NRAS is an investment break worth considering

So the talk is that NRAS might be stopped in the upcoming May Federal Budget.

For mine, this is one government scheme that really works for the building industry and low-income households.

We have worked on several NRAS-based new projects.

I support the media blast by Metro and the UDIA.

Read on to see what we wrote about NRAS back in 2011.

To my surprise, very few investors (and sadly fewer property gate-keepers) know about NRAS.  And if they know something about it, then they are dismissive of it.  And mostly – I feel – out of fear and/or ignorance.

Yes, like most government schemes, what NRAS is and its merits, have been poorly communicated.  And in some instances, its application further entrenches its incorrect “welfare housing” persona.  But overall, it is a great scheme and too few investors (and developers) are taking the $10,000 annual rental subsidy seriously.

For mine, NRAS is one government scheme that really works for the building industry and low-income households.

So what exactly is NRAS?

The National Rental Affordability Scheme (NRAS) is a federal government initiative designed to tackle the issue of affordable housing.

NRAS is not a public or social housing programme, but rather a tax incentive to provide quality housing at below market rental rates.

Run in conjunction with state governments, NRAS aims to induce more investment in the lower price range of the residential construction and rental market by offering inducements to investors who participate in the scheme.

NRAS offers property investors a tax-free incentive for each property while participating in the scheme for a maximum of 10 years.

Currently, this incentive is $9,524 per year for every NRAS dwelling an investor owns, comprising a federal government contribution of $7,143 per dwelling, available as a refundable tax offset; plus a state or territory contribution of $2,381 per dwelling per year, as a cash payment or in-kind financial support.

In return, rents for NRAS dwellings must be charged at no more than 80% of the market rent valuation and there is to be a maximum of one rent increase for each dwelling each year.

In Queensland for example, the state government maintains a list of NRAS-approved tenants, who must meet strict eligibility requirements.

When a vacancy occurs, eligible rental applicants are referred to approved tenancy managers who manage NRAS properties on behalf of owners.

Standard residential tenancy laws apply to NRAS properties just as they do for any private residential investment.

In other words, the same rules regarding evictions, maintenance obligations and responsibilities of tenants apply to NRAS tenants as they do to other tenants in the private sector.

Rents are indexed annually in line with the percentage change in the rental CPI component, except in years four and seven when independent valuations are required.

And, importantly, investors may exit the scheme at any time with appropriate notice and without any financial penalties.

In general, NRAS projects are well-located in terms of jobs, amenities and public transport.  And in general, the design and quality of NRAS dwellings compares favourably with any private non-NRAS dwelling.

NRAS properties often co-exist within developments with other non-NRAS product.

Some of the points of difference that NRAS offers to property investors are:

• All the benefits of a normal investment property with added annual tax-free government incentives

• Investors can apply property expenses, non-cash deductions and allowances against a lower assessable rental income, increasing the gearing benefit

• More than 1.5 million Australian households are eligible to rent NRAS properties, hence vacancy risk is negligible

• Tenants are selected on their potential to be good tenants and their capacity to meet strict eligibility requirements

• In many markets, NRAS properties often deliver a cash flow positive investment

• Importantly, self-managed super funds can purchase

• NRAS dwellings are private property – no government holds or caveats.

So here we have a scheme that shows many investment properties as cash-flow positive in the first year – and these are more often than not backed up by impressive (well by residential property standards) independent financial analysis.

What’s not to like here?  You are making money from day one; providing affordable rent for those that are finding it a bit hard; have a ten-year rental guarantee (assuming the government doesn’t water down or scrap the scheme); hassle free-management (on paper at least) and a box of chocolates from the government every year.

It appears to tick all the boxes.

Several of our developer clients inform us that their NRAS product is now the first to sell to investors.

Yet the banks are scared of it and will only finance 70% of the purchase price.  Some banks flatly refuse to be involved.  So, too, do too many solicitors, accountants, loan brokers and real estate agents.

True to form, valuers are discounting end prices by 20% – one assumes because the owner can only charge 80% of market rent and most valuers won’t include a subsidy when determining value, despite it coming from the government and being a 10-year programme.

Yes, NRAS is somewhat new; it hasn’t been that well communicated and it is a government-funded subsidy.  But welfare housing it isn’t and gone are the days where one’s residential investment strategy was as simple as “buy and forget”.

Our mindset is that property investors will need to look for every break they can get.

NRAS is a break worth considering.

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