NRAS Investment Property Opportunity
You are aware that there is currently a shortfall of dwellings throughout Australia of around 200,000 homes with this gap widening by the year and expected to reach 500,000 by 2030.
House prices are very strong due to the unusually high demand created by emigration and immigration, baby boomers downsizing and children leaving homes for the first time! As house prices strengthen and people cannot afford to buy where they wish to live so they become tenants. The high demand for rentals has kept rental income yields very strong and continue to grow (estimated to grow by 6% during 2012 according to RP Data)
What increased rents mean to tenants is that they cannot afford to live where they want. And so NRAS was born with the aim being to provide affordable rental accommodation to tens of thousands of families and individuals across Australia. In fact this demand is estimated to be 1,5 Million!
Your Incentive to put a new rental on the market could be $110,000 in massive tax free credits over 10 years resulting in you having never to put another dollar into your investment property after you have contributed your deposit!
Incentivised by both Federal and State governments to encourage property investors to help provide 50,000 new dwellings into the rental market – meaning that this opportunity is limited and finite!
As an investor, what the government are saying to you is that if you choose to put up your hand to help put a new property into the rental market they will reward you for doing this. The only condition is that you must give at least a 20% discount (off the market rent) to your tenant. If you do the maths, the Tax Credit you are receiving per anum of $10,350 (this financial year escalating by Rental CPI) for becoming a property investor, is larger than the rental discount you are incentivised to give to your tenant. How good is that!
What is better news is that you are eligible for a minimum of $103,500 over the next ten years as guaranteed tax free tax credits. It is for this reason that a NRAS investment property will in all likelihood be a positively geared property in your hands.
NRAS can help you add a cash flow positive property investment to your portfolio
To recap, in an effort to reduce Australia’s chronic shortage of housing, the Federal Government has established the NRAS (National Rental Affordability Scheme) and under this programme you are incentivised to : increase the supply of rental accommodations to average income earners who qualify to be NRAS tenants. And these incentives are estimated to be worth $110,000 tax free per property over 10 years. All you have to do is provide at least 20% Rental Discount to tenants who qualify.
Think about the winners in the programme : You the investor, Your Tenant and the Government who has less pressure applied on them to provide affordable housing.
The $10,350 tax credit will turn what would be a negatively geared investment property into a Positively Geared Investment Property and improve your cash flow and investment opportunity. Further to this it now allows for those who couldn’t get into the investment property arena to comfortably enter the market. And of course, this makes so much sense for a Self Managed Super Fund to own an investment property and receive the tax credit of $10,350 per anum no matter what the SMSF tax rate is.[hr]
How the NRAS figures work:
- Both State and Federal government will provide a combined tax credit of $10,350 which in all likelihood will increase with CPI rate for rent which has been averaged at 3.9% over the last 10 years. The tax credit has escalated from 2010 by 5.4%.
- You as the landlord will give your tenant a 20% discount to help them afford the rent
- If a property is renting out for market related rentals of say $350 pw and you provide a 20% discount of $70 pw
- Taking the tax credit of $10,350 and dividing it by 52 weeks you average $199 pw as a refund (at the end of the financial year)
- The difference between the $70 discount and the $199 tax credit is $129 per week in your pocket
- This $199 will turn a negatively geared property into a positively geared investment property (* each individual circumstance the figures and results will differ and this is merely an example and a generalisation for demonstration purposes only)
- As an investor you stand to receive a 10 year incentive of around $110,000 Tax Free ‘income’.
Being a refundable tax offset, this will reduce the amount of tax you are liable to pay to and if this falls below zero you will receive a refundable amount in money. The same applies to off shore investors who do not pay tax or who pay minimal tax on rental income received.[hr]
Working Example for an individual:
A working example based on a taxable income of $81,000, a property to the value of $368,615, interest only loan of 7.7%, borrowing 90% of the value of the property and receiving a rental income of $312 per week. (including all expenses incurred)
If we did the same Working Example for a Self Managed Super Fund who is taxed at only 15%, the results would be :
Both opportunities for you as an individual or within your SMSF will provide you with the following benefits :
- Huge Stamp Duty Savings
- Lower maintenance costs as property will be brand new
- Higher depreciation benefits
- Market related rental income
- You will pay less income tax
- The tax credit is not income it is tax free (no matter what your tax rate is)
- As an individual you will own a positively geared investment property from day one (in most cases)
- As an SMSF, the cost of owning an investment property as an asset in your retirement fund will be much lower than non-NRAS properties
Who qualifies as a tenant?
Potentially 1 Million 500,000 Families and Individuals qualify
Social Welfare Workers, Teachers, Nurses, Bus Drivers, Police Officers, Retirees on Pension etc … people with good careers but traditionally do not get paid well
According to the most recent Australian Bureau of Statistics figures (ABS Household Income and Income Distribution 2007-8) the average household income for households renting residential property through a private landlord was $78,104, and the median household income (i.e. 50% of households above and below) was $64,792. Meaning your average private tenant is going to be eligible for an NRAS property. This is a massive pool of potential tenants. In fact most organisations managing the properties on your behalf are already building a waiting list for properties that are not even built yet. The opportunity here as an investor is that your vacancy rate will continue to remain extremely low, in fact should be lower than other non-NRAS properties as more and more households find current market rentals out of their financial means.[hr]
Who manages the properties on your behalf?
A property management company applies for the rights to manage particular NRAS properties on behalf of Landlords. This is a specific role and includes qualifying tenants from an NRAS point of view, managing the property on your behalf on a daily basis, assisting in the audit to ensure the tax credit is approved, re-assessing the rental market a minimum of 3 times during the 10 year period to ensure that the rentals are in line with other similar properties in the area.[hr]
Who is eligible to invest in a NRAS property?
- NRAS is a Federal and State Government backed incentive scheme designed to :
- Encourage Investors to Develop Additional housing for the rental market
- To provide an affordable Rent Programme for average Australian wage earners as individuals, couples and families
- An incentive is for investors to earn higher than usual Investment Returns in the residential property market, provided by the Tax Credit of $10,350 pa
- The benefit to the Australian economy is to increase the number of rental dwellings built through the stimulation of demand and investment, while supporting the building industry and related jobs
- 50,000 new residential dwellings will be constructed through $623 million Government Investment into the NRAS programme over a ten year period
- Construction of these dwellings are in locations with high population growth with adequate support infrastructure such as schools, hospitals, job growth, public transport etc to ensure tenant lifestyle objectives
- 1.5 million households are in financial stress and are eligible for the NRAS programme according to government figures, resulting in very low vacancy rates for Investors
- 20% rental discount is provided by the Investor to the tenant to ease this financial burden and help make rentals affordable
- In return, a tax credit (NRAS Tax Incentive) is provided to you the Investor paid in 2 parts
- 75% from Federal Government in June each year
- 25% from State Government in May each year
- Indexed to Rental CPI which rose by 8.1% in 2009 and by 5.4% in 2010
- Qualified tenants are found for you and your property is managed on your behalf on an ongoing basis during the 10 years that your property is in the NRAS programme
- In order to qualify for the NRAS programme, properties have to meet strict construction and finish standards according to Government guidelines
- All properties at time of completion are audited and have to be signed off once they meet all requirements … giving investors a level of confidence in their NRAS property
- Government website info here
Download a printable version NRAS Investment Property Opportunity
Comments or questions are welcome.