FURNISHED vs UNFURNISHED RENTALS
The Pros and Cons
All things being equal, on an annual basis in 2009, a property will generate about the same amount of income furnished as it would unfurnished. The furnished version will command much higher rents in a few of the seasonal months, but that will be offset by greater amounts of time the property is setting vacant.
Seasonal income is at greater risk than long term unfurnished rental income. Vacation rentals are typically booked by older snowbirds, as much as a year in advance, leaving more time for circumstances to change prior to the arrival date.
Also, a vacation rental is discretionary spending, while a long-term unfurnished rental is a personal residence representing the person’s basic need for housing, and so the unfurnished rental lease is far less likely to be abandoned, regardless of most personal concerns.
Operating costs are much higher for a furnished rental. For example, the owner is required to continue paying phone, cable and Internet even when the property is setting vacant, or absorbing the costs of turning those utilities on and off as tenants come or go. Electricity must be maintained, and some amounts of heating and air conditioning must be supplied, otherwise risking damage to the furniture and appliances.
Every year, glasses and dishes will inevitably break, sheets wear out, towels fade, and linens get stained – requiring annual expenditures just maintaining the small everyday items that are part of the furnished package, in order to keep the property competitive.
But the greatest expense is in the furnishings themselves, and the true extent of that cost is not always understood by the landlord-investor. To properly outfit a furnished two-bedroom condo may require a cash outlay of $20,000, a cost which might be depreciated over a 10-year life expectancy, so the annualized cost is $2000 per year.
However, whether the purchase of the furnishings is financed on a credit card, or paid for in cash, there is an opportunity cost in using the $20,000 to buy furniture, as opposed to investing the money somewhere else, or avoiding the financing by leaving the property unfurnished.
Let’s suppose that the owner could have invested the $20,000 cost of the furniture somewhere with a 5% average annual return over ten years – then the additional cost of using the money to instead buy furniture represents a $1000 per year (lost) opportunity cost, in addition to the depreciated annual expense of the furniture itself.
On the other hand, if the owner financed the purchase of the furniture, then the annual cost of the interest on the financing adds to the total annual expenses of the rental property.
We don’t give tax advice, and we always recommend that owners speak with an accountant, but there may be an important tax question to be considered. As we understand it, an owner may only employ a rental property for personal use for a maximum of 2 weeks, or 10% of the total amount of time it is rented, whichever is less.
If the owner exceeds that limitation on personal use, there is a risk of losing the right to depreciate the property and furnishings, or to write off repairs, maintenance, utilities and other operating costs, while any rental income would remain taxable. So, if the owner stayed in the property for a month, those additional two weeks could prove to be very expensive.
Our experience is that some types of properties work far better for seasonal rentals than others. For instance, winter visitors flock to condos because the heated community swimming pool creates opportunities to socialize and make new friends, whereas furnished homes do not present this sort of social opportunity, in addition to the fact that pools at houses are not generally heated, while condo community pools typically are.
There is not a lot of value in having a swimming pool in your winter vacation home, if the pool is unheated and basically unuseabel.
Most winter visitors are older people who might be more inclined to rent a ground floor condo, rather than deal with a 2nd or 3rd floor location requiring climbing up and down stairs several times each day.
A final consideration are the location and amenities. The Racquet Club at Scottsdale Ranch, for example, is a beautiful tennis resort, with many year-round residents, a 24/7 manned guard gate, active clubhouse with fitness center, tennis pro and an activities director. This sort of property has a better chance of attracting vacationers all through the year, rather than a furnished condo in a complex with minimum amenities which would be more likely to set vacant off-season.
All things considered, if your main purpose in furnishing a rental is for your own use, while whatever income it generates is secondary and serves simply to help offset some portion of your expenses, then by all means furnish it, recognizing the true costs involved.
On the other hand, if the primary purpose in owning the property is strictly as an investment, with the intent of maximizing income, you may do better to leave it unfurnished. Besides, you could still come out to check on your property once or twice each year, consult with your property manager, and then write off your travel and the cost of your lodging as legitimate business expenses.