Misleading Accountant Advice!

[euro73]

Ignoring NRAS spruikers of course IMO I always feel NRAS properties aren't prime tenants and owners retain a long term risk to the income stream (ie its houso housing). A buyer needs to understand THEY are assuming tenancy risks that non-NRAS housing also has (foolish to think it doesn't) but its a higher risk. Perhaps not substantially higher but has to be higher. The risks may not appear when renting - Just when selling - Or both.

The NRAS incentive is there to compensate that risk through encouraging private investors to invest in low income housing that the govt doesn't want to do...(Low income is the first problem) That speaks volume for the risk. That's my lender of last resort comment. Poor private investor may be burned now or in ten years. Is the offset etc enough ?

I wish NRAS came with the DHA refit benefit. The NRAS refit cost v's non-NRAS repairs hasn't had time to prove itself. Is the marginal NRAS benefit sufficient to cover a refit cost of $XXX in 10 years ?? Maybe me but I think of TV's houso's and cringe thinking of damage / wear costs. How do you cherry pick a good tenant ? You cant. Their rental history is protected. Yes they always paid their rent. $35 a week. How will they pay $220 ? Who will move in with them ? They often have job insecurity, habits and mental health issues too. That a owner cant ask about.

Selling an NRAS property has to be a harder sale for any REA v's a non-NRAS in same street. Or in cases where its a large % NRAS suburb the property val and liquidity has to be considered. It has to be harder to sell NRAS. Meaning seller may have to cut price when they want out (quickly or not ?)

Hope I don't come across as anti-welfare. Not intended. I think NRAS is a good. I just question if the benefits are conservative

Paul your position appears to be based on the premise that NRAS is social housing filled with social housing tenants. Let me clarify a few points you appear to have misunderstood.

1. All normal state and territory laws relating to tenancy management apply. This means tenants are selected, signed up, screened/reference checked, or even evicted from an NRAS approved property in precisely, exactly, specifically the same way as would occur with any non NRAS approved property.

2. Owners can select whomever they want as tenants, subject to one extra criteria - income eligibility. The income thresholds are quite generous, and increase 25% after qualifying, and annually thereafter, indexed to rental CPI . The ABS advises that 1.5 million Full Time PAYG earners qualify within the income thresholds.

3. DHA is a head lease arrangement with little or no control provided to the owner/investor. It is quite inflexible with little or no choice of tenant, offers weak cash flow, is available only in very limited locations and an investors "compensation" is a fresh paint job and carpets at the end of the lease. It isn't a bad investment, but it's certainly a super super conservative one. NRAS offers a far wider variety of locations, far more owner control, and over 130K of tax free cash flow (assuming 4% compounding increases) across 10 years . But it can also be on sold or withdrawn from the NRAS at any time. It is infinitely more flexible.

4. In addition to the income thresholds being indexed to rental CPI, rental increases and the actual tax credits themselves are also indexed in line with rental CPI. FYI, this means an average increase of 5.2% since 2008/9 when the NRAS commenced. That is @ double the rate of inflation.

 

[Paul@PFI]

I don't dispute these and some of these comments I take on board and will discuss with those I know in industry. I have client experiences with NRAS that are all negative. (I don't sell or introduce ANY property - I want it said I'm independent of such issues)

Thanks for your explanations but I don't see it change fact that its housing for those who need or who have access to financial support. That public housing in other words. Same scale just a different level. Two client have encountered what appeared glowing references. They then fail to pay rent soon after moving in. Reason? Public housing wont disclose rental arrears - EVERYONE gets a positive report unless they are undergoing eviction / criminal damage.

The incentives v's the issues don't stack up IMO. Just the aweful way that offset certs are poorly managed is a turn off. Its like the insulation scheme for investors. The investor seems to be the mug at the end of the chain.

To me its like putting $ on a unsecured deposit. The rate of return I would need would be very high v's a bank term deposit due to risk profile.

1. All tenancy concerns are best avoided. I believe NRAS has a higher risk profile. Its the very nature of why NRAS was conceived. Public / Private Partnership in action.
2. NRAS tenants have a lower income than comparable value non-NRAS. That's a higher risk profile. The income issues often accompany social and health issues such as mental illness, single income etc..
3. Agree DHA lacks control. (I also find them outrageously expensive - $900K Darwin as example)
4. Agree thats good. I always like tenancy agreements with indexed increases. Regular small increases are far better than irregular jumps.

 

[euro73]

Again, you have formed those arguments on a predisposed assumption that tenants are public housing tenants. This is incorrect and forms a biased view based on flawed assumptions.

Let me give you a very simple example to demonstrate why NRAS is not social /public housing. The weekly income threshold for public housing in NSW for 2014/15 , for a couple with 3 children is $575 for the first adult, $220 for the 2nd adult, $280 or the first child under 18 and $95 for each additional child under 18. That equates to $65,780 per annum. This figure is inclusive of FTB payments

The income threshold for NRAS for a couple with 3 children is two fold
a ) qualifying income of $112,433. This means the tenancy applicants must demonstrate ( with 12 months of payslips) that they have earned less than this amount in the 12 months prior to their tenancy application for the NRAS property. It does not mean they must earn less than this amount currently, as qualification is not based on current income - it is based on 12 months historical income up to the date of tenancy application. This is precisely why your argument about NRAS being a public housing substitute is flawed. The income tests are designed specifically for graduates who are coming off modest incomes from part time work and Austudy, then starting work and seeing increases to their incomes over their first few years in FT work.

b) once qualified ( see above) , tenants are allowed to earn 25% more than the qualifying amount in subsequent years, which equates to $140,541 for the 2014/15 NRAS year .

These figures then increase annually with indexing. This provides for significant long term tenancy to be possible for many NRAS tenants. And regarding ineligibility, once qualified - ( see point a above) if a tenant ( or tenants) did then exceed the allowable amount ( 25% more than the qualifying income) for two years consecutively, - not two years in total - it must be two consecutive breaches - they then become ineligible to remain as tenants.

So there is far more flexibility than you have considered. And there is a significant difference between the income tests applied to public housing and NRAS. NRAS incomes effectively allow for 2.5 x social housing income levels.

I would also point out that NRAS allows you to choose your tenant. You have all the same opportunities to check references as you have with any other tenant. If you pick a dud, that is hardly the fault of the NRAS. I would hope that your argument isn't simply based on an assumption that people earning middle/modest incomes are somehow inherently predisposed to be nastier, lower quality tenants with a bigger likelihood of poor behaviour? I certainly dont believe a single person earning up to 59K, or a couple with 1 child earning up to 101,329 , or so on... are by definition a more troubled, higher risk group of tenants.

 

[Redom]

I don't dispute these and some of these comments I take on board and will discuss with those I know in industry. I have client experiences with NRAS that are all negative. (I don't sell or introduce ANY property - I want it said I'm independent of such issues)

Thanks for your explanations but I don't see it change fact that its housing for those who need or who have access to financial support. That public housing in other words. Same scale just a different level. Two client have encountered what appeared glowing references. They then fail to pay rent soon after moving in. Reason? Public housing wont disclose rental arrears - EVERYONE gets a positive report unless they are undergoing eviction / criminal damage.

The incentives v's the issues don't stack up IMO. Just the aweful way that offset certs are poorly managed is a turn off. Its like the insulation scheme for investors. The investor seems to be the mug at the end of the chain.

To me its like putting $ on a unsecured deposit. The rate of return I would need would be very high v's a bank term deposit due to risk profile.

1. All tenancy concerns are best avoided. I believe NRAS has a higher risk profile. Its the very nature of why NRAS was conceived. Public / Private Partnership in action.
2. NRAS tenants have a lower income than comparable value non-NRAS. That's a higher risk profile. The income issues often accompany social and health issues such as mental illness, single income etc..
3. Agree DHA lacks control. (I also find them outrageously expensive - $900K Darwin as example)
4. Agree thats good. I always like tenancy agreements with indexed increases. Regular small increases are far better than irregular jumps.

Hmm I tend to agree with your theory Paul, but practically I haven't found it to be true, although I have heard some stories like you've mentioned. In my own small portfolio, none of my 4 tenants have come from social housing into NRAS. I have a student, a nurse, a single mother with two jobs, and a friendly young couple at uni/part time work tenanting my place.

I've met most of my tenants - I get an overriding sense from them that they're grateful for getting a 20% discount and really want to keep it. I don't know the mechanics of how it works in QLD - but there is some register there for NRAS eligibility, so the tenants want to stay on it.

Nonetheless, before I stepped into NRAS investing, I spent a large amount of time weighing up the very point you've mentioned - tenancy risk. I spent a fair bit of time talking to property managers - it was essentially my biggest fear.

After being in it for a few years, I've found:

1. Vacancy risk is just not an issue - realistically, i'd back my NRAS properties to tenant out faster than any other comparable. Their purchased in slightly lower demographics (western Sydney as opposed to the lower north shore).

2. Tenancy profile has been strong.

I've been pleasantly surprised and hope it continues.

Cheers,
Redom

 

[paull10au]

Regarding the scenario that existing tenants becomes ineligible to rent under the nras due to them having an income increase in excess of 25% over the threshold - is there a clause in the tenancy agreement that terminates the existing contract? Ie is the tenant made aware of this requirement when signing the lease?

Ie it would seem in the investors interest to remain in the scheme for the entire 10 year term.

 

[westminster]

Regarding the scenario that existing tenants becomes ineligible to rent under the nras due to them having an income increase in excess of 25% over the threshold - is there a clause in the tenancy agreement that terminates the existing contract? Ie is the tenant made aware of this requirement when signing the lease?

Ie it would seem in the investors interest to remain in the scheme for the entire 10 year term.

If your tenant becomes ineligible for NRAS discounted housing then they will have to leave (yes it is in their contract) then you get another NRAS eligible tenant and continue on until the 10yrs is up.

The tenants are very aware of how it works. They don't just suddenly get kicked out nor fight it and refuse to move out. There is plenty of notice etc

 

[paull10au]

Thanks Westminster. So i take it every year the tenants must provide a tax return to prove total earnings, or something along those lines?

 

[euro73]

Incomes are audited annually

 

[paull10au]

Thanks euro