Need devil's advocate for NRAS investment

Cons:
- Valuation risk (easily mitigated by requesting valuation)

Imbi3, from your posts, you sound very well researched on how NRAS works etc, so I won't touch on the investing side of things. NRAS has worked reasonably well for me, with some great capital gains achieved in short periods of time. I've got a reasonably strict criteria for purchasing, very very few NRAS properties fit into it - so they almost pick themselves when they become available. I agree with others that lots of stock is rubbish - but those that aren't are absolute steals IMO.

Playing 'devils' advocate, IMO the biggest issue that's often overlooked with NRAS is its impact on your long term financing.

One of the biggest mistakes (other than selection poor properties) with an NRAS investment strategy is adequate planning on how it impacts your lending over the medium term. Its important to look at NRAS properties well beyond the transaction ahead and instead of for the next 3-5-10 years. IMO the impacts on your future investing is where NRAS cons really start to kick in.

Breaking the finance issues down:

Immediate:
- Valuation (can be mitigated with upfront valuations).
- Lender choice (plenty of lenders go to 90%, but plenty don't).
- OTP (be careful with this, most NRAS stock is OTP at the moment, and re-introduces valuation risk outside of your control).

Medium term:

Consider what does NRAS do to your borrowing power? How much quicker do you run into a servicing wall with an NRAS strategy vs a non NRAS strategy.

Based on an earlier calculation at your tax rate, reducing your rental income by $1 reduces your borrowing power by around $5.5. If you purchase 5 of these that have a market rent of around $400 per week, you've cut your borrowing power with the main lenders by over $100,000.

This is pretty substantial - another way to think of it is adding a $20,000+ credit card to your servicing ongoing. You'll require an additional $600+ in your monthly surplus calculations compared to non NRAS properties that rent at market rates.

Consider what your plans are BEYOND NRAS and see how your NRAS investing impacts those plans.

If you can, map it out and plan for it. It'll save you headaches down the track.

Long term:

- Equity releases: My god these are a pain with NRAS. At LMI territory, its just not possible. Without LMI, its possible, but you'll need a lender exemption and stick to a very small subset of lenders (ANZ are not one of them). No lender will allow you to release equity that I know of. Genworth won't, the majors won't.

This limits your ability to use equity as deposits for future properties. Given that most investors use this method to continue to purchase over time, you should consider how you'll achieve those goals.

^^^ All of the above have solutions etc, and IMO can be negated as part of a 10 year investing plan, but should be considered while in the formative stage of working out your investing plan.

If you haven't seen this already, a few more posts where I've presented my views on NRAS:
http://somersoft.com/forums/showpost.php?p=1251877&postcount=4
http://somersoft.com/forums/showpost.php?p=1189733&postcount=4

Cheers,
Redom
 
Its more of a legitimate tax scheme than a stand alone property investment and definitely has its place if you truly understand its potential so to eliminate your decision based on the incentive alone is futile.

60k down (10% deposit + costs) on a 400k property with a return of 12%+ (on the original 60k) is a good investment in most peoples books even if you achieve zero growth over the ten year period, which is possible but unlikely.

100k salary can be reduced by 20k per NRAS so 5 NRAS properties = zero tax potentially.

Wheres Euro? ;)
 
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I view it as more than just a property play. I view it as a simultaneous tax minimisation, cash flow maximisation, mortgage reduction , portfolio building play where I can use a combination of the ATO, the tenant and the NRAS credit to generate significant additional tax free cash flow which is then reinvested towards aggressive debt reduction to achieve very, very, very high compounding outcomes. And most importantly, it is an entirely self sufficient , self funded model. I can hold the properties for as long as I like with $0 out of pocket costs.

Some of the posts on here from buyers agents and others regarding the location and growth potential of NRAS approved dwellings are just plain disappointing - because simplistic unqualified commentary only serves to reinforce negative stereotypes that just aren't accurate, and only highlight how limited those commentators knowledge is regarding whats actually available. Its like a person who reads the back cover of a book and doesn't go any further- suddenly they feel qualified to write a review on the book. If all you have ever seen is a very small number of NRAS and they were being sold by greedy groups, the criticism should be leveled at the greedy groups, not NRAS. I've posted some locations previously to demonstrate just how erroneous and ill informed those "all NRAS is bad NRAS" comments are, because they're just such lazy comments, formed from an extremely limited exposure to the stock available nationally. So here again I will list several locations and would challenge any of the people writing such "all NRAS is bad NRAS" posts to explain to me and other readers how suburbs such as Brunswick, Gregory Hills, Castle Hill, Zillmere, Windsor (Qld ) Alderley, Nundah, Elanora Heights, Baulkham Hills and Ringwood, just to name a few - are areas that are hopelessly devoid of a future and offer no potential whatsoever for growth. In every example listed I can demonstrate significant growth has been achieved by my clients. Arguments about all NRAS being inferior just don't hold water.

Now admittedly, I do things quite differently - I secure my own NRAS incentives, transfer them to projects that are mine and mine alone, and keep them well away from the commission gouging types who have a real lend of the value proposition of NRAS, but the point is; just as Redom and others have said- plenty of good quality NRAS approved dwellings if you are prepared to look a little deeper.

Just quickly- to address some of the other comments RE borrowing capacity. Macquarie now allows refinancing and cash out to 90% for NRAS - or so they keep telling me .... although I have not tested the theory . But they assure me this is the case. They are a great lender for NRAS , generally speaking. Adelaide Bank (wholesale channel only) and FirstMac (retail and broker channel ) allow the NRAS tax credit to be used at 80% LVR or below - this I have tested; seeing as I designed the product :) and you'll find that this significantly increases borrowing capacity because they treat it as tax free income. So it's not true to argue that NRAS reduces capacity. With the correct mix of lenders, the opposite can be true.

And finally; just to reinforce that I actually put my money where my mouth is - I own 10 NRAS approved properties ( and several non NRAS properties) Those 10 NRAS properties create @ 190-200K of deductible losses for me (which means a significant portion of my income is tax free income) and they also generate @ 80K of tax free income for me over and above that, and with that total amount of cash flow I have paid down a 440K mortgage in 2 years. That may or may not seem impressive, but to ignore it is a nonsense. If nothing else, that's 2K + per month that used to go out to the bank every month, which no longer will - over the 20+ years I wont be spending that money on repaying the bank, it can be reinvested elsewhere. And that's a clearly measurable, quantifiable, real money making outcome. It's not a guess. It's not a maybe. It's real. It seems to me to be the multiplier effects people seem to keep missing... and I don't see how those can be ignored.

Now you may not agree, and you may feel NRAS should not be assessed any differently, but again I say; I just paid off a 440K non deductible mortgage in 2 years using NRAS, added 10 additional properties to my portfolio in 2 years using NRAS (with 4 or 5 more to settle this year ) which will deliver me a completely tax free income for the next decade. In addition to all of that, I'm also @ 24K + better off 'cos I'm not paying ANZ 2K + per month anymore. This allows me to now divert much of the surplus tax free money towards repaying non tax effective investment debt on more mature properties in my portfolio, and also boosting superannuation contributions with a view to ;
1. transforming the more mature properties (non NRAS) into passive income generators without debt, and
2. commencing SMSF accumulation phase.
While I do this, my portfolio costs me absolutely $0 to hold, and will continue to cost me $0 to hold long after NRAS stops in 10 years ( unless rates go well into double digits - in which case I would argue anyone would find themselves in relatively deep doo-doo) Most importantly though, I have not and most likely will not ever have to sell anything or incur CGT to achieve these things. So for those who dismiss NRAS so quickly without considering the potency of the multiplier effects it creates, and who don't agree that the tax and cash flow benefits should be considered within the framework of an investment decision , I would argue that perhaps some reconsideration may be warranted.


PS Colin - 4 x NRAS (rather than 5) would be sufficient to reduce 100K taxable to @ 20K taxable, which would effectively equate to tax free. The first $18,200 is tax free :) See - I just saved you 400K on an unnecessary 5th purchase !!!
 
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Thanks for the responses. Yes, I agree that the incentive is very attractive as explained by Redom and euro. However, I still have this concern about dealing with consortiums. Am I being paranoid or is it a genuine concern?

And yes, NRAS would not suit everyone especially for someone who already has a low taxable income and hence would make it even harder to obtain finance
 
Now admittedly, I do things quite differently - I secure my own NRAS incentives, transfer them to projects that are mine and mine alone, and keep them well away from the commission gouging types who have a real lend of the value proposition of NRAS, but the point is; just as Redom and others have said- plenty of good quality NRAS approved dwellings if you are prepared to look a little deeper.

I've said this before on here, but its pretty important to find pretty good operators in NRAS - otherwise you'll spend 70% of your time lured into dud deals and be turned off the strategy altogether. I believe I've spoken to 20+ operators from across the country (WA, Adelaide, Melbourne, Syd, Brissy) - most have held pretty dud stock, with the exception of a few good deals popping up. I generally find searching of realestate.com to lead to useless avenues. Talk to euro and see if he has anything on hand that you'd like - his vetting of stock generally saves you time, money, headaches! I've secured my first 4 through him and will do the same for any future NRAS purchases.

Just quickly- to address some of the other comments RE borrowing capacity. Macquarie now allows refinancing and cash out to 90% for NRAS - or so they keep telling me .... although I have not tested the theory . But they assure me this is the case.

Macquarie's recently tightened up on cash outs euro - they wont even go to 90% for standard resi properties without exceptions. I believe the policy is one of the tightest on the market, restricted to 5% of the refinanced amount. For strong cases, they defer back to genworths policy.
 
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