Need devil's advocate for NRAS investment

[imbi3]

I am thinking to get into NRAS investment. The cashflow is too attractive to be ignored although I will need to get a few to obtain a 'sizeable' cashflow eg 4-5. From euro73 posts previously, the projection is approx. $100k / per property during the 10 year period from the government incentive

I have done a few pros and cons and would like to see if anyone else has anything to contribute

Pros:
- Cashflow. Assuming $100k for 10 year for each property, owning 5 = $500k net ~ approx. $800k-$900k gross with lower risk/less hassle compared to doing developments
- Brand new property, should require less maintenance

Cons:
- Delays (potential) in receiving state and federal incentives
- May be lacking in CG for investment in brand new apartments/units
- NRAS agreement is between the government and NRAS consortium, and therefore individual investor is at 'mercy' with the NRAS consortium. Also, if it hits the fan then may involve significant legal costs (although this has never happened previously)
- Risk of government withdrawing the incentive (low risk, unlikely)
- Valuation risk (easily mitigated by requesting valuation)
- Unable to value add further

As you can see, the cons list is longer however I would be comfortable with the cashflow in mind. Any other risk which I may have left out? Would also like to get opinions from SS members who have owned NRAS properties for a number of years

 

[Rolf Latham]

select your stock carefully.

Dont just rely on the benefit, but perhaps look to purchase with some growth potential - I know im stating the obvious, but .................

Vals can be an issue when purchasing, usually related more to the margins on the comms to the selling agents and marketers than the stock itself

ta
rolf

 

[D.T.]

Are you on a good income? NRAS properties rent for a 20% discount so it reduces your serviceability further, limiting how man you can potentially buy. You also have to cover that shortfall during the year til you get your payout. If it were me, I'd buy in an area with decent yield to mitigate this.

The other con is that quite a few nras properties are marked up in price (along with any related services such as PM), just cuz it's nras. You can mitigate this by using reputable operators.

 

[imbi3]

Are you on a good income? NRAS properties rent for a 20% discount so it reduces your serviceability further, limiting how man you can potentially buy. You also have to cover that shortfall during the year til you get your payout. If it were me, I'd buy in an area with decent yield to mitigate this.

The other con is that quite a few nras properties are marked up in price (along with any related services such as PM), just cuz it's nras. You can mitigate this by using reputable operators.

Hi DT. I am on 37% tax bracket (+2% medicare). So from negative gearing point of view, it is quite attractive. From borrowing capacity, I could get a couple of properties at lower entry point ($300k) from my current bank (ANZ). After that, will need to discuss with a broker

Yes, I do realise the higher PM fee (generally 10% whilst standard PM could be 6-8%)

 

[Rolf Latham]

From borrowing capacity, I could get a couple of properties at lower entry point ($300k) from my current bank (ANZ).

Assuming you have the equity, plenty of headroom then, ANZ is one of the more conservatives in the serviceability pile.

ta
rolf

 

[imbi3]

Surely there are people who own NRAS in this forum. Come on guys, need your opinion and experience

 

[Xenia IM]

The ones I've looked at in the past have had minimal capital gain potential, in low Growth areas, no value add potential and overpriced.

The small incentive of cash flow for a set amount of years to me does not overcome the negatives of no growth and purchasing a very bad property.

We've explored this in many different ways but finally decided it's a NO for us.

I would rather hold a better property with the potential to value add and generate the shortfall to hold it through some other means - ie business that is NOT controlled by governments and their rules.

 

[chrispy]

I agree with Xenia. I looked seriously at one last year but it was so overpriced. I offered what I thought it was worth and was told they had 5 offers around the same figure but were not interested It sat around for 8 months and has recently sold

The figures did not work for me

Chris

 

[Jay84]

I am thinking to get into NRAS investment. The cashflow is too attractive to be ignored although I will need to get a few to obtain a 'sizeable' cashflow eg 4-5. From euro73 posts previously, the projection is approx. $100k / per property during the 10 year period from the government incentive

I have done a few pros and cons and would like to see if anyone else has anything to contribute

Pros:
- Cashflow. Assuming $100k for 10 year for each property, owning 5 = $500k net ~ approx. $800k-$900k gross with lower risk/less hassle compared to doing developments
- Brand new property, should require less maintenance

Cons:
- Delays (potential) in receiving state and federal incentives
- May be lacking in CG for investment in brand new apartments/units
- NRAS agreement is between the government and NRAS consortium, and therefore individual investor is at 'mercy' with the NRAS consortium. Also, if it hits the fan then may involve significant legal costs (although this has never happened previously)
- Risk of government withdrawing the incentive (low risk, unlikely)
- Valuation risk (easily mitigated by requesting valuation)
- Unable to value add further

As you can see, the cons list is longer however I would be comfortable with the cashflow in mind. Any other risk which I may have left out? Would also like to get opinions from SS members who have owned NRAS properties for a number of years

Yes to all of them, and to DTs comments about servicibility and pricing.

It took 18 months to go from land settlement to tenanted, which was a a lot longer than I was expecting, I was told we would be up and running in about 9 months. The holding costs during construction were much higher than budget due to this.

When they built them - they built them all together - there was a bit of a glut in housing and difficulties getting tenants

The consortium took over the day to day managing of the property. That means if you are unhappy with the management, it removes your ability to hire or fire them.

NRAS would be ok IMO if everything worked the way it was meant to work, but as per the the other thread things go wrong. It's probably like many other things though, things do go wrong with other investments.
(I'm far from an investment guru though- take my advice with caution)

 

[imbi3]

It took 18 months to go from land settlement to tenanted, which was a a lot longer than I was expecting, I was told we would be up and running in about 9 months. The holding costs during construction were much higher than budget due to this.

The one I am looking at is almost finished so this risk would be eliminated I supposed. And it is not a land + construction scenario which would increase the holding costs etc

All good points. Thanks guys

 

[imbi3]

I agree with Xenia. I looked seriously at one last year but it was so overpriced. I offered what I thought it was worth and was told they had 5 offers around the same figure but were not interested It sat around for 8 months and has recently sold

The figures did not work for me

Chris

Hi Chris, may I ask where the one you looked at is located?

 

[greedy2000]

my advice is this:

If you took away the NRAS incentives would you still purchase the property?

if the answer to that question is no, just walk away.

 

[D.T.]

my advice is this:

If you took away the NRAS incentives would you still purchase the property?

if the answer to that question is no, just walk away.

Although NRAS purchases don't suit my own strategy, I don't think that's a fair question. That's like saying "if you took the dividends away would you still buy shares?". It's an overall investment decision.

Yes, I'd love to buy this big 2 storey beach shack if only it were in the middle of the CBD.

 

[Xenia IM]

my advice is this:

If you took away the NRAS incentives would you still purchase the property?

if the answer to that question is no, just walk away.

I agree - the investment will most likely outlive the incentive period.

 

[D.T.]

That doesn't mean you should ignore half the return for the next 10 years.

 

[greedy2000]

Although NRAS purchases don't suit my own strategy, I don't think that's a fair question. That's like saying "if you took the dividends away would you still buy shares?". It's an overall investment decision.

Yes, I'd love to buy this big 2 storey beach shack if only it were in the middle of the CBD.

I think its a very fair question.

the reason I say this is, if you look at the whole Argi business collapse (great southern, timber corp etc). if you took away the initial tax deduction "trees" didn't stack up as an investment and you would never have put your money into it.

If you asked anyone who invested into "trees" or was recommended to do it, they were sold on the tax benefits and that's the only reason they did it.

Its the same with NRAS, when asked why did you buy that property "A" instead of property "B". "Because the govt gave me free money", would be the likely response.


I don't think NRAS will end up like the Agribusiness debacle, but they will be worse off when compared to an ordinary IP outside of this scheme. Where investors can choose the location, can better negotiate on purchase price, have lower ongoing Management costs, much greater tenant selection, rent increases and potential to add value to the property.

 

[imbi3]

I think what greedy2000 raised is a valid point. One of my concerns is, the involvement of another party as middle man in the scheme ie the consortium. Chasing someone for cash is hard enough, let alone when there is another person involved in the middle.

What DT said is also relevant. The incentive should be taken in the decision making process as long as we acknowledge there is a risk to the incentive (ie either from the government or the NRAS consortium)

 

[Brady]

my advice is this:

If you took away the NRAS incentives would you still purchase the property?

if the answer to that question is no, just walk away.

A like this school of thought and often discuss this with clients when they want to build brand new, just for the $15K FHOG (in SA).

I still think it applies, if the property doesn't stack up without the incentive then why buy it. The incentive should be the cream on top of the cake.

 

[VaSSagO]

my advice is this:

If you took away the NRAS incentives would you still purchase the property?

if the answer to that question is no, just walk away.

I disagree with this. To me there are lots of good properties out there and for me to pick one above the others it must have a good "bonus". Whether it be subdivision potential, under market value, high rent or NRAS.

In saying that I wouldn't touch most of the NRAS properties I have seen. I did see two 3x2x2 NRAS villas in Balga the other day for $400k each, snapped up straight away by Eastern States investors unfortunately. I would of picked up one or both of those.

A positive that you missed is it is easier to find tenants! My rent of my NRAS property I purchased ~13mths ago has gone up $37pw, tenant found quickly even with higher than normal rentals in Perth available at the moment.

 

[Redom]

my advice is this:

If you took away the NRAS incentives would you still purchase the property?

if the answer to that question is no, just walk away.

This viewpoints marketed by some as a way to think of it. I like its simplicity, but I think its worth digging a little deeper in the analysis of the investment. NRAS is a tax benefit, and ignoring it simply doesn't make sense when making comparisons.

For me, its $110k in my pocket when applied in a structured manner. Given that I intend to re-invest the returns each year at roughly 4-5% p.a., it ends up being worth about $150k over a 10 year period.

Not including this in your analysis of the investment doesn't make much sense to me. Its too material, it does and SHOULD be factored into your investment decisions.

If you're comparing an NRAS investment vs a non NRAS investment, best to project out the capital gain difference between the two and work out whether it'll beat the NRAS investment after the 110-150k cash flow benefit you receive.