommodation is input taxed. This means that:
- Developers can’t claim GST credits on the buildings construction or any other ongoing costs of the development; and
- GST doesn’t apply to the rental payments you receive — in other words; you can’t reclaim GST tax from your tenants
How Does Build-To-Rent Work For The Average Individual Investor?
Typically, a build-to-rent development is owned by a large institution, such as a superannuation fund or a management investment trust. The institution then partners with a developer who specialises in build-to-rent developments.
For example, Australia’s biggest super fund, AustralianSuper, has recently invested in the build-to-rent sector. They partnered with a Melbourne-based developer, Assemble Communities.
Funding for the development comes from investors keen to take advantage of reliable rental returns and long term growth.
So, if you’re an individual investor looking to get involved in a build-to-rent development, you can do so through an institutional investor such as AustralianSuper.
Are There Other Tax Implications for Build-To-Rent Projects?
Many investors and developers believe that the current tax policies governing build-to-rent developments are the main reason Australia hasn’t seen significant growth as with countries like the UK and the USA.
Stamp Duty and Land Taxes
In most Australian States and Territories, the stamp duty and land tax investors must pay on their build-to-rent projects (and residential land in general) are generally higher than what commercial developers pay.
For example, it could be as high as 15% of the land’s gross market value in NSW. That’s almost three times more than commercial rates, around 5.5%.
However, in August 2020, the NSW government recognised the high tax rates with the State Revenue Legislation Amendment (COVID-19 Housing Response) Bill 2020 (NSW), proposing reducing land tax by 50% over the next 20 years for new build-to-rent developments.
Hopefully, the other States and Territories will follow suit as well.
The 30% Withholding Tax Rate
Foreign investors commonly use managed investment trusts (MIT) in the commercial sector. For example, an industry superannuation fund may buy an office building through an Australian MIT. The superannuation fund then has access to a share of an income stream, such as tenants’ rent.
Generally, the tax withheld rate for foreign investors is 15%. However, the withholding tax rate on residential real estate, including build-to-rent, is double that. So foreign investors have to pay 30% withholding tax on build-to-rent income if they wish to invest in developments in Australia.
What About Depreciation?
Build-to-rent developments are likely to offer substantial tax benefits for the property investor. While all property investors qualify to claim tax depreciation deductions if their real estate generates an income, brand new properties typically bring in higher deductions.
So, you’ll want to ensure you claim all your property tax deductions — especially depreciation.
As a building gets older, its structure and its assets are subject to general wear and tear. In other words, each year, the value decreases and, thus, depreciates. These deductions can be claimed under two categories:
- Capital works deductions; and
- Plant & Equipment depreciation.
To claim your property’s depreciation deductions, you’ll have to identify the value of the property and all its fittings and fixtures.
To have your property evaluated you’ll have to consult with a quantity surveyor (QS) who specialises in tax depreciation schedules.
A tax depreciation schedule is the assets’ value report compiled by the quantity surveyor. It details the value of your Division 40 and Division 43 assets and how much they have depreciated and will depreciate.
Key Takeaways
With long-term investments in mind, the build-to-rent strategy has become commonly discussed among many institutions, including developers and industry superannuation funds.
However, the 30% withholding tax rate, high land taxes and GST concerns remain a common hurdle many interested investors face.
Suppose you have already ventured into the build-to-rent sector or are looking to do so in the future. In that case, you’ll want to consider maximising the tax benefits available — like depreciation.
The Duo Tax team has helped thousands of property investors maximise their deductions and save thousands of dollars through the power of investment property depreciation schedules.
While the tax burden for build-to-rent may be high in some areas, our objective is to help you take advantage of the available benefits and get the most value out of your investments.
Disclaimer: Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to property investors. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal or tax advice. You should, where necessary, seek a second professional opinion for any legal or tax issues raised in your investing affairs. Article sourced from duotax.com.au
