NRAS ARTICLE – L J Gilland Real Estate

Hi Valued Clients, Associates & Friends,

Article of interest below re NRAS for your perusal, information and feedback.

quote”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.

So what exactly is NRAS?

The National Rental Affordability Scheme or 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 ten 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 ten-year programme. Hmmm, maybe Jimmy was right after all.

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.”unquote Maturisk

Quote”

A TALE OF TWO BUILDINGS

Children grab your note books and gather around, I am going to tell you a story.

There were once two identical buildings – building A and building B. They sat side-by-side and remember they were exactly the same.

They each had 50 nice little apartments in them.

Both building A and B started selling at the same time. Each of the apartments in both buildings sold for exactly the same price and attracted the same exact rent once completed. They were both promoted as being affordable and were targeted to house key workers.

Now children, a key worker is a local resident such as a nurse, school teacher, bus driver, police officer or fireman for example, and reflecting today’s society, baristas are included also.

Nearly all of the apartments, in both buildings, sold to investors. Both projects each employed 200 people during their construction.

But this is where their similarities stopped.

And the moral to this story, like all good tales, comes at its end. So best we listen carefully.

Building Awas sold locally. The developer built an expensive display suite and advertised in the traditional way via print advertising. He staffed the display with a receptionist and several salespeople who all drew a wage and got paid the standard industry commission. Only government rebates applied, such as the first home buyers boost.

Building A took three and half years to sell, with the first tenants moving in a full five years after the first sale was made.

All of the apartments settled without much of a hiccup, with most of the buyers’ bank settlement valuations coming in within 5% of the purchase price. And for the older (read smarter) children in the class, there was very little resale price or rental growth across the market between the first sale and settlement.

The developer, given the project took so long to sell, ended up spending close to 20% of his gross realisation (kids, ask one of your parents when you get home what GR is) on promotion and commissions. He made very little profit – and the stress from such an arduous haul almost killed him – and he vowed never to do another property development again.

Building B was a completely different kettle of fish. It sold out in under six months and was ready for tenants to move in within 18 months of the first sale. The developer spent less than 10% of GR on promotion, sales commissions and rebates.

The 200 people employed during its construction all got paid and are now off working on another building job, making good money and helping house even more key workers.

But this developer, too, will not be doing another project any time soon. Why? Because only 35 out of the 50 little apartments have actually settled. So the developer has made no profit and might have to sell her house to make ends meet.

Now, in order to sell these apartments quickly, the developer offered a higher sales commission; targeted interstate and overseas buyers (as there are lots more of them than local buyers) and also offered to pay buyers’ stamp duties if they bought before construction started.

You see children, these buildings were located in a backward state where electioneering, not sense, prevails. In this dark place, full stamp duties are charged on presales and even things like 27c¹ still exist.

In order to make her marketing budget stretch, the developer of building B didn’t build a display suite, nor directly employ anyone, she was smart and promoted her project digitally and utilised the expertise of others to help make sales.

For building B it was a fight from the get-go with regards to buyer settlement valuations. The same valuers were employed as in the case of building A. They even used the same “comparable” resales to bench market value.

But because a higher commission rate was paid, sales weren’t made to yokels (oops, kids I meant to say locals) and rebates were offered, the apartments in building B were apparently worth much less, despite them attracting the same rent.

As a result, the buyers in building B had to find more money in order to settle. Most did, some begrudgingly (and who could blame them), whilst several just couldn’t afford to do so. Hence, 15 apartments have yet to settle.

So children, what is the moral to this story?

No, Jane – buying in Building A isn’t the answer I am looking for. And no, Jimmy – we cannot get rid of valuers.

In fact children, there are two main messages here:

Firstly, an investment dwelling’s worth should be determined by income – that means rent – just like it does for offices, shops and factories. It shouldn’t be determined by a “comparable” resale.

Secondly, how and where the developer spends his or her money on a project shouldn’t affect the market’s (nor valuers’) perception of value.

Now everyone get out your note books and write down these two things:

An investment’s value shouldn’t be determined by what a buyer once paid but by its income.

The distribution of costs has no bearing on the end value of a product.

¹ According to form 27c, all agents in Queensland are required to list how much they charge for commissions. Valuers on instructions from the mortgage insurers and banks are deducting the amount the agent is paid in excess of the standard Queensland sale fee of 2.5%. The 27c is a product of the Gold Coast fly in and fly out marketing of 25-plus years ago. It only applies to Queensland.”unquote Maturisk

Kind regards,

Linda Jane Debello

http://twitter.com/GillandDebello

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HTW Report-September-2011.pdf

About http://www.ljgrealestate.com.au

Previous Board Member of Singapore & Malaysian Business Associations, BA Modern Asian Studies (GU) majoring in Economics & Mandarin, Licensed Real Estate Agent since 1996. Member of REIQ. Firm Member of Leading Property Managers of Australia. Our expertise at LJ Gilland Real Estate is your peace of mind. Our reputation lies in high performance property sales, and we take great pride in our excellence in property and asset management as well as body corporate management. We find individual solutions to fit our Clients needs. Being property specific rather than area specific because confining ourselves to one area simply wouldn't be giving you what you need. Specialties International Business negotiations, bilingual, Appraising Queensland Based Properties, Contractual negotiations, Dedicated to Family & Business, hardworking & focused to get the best outcomes for each and every Client.
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