Case study – NRAS smoke screen
The National Rental Affordability Scheme (NRAS) started out as a great initiative by the Australian Government to stimulate the supply of new affordable rental dwellings. Watch out though, as some deals end up being a smoke screen to hide problems down the track.
The NRAS subsidizes rent to allow tenants to live in an area they would not normally be able to afford. For example – police on entry level wages who need to live close to their workplace in Potts Point. Property owners are paid a gap between the rent offered and the market rent, and this is usually agreed over a time period of 10 years.
Generally, NRAS deals can appear great on paper for an investor looking for a low-risk cash flow addition to their portfolio. In a current example, a dual occupancy recent build in Gladstone with 3bds + 1bd was offered to an investor for high $400,000. The sales pitch states the property is currently rented out for $416 per week, representing 80% of a $510 per week rent. There is nine years left on the NRAS deal, with tax credits at $21,000 per year.
Gladstone vacancy rates are currently sitting at 8.3%. Approximately 160 three and four bedroom homes are advertised to rent for under $200 per week. Five NRAS three bedroom homes are currently renting at $170 per week.
Like other investors in the area, the owner of the property in this case study purchased NRAS property in Gladstone and is now trying to dump the property for the best price they can get and take the loss.
The real rent when the current tenants’ leases come up would be $170 per week for the main property and $100 per week for the smaller (1 bedroom) in the dual occupancy, equating to $270 per week. Even on a reduced purchase price of $450,000, this is a yield of only 3.1%. This will mean the purchaser will be looking at many years in a significantly negatively geared situation.
Under NRAS, there will be eight years of $21,000 tax credits but this will cease at the end of the period. After this time, the investor would be looking at market rent. Few realize it, but NRAS properties really hurt your ability to service loans, as the banks do not include the tax credits as income in servicing calculations.
The marketers of these properties are hyping the recently announced tourism infrastructure, which is definitely a plus for the area. Gladstone is not a place investors need to avoid, but it’s important to understand what constitutes real value along with realistic projections for future returns.
The biggest lesson here is to focus on all the numbers. Many focus on the NRAS grants themselves and spend plenty of time doing due diligence on them. They see the low discounted rent and think well ‘I’ll easily get that’. But this would be incorrect. Sometimes even a rent discounted by 20-25% is not achievable, or rents have dropped so far, that you will have to go much lower to attract tenants.
As the saying goes . . buyer beware.
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Crave Property Advisory is a unique property strategy and buyers agent service. As the only independent and unbiased advisory that can help you use any property strategy Australia-wide, Crave’s services extend to home, investment and commercial property. A highly client focused organization, Crave developed the Modular Investing System (MI System) to provide clients with the ability to use a tailored mix of strategies and efficiently build profitable portfolios that create lifetime income.
Debra Beck-Mewing is the CEO of Crave Property Advisory, and has more than 20 years’ experience in property investing, Australia-wide. She has used a range of strategies to build her property portfolio including renovating, granny flats, sub-division and development. Debra is skilled in identifying development opportunities, and sourcing properties that have multiple uses and multiple exit strategies. She is a Qualified Property Investment Advisor, licensed real estate agent and also holds a Bachelor of Commerce and Master of Business.
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Disclaimer – This information is of a general nature only and does not constitute professional advice. We strongly recommend you seek your own professional advice in relation to your particular circumstances.