It’s been the theme of a recent television series and the topic of several articles featured in the media lately. Of course, we’re talking about luxury real estate.
Plush and luxurious homes seem to be experiencing a resurgence in popularity lately, and while these types of properties certainly look enticing, we thought we’d take a look at whether they make a worthwhile investment options and discuss some factors recently influencing this segment of the market.
What defines luxury property?
One of the issues investors face when deciding whether a luxury property is a worthwhile purchase, is figuring out exactly what makes it ‘luxurious’.
While a general definition explains that luxury real estate refers to properties targeted towards high-net worth individuals, this description is quite broad and whether a property will appeal to buyers or tenants can really depend on their individual perceptions. Luxury, like beauty, can be said to be in the eye of the beholder.
Of course there are some resounding factors which can influence whether a property will appeal to a potential buyer or to the types of tenants who will rent a luxury home. However some of the features, as listed by Christies’ International Real Estate in a recent luxury market report, could also be reasons everyday investors decide to make a purchase. For example the location, convenience and privacy of the property.
Perhaps the easiest way to describe a luxury property is to say that they are exclusive, contain something out of the ordinary and that they exude a certain level of class, comfort and quality. For some this could mean an apartment with ocean views and for others a bathroom equipped with a luscious Jacuzzi.
At the end of the day, these properties come at a price which puts them out of reach for some and reserves them for only the few who can afford them.
Luxury properties can achieve lavish rents
A recent tour through Australia’s most expensive rentals by News Corp revealed just how much some tenants are willing to pay for the opportunity to live in or stay at some of the classiest luxury properties money can buy.
A five bedroom, five bathroom property available for holiday rental as either a short or long-term lease achieves an extraordinary $28,000 in weekly rent for its owners.
While this amount was by far the most expensive of the properties mentioned in the article, the weekly rents for other luxurious properties located all around the country were still exceptional, ranging from $1,000 per week for a property located in Tasmania to $3,577 for a three bedroom home at Sanctuary Cove on the Gold Coast.
The wide range in rents achieved is another indication that the success of a luxury investment property could be tied to its location. For luxury property investors, location is important for future capital growth and also a factor in whether they can achieve consistent tenancy, particularly if the property is listed only for holiday or short-term rental.
A noteworthy report from Knight Frank in their latest Global Cities Index also indicates luxury accommodation isn’t experiencing the growth rates this area of the market has accomplished previously.
In the year to September 2016, the average annual price growth was 3.8 per cent. The rate of growth declined in eighteen of the thirty seven cities tracked by the study; the growth in the previous quarter had been 4.6 per cent. However, the two Australian cities mentioned in the report went against the trend in decline in growth. Melbourne prices went up 10.2 per cent year on year, while Sydney was up 8.1 per cent in the same period.
Lenders may offer big incentives as growth slows at the top end of the market
A recent article in the Australian Financial Review exposed confidential documents that suggest rich property buyers are being offered large incentives to buy mansions in the glitziest of the nation’s post codes.
It was reported that Bankwest is planning to drop mandatory deposits for mansions worth more than $5 million by up to $500,000, or raise the loan-to-value ratio from 50 per cent to 60 per cent.
The incentives could be seen as a way to woo high-net worth individuals back into the luxury property market after lenders saw a decline in the number of investors due to tightened lending conditions introduced last year.
The assets found are expensive, but they do equate to valuable deductions
If you’re planning to rent out a luxury property purchase, you must factor in the costs of repairs, maintenance and capital improvements.
As many of the items within these properties are expensive, it can become quite costly when the items experience wear and tear. Items may need to be replaced more often so that the property maintains its luxurious status.
As with any income producing property, there are tax benefits associated with renting a luxury home. Any repairs and maintenance costs can be deducted in the year the expense is incurred. Owners can also claim other expenses such as interest, property management fees, insurance and council rates and depreciation deductions can be claimed for the structure of eligible buildings and any plant and equipment they contain.
Some of the areas which may host additional deductions featured in luxury properties might include that luscious Jacuzzi or the devices and furniture required to create an at home cinema experience. Outdoor areas such as tennis courts feature depreciable items such as nets and rollers which can also add to the deductions an investor can claim at tax time.