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