Indexed to rental CPI - not general CPI. Something I learned from one of Euro's numerous NRAS posts (and verified independently).
Regards,
Jason
$100,000/pa Passive Income...
- Thread starter Jake Milne
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Indexed to rental CPI - not general CPI. Something I learned from one of Euro's numerous NRAS posts (and verified independently).
Regards,
Jason
For me , the end game is building up a portfolio of several million early in a cycle in good areas and riding that to the end of a cycle , then selling down enough to pay out the remaining properties so we have a portfolio of fully owned properties
As the properties go up during the cycle , we can draw down equity to buy further properties as opportunities arise .
I prefer to buy good properties as they involve less ongoing work and you need less to have the same $ exposure.
If we get to the situation when you can't get good returns in good areas then if we can get good returns in lesser areas , then we will buy there if we can.
Selling down after periods of growth has helped us move on to the next step .
Prior to the GFC hitting we had sold down to the point were our total LVR was around 15 % . With the purchases we've made since then our total portfolio has almost tripled in value and our LVR has gone up to around 65 %.
Cliff
As the properties go up during the cycle , we can draw down equity to buy further properties as opportunities arise .
I prefer to buy good properties as they involve less ongoing work and you need less to have the same $ exposure.
If we get to the situation when you can't get good returns in good areas then if we can get good returns in lesser areas , then we will buy there if we can.
Selling down after periods of growth has helped us move on to the next step .
Prior to the GFC hitting we had sold down to the point were our total LVR was around 15 % . With the purchases we've made since then our total portfolio has almost tripled in value and our LVR has gone up to around 65 %.
Cliff
As I said, I know very little about NRAS.
Why is the rental low and he's saying you can get 10% return per annum on cashflow?
Basically, you are renting it out at 20% lower. That increases your negative gearing (together with the depreciation). Then the gov handout comes in as tax free.
NRAS properties are a gov initiative to help the 'affordability crisis'. The deal is, you rent them for 20% less than market rent so that someone with the appropiate income threshold can rent them. In return, the gov gives you $10K per year tax free (in arrears at the end of the year). So, its heavily negatively geared, but can work out ahead due to the $10K plus depreciation allowances (as most are new developments).
Hmm.
So if I buy a $400k rent @ 80% gearing, that's $320k debt. Or $16k/year interest. I presume there's a bunch of fees, rates etc too. So maybe $20k/year all up?
To be cashflow neutral you'd need to rent these things out for $400/week? If I was a low income earner and had to pay $400/week for a $400k apartment under a NRAS scheme, I'd be pretty angry. I could be renting a 2 bedroom flat in a leafy suburb that's probably worth $580k.
So if I buy a $400k rent @ 80% gearing, that's $320k debt. Or $16k/year interest. I presume there's a bunch of fees, rates etc too. So maybe $20k/year all up?
To be cashflow neutral you'd need to rent these things out for $400/week? If I was a low income earner and had to pay $400/week for a $400k apartment under a NRAS scheme, I'd be pretty angry. I could be renting a 2 bedroom flat in a leafy suburb that's probably worth $580k.
Here are some example figures http://www.pasa.com.au/NRAS_Calculator.html
NB: I have no affiliation with the website, was just the first one google offered me.
Renter pays 80% of the rent which is $320/week. I think it was designed for nurses or police type of professionals so that they can live in Toorak
Otherwise expensive places won't have anyone providing these kind of services near by.
So to be conservative you'd be up $6k a year, on a $100k investment.
Obviously I've included council rates, water, insurance, body corporate, land tax, maintenance blah blah blah on it. To be fair, I didn't include depreciation and maybe you get back to $10k after that?
But to be honest, even if all the numbers stacked up, it's hardly that attractive. For every $100k I invest, I can make net rental returns like that, but also get the capital growth too - in fact in the last 6 months, I would've gotten at least $50 for every $100 invested in the last 12 months, from capital growth.
I know people will say, but is this capital growth going to repeat itself?!?!?!?
Well honestly, I don't know. But the same people were asking the same thing 12 months ago.
Obviously I've included council rates, water, insurance, body corporate, land tax, maintenance blah blah blah on it. To be fair, I didn't include depreciation and maybe you get back to $10k after that?
But to be honest, even if all the numbers stacked up, it's hardly that attractive. For every $100k I invest, I can make net rental returns like that, but also get the capital growth too - in fact in the last 6 months, I would've gotten at least $50 for every $100 invested in the last 12 months, from capital growth.
I know people will say, but is this capital growth going to repeat itself?!?!?!?
Well honestly, I don't know. But the same people were asking the same thing 12 months ago.
Renter pays 80% of the rent which is $320/week. I think it was designed for nurses or police type of professionals so that they can live in Toorak
Otherwise expensive places won't have anyone providing these kind of services near by.
I'd like to know of any NRAS properties in Toorak; most I've heard of are in areas like Glenroy, Craigieburn, Taylors Hill and Ferntree Gully.
I'm not a fan of NRAS as they're usually in areas that won't get very good CG but if there are some in decent suburbs then it may be worth a closer look.
People in East Melbourne, Middle Park are going to get very angry.
You will never see them in Toorak (well i suppose never say never) because in order for people to qualify they have to:
a) rent at 20% under market
b) earn less than a certain amount - i think $55k for singles
c) have that rent be less than 30% or so of their income. ie for someone earning $55k, the rent for an NRAS property cannot be more than 320/week or a market rent of about 400/week.
i doubt you will see any toorak development (irrespective of NRAS) where market rents are $400/week
those figures may be out slightly but that is the general gist of it. Also couples etc have a higher threshold but still i think only $65k or so household income.
upper income threshold for couple with 3 kids is $136,680
http://www.fahcsia.gov.au/our-respo...ility-scheme-nras-household-income-indexation
http://www.fahcsia.gov.au/our-respo...ility-scheme-nras-household-income-indexation
Not only is it indexed to rental CPI, but independent rental appraisals are done in Years 1,4 and 7 to bring your market rent back in line with local conditions- just in case rental CPI has been outperformed by local increases in the intervening years
So Year 1 - Market Rent is set, based on independent appraisal. Then 20% is deducted for NRAS
Year 2 and 3 - Market rent is increased by Rental CPI ( which has averaged 5.2% since 2008/9 ) then 20% is deducted for NRAS
Year 4 - Market Rent is set, based on independent appraisal. Then 20% is deducted for NRAS
Year 5 and 6 - Market rent is increased by Rental CPI ( which has averaged 5.2% since 2008/9 ) then 20% is deducted for NRAS
Year 7 - Market Rent is set, based on independent appraisal. Then 20% is deducted for NRAS
Years 8,9 and 10 - Market rent is increased by Rental CPI ( which has averaged 5.2% since 2008/9 ) then 20% is deducted for NRAS
You will see them in inner city/expensive areas at times. It's not common, but for example, there are 828 NRAS allocations attached to Studio's in this project - http://www.centralparksydney.com/
This is a massive project, due to deliver around 2,000 apartments in total.
In your scenario, you've assumed costs of 20K per annum
Assuming $400 market rent, you'd receive $320 under NRAS, or $16,640 per annum
That would generate a $3,360 cash flow loss ( $16,640 income - 20K expenses)
You'd also have depreciation. This will vary from property to property, but 10K would be a reasonable assumption on a brand new 400K apartment.
So you'd have a total deductible loss of $13,360. ( $3360 cash loss and 10K depreciation) At a Marginal Tax rate of 37%, you'd receive an ATO refund for $4,943.20 plus a $10,350 tax free NRAS incentive, for a total of $15,293.20.
Your Cash flow loss was $3360. Your ATO refund was $15,293, so you'd be $$11,933.20 CF+ Tax Free in this example. This figure would increase annually due to the indexing of the incentive.
Ata Marginal tax rate of 45% you'd receive an ATO refund for $6012 + $10,350 NRAS, for a total of $16,362.
Your Cash flow loss was $3360. Your ATO refund + NRAS was $16,362, so you'd be $13,002 CF+ Tax Free in this example.
True but inner areas are still not your Toorak kind of areas or Mosman in Sydney and Dalkeith in Perth which is what i was more or less alluding to.
I take your point thopugh
The 10% return is simple to demonstrate.
Even allowing for 105%gearing ( total purchase, legals and stamp duty) here's an example.
400K Apartment in low rise development, in NSW.
Total funds borrowed = 425K (use any structure you like. But for the purpose of this exercise lets use 10% + costs/stamp duty borrowed from equity plus 90%+LMI against the investment purchase . So @ 65K of your equity has been used in this example. )
Funds are borrowed at 4.79% - so 425K x 4.79% = $20,357.50 repayments
Allow 5K for p/mgt, rates, insurance, strata and NRAS admin fee
Total expenses = @ 25,375.50
Income $400 ( minus 20% ) = $16,640 per annum
Cash Flow Loss = @ $8735.50
Depreciation = @ 10K
Total Deductible Loss = $18,735.50
ATO Refund @ 37% MTR = $6.932.14 + $10,350 NRAS = $17,282.14. CF+ $8546.64 You invested 65K of equity to receive $8,546.64 tax free after all costs = 13.14% Tax Free Return
ATO Refund @ 45% MTR = $8430.98+ $10350 NRAS = $18,780.98 CF + $10,045.48. You invested @ 65K of equity to generate $ 10,045.48 tax free after all costs are accounted for. 15.45% Tax Free Return
if you purchased a 400K apartment in Melbourne, the returns would be lower because stamp duty is 10K dearer. 5% stamp duty vs 4%, and no 5K rebate available for the purchase of new stock, unlike in NSW . So you'd be putting 75K of equity in to the same 400K property, instead of 65K. And generally, you'd also get lower market rent on a 400K apartment in Melbourne. More likely $370-380 per week vs $400-420 for the same 400K spent in Sydney. The net result would be that you can expect results closer to 9.5- 10 % Tax Free in Melbourne, instead of 13-15% like I've just demonstrated for Sydney.
So the results vary depending on the interest rate you borrow at, the market rental yield, and stamp duty costs ...
Here's another example, at a lower price point - some clients just purchased units in Brisbane at 260K. 10% deposit = 26K. Stamps = @ 7400K. That's 33.4K plus 2K for legals, to get in. Total equity invested = 35.4K.
The properties are tenanted at 330 per week, minus 20%. The cash flows are therefore
Costs = Loan of 275K @ 4.79% - $13,172.50 I/O
Holding Costs = 5K
Total Costs $ 18,172.50
Income ( after applying 20% discount ) = $13,728
Cash Flow Loss= $5000
Depreciation = $7500
Total Deduction = $12,500.
ATO Refund @ 37% $4625 + $10350 = $14,975 CF +$9975. Equity Invested 35.4K. 28.18% Tax Free Return
ATO Refund @ 45% $5625 + 10,350 = $15,975 CF + $10,975
Equity Invested 35.4K 31% Tax Free Return
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