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1 March 2021

The Ultimate Build to Rent Guide

Written by Tuan Duong
Founder & Director

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. 

Most rental houses are owned by individual investors. 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 have 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’ve got 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, there is only one party that 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 as commercial office spaces and commercial retail spaces. 

build to rent graphic

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, there’s a whole new opportunity for beginner investors 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 that are 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, they have various amenities, and they’re very much community-driven. 

Build-to-sell projects are often developed as quickly and cheaply as possible. Building to rent properties, on the other hand, are built with adaptability and durability in mind because the developers are the ones retaining the premises.

building graphic

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, it’s likely that these developments will attract younger tenants who enjoy the flexibility of renting. So, you should definitely 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 primarily 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 why 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 have to pay on their build to rent projects (and residential land in general) are generally higher than what commercial developers pay. 

For example, in NSW, it could be as high as 15% of the land’s gross market value. That’s almost three times more than commercial rates that are around 5.5%. 

However, in August 2020, the NSW government has recognised the high tax rates with the State Revenue Legislation Amendment (COVID-19 Housing Response) Bill 2020 (NSW) currently proposing to reduce land tax by 50% 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

Managed investment trusts (MIT) are commonly used in the commercial sector by foreign investors. 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, currently, 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 make sure that you claim all your property tax deductions - especially depreciation

As a building gets older, its structure and the assets within the building 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: 

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, who specialises in tax depreciation schedules. 

A tax depreciation schedule is the assets' value report compiled by the quantity surveyor that details the value of both your Division 40 and Division 43 assets and how much it has depreciated and will depreciate in the future.

To find out more, make sure to check out the reasons why a tax depreciation schedule is essential for EVERY property investor - including build to rent investors. 

Key Takeaways

With long-term investments in mind, the build to rent strategy has become a commonly discussed strategy among many different institutions, including developers and industry superannuation funds. 

However, the 30% withholding tax rate, high land taxes and GST concerns remain a common hurdle that 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 definitely want to consider maximising on the tax benefits that are available to you - 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 their investments.

To receive a free estimate on your build to rent depreciation, or to request a sample report, get in touch with us today!

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.
Tuan Duong is an award winning Quantity Surveyor and leads Duo Tax Quantity Surveyors – Australia’s fastest growing provider of Tax Depreciation. Reach out to him directly on 0431 154 356 or email tuan@duotax.com.au
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