Nras #2

[MikeF]

Our plan was to buy in QLD around $350k property borrow as much as we could and use the $10k grant as the main contributor to the holding costs in the first year.

Hi Fairsjk

Planning to access the $10K immediately to cover holding costs could be a problem as the incentive is paid each tax year around June/July and consists of two parts of which only 25% is in cash. The 75% balance is paid as a refundable tax offset.

Also, I've read that where the property is made available for rent part way through the NRAS year (1 May - 30 April) a partial entitlement will be paid in the first and final NRAS year.

 

[Fairsjk]

Hi Fairsjk

Planning to access the $10K immediately to cover holding costs could be a problem as the incentive is paid each tax year around June/July and consists of two parts of which only 25% is in cash. The 75% balance is paid as a refundable tax offset.

Also, I've read that where the property is made available for rent part way through the NRAS year (1 May - 30 April) a partial entitlement will be paid in the first and final NRAS year.

No I was not planning to use the NRAS Incentive I was planning to use the QLD Government Boost Money of $10000. Also was planning to use a tax variation to further free up some cash. That first years tax return is massive and unlocking it will make things a hell of a lot easier. There is also at least $500 a month of household expenses (e.g. rates, insurances, Christmas Presents etc conservatively that we are paying monthly that we can be paying in August when we get the NRAS Incentive. I am extremely confident serviceability is not a worry for us (the banks might not see it that way unless we go with First Mac) it is just getting the right val on our PPOR. Had a look at the latest growth figures in a property mag in our area and they are showing 11% growth in the last year. If we get half of that and the valuer factors in at least cost price for our reno's (render, flooring, roof and 3.5kw solar) we will get at least $480/490k which will sneak us over the line.

 

[euro73]

Hi Fairsjk

Planning to access the $10K immediately to cover holding costs could be a problem as the incentive is paid each tax year around June/July and consists of two parts of which only 25% is in cash. The 75% balance is paid as a refundable tax offset.

Also, I've read that where the property is made available for rent part way through the NRAS year (1 May - 30 April) a partial entitlement will be paid in the first and final NRAS year.

Mike is right. absolutely

It's really important to factor in @ 15K of holding costs at a minimum, unless you have an income that provides for that sort of surplus cash flow. You cant rely on the boost or the incentive to carry the holding costs in the first year, as they aren't paid to you on a fortnightly or monthly basis. They come AFTER you get through the year, and the NRAS incentive is, as Mike has suggested- paid on a proportional basis. ie if you settle on a property and enter it into the NRAS on Jan 1, you'll only be entitled to @ 6 months of incentive that particular year. It's really important to factor this in.

The marketers wont tell you any of this. They are selling properties- not giving you financial advice. They promote all NRAS as being cash flow positive (which it is- eventually) but don't really explain the nitty gritty of how to get through the year or 18 months BEFORE the property goes positive. Understanding how you get paid the incentive, when you get paid the incentive and how to set up a "buffer" is really key.

But you also have to factor in a valuation shortfall of something around 5%, and you also have to factor in relevant legal costs and duties.

This is why I would always propose that anyone considering NRAS, should do their numbers based on a 65- 70% LVR for NRAS, if at all possible- it should mean your purchase and loan will "land" around 80%, after factoring in all of the following.

20% deposit to avoid LMI
Buffer for low valuation - somewhere around 5%
Buffer for holding costs and duties etc. (this will vary state to state, and stamp duty on land + construct is cheaper than on completed, for example)

If you do some quick maths, you'll see that trying for 90% means that even a 2 or 3% valuation shortfall tips the deal over 90% and even if you could cover it with savings, it likely leaves you no cash buffer for holding costs, so you would face cash flow pressure for 12-18 months. For some high income earners that may be manageable, but for most mere mortals that's a big ask- especially if rates go up.

Of course, I realise not everyone can access 30-35% equity from elsewhere for investment purposes, so sometimes you'll need to go above 80% LVR. But what I've suggested above is the "ideal", and you should definitely not try and exceed 85%, because you need the buffer for the low val (which is basically something you should treat as a given, whether you agree its fair or not) and holding costs. Even at 85% I think its way too tight for most people, but again, if someone has the income to make it work- it may be OK.

But what I'm trying to illustrate is that 90% deals just leave you no room to move. You need the val to be perfect and have enough surplus cash to cover legal and duties and to cover 12-18 months of holding costs, to make a 90% deal work.

Buy a cheaper NRAS property if you have to- but try and have 30% upfront if at all possible.

 

[Fairsjk]

Mike is right. absolutely

It's really important to factor in @ 15K of holding costs at a minimum, unless you have an income that provides for that sort of surplus cash flow. You cant rely on the boost or the incentive to carry the holding costs in the first year, as they aren't paid to you on a fortnightly or monthly basis. They come AFTER you get through the year, and the NRAS incentive is, as Mike has suggested- paid on a proportional basis. ie if you settle on a property and enter it into the NRAS on Jan 1, you'll only be entitled to @ 6 months of incentive that particular year. It's really important to factor this in.

.

I am pretty sure QLD Boost is paid on settlement. Combined with a tax variation and some rejigging of our expenses we would have that $15k. As you say Euro though finding the right price point in QLD might be a problem especially considering some of the low vals. Tell me this Euro do you pay lower Stamp Duty in Victoria if you buy a house that is not already constructed? Does the amount of stamp duty depend on what stage of the construction you are at.

 

[MikeF]

I am pretty sure QLD Boost is paid on settlement.

Sorry not being a Queenslander I didn't realise that the Boost was in addition to the NRAS incentives. And yes your right, it is paid on settlement.

 

[Fairsjk]

Sorry not being a Queenslander I didn't realise that the Boost was in addition to the NRAS incentives. And yes your right, it is paid on settlement.

Thats OK it only started two days ago. Makes the numbers a little easier but still have to find the lower price points. You are right not being a canetoad is a disadvantage in many ways aside from football. Still trying to find a stamp duty calc that takes into consideration that saving from off the plan.

 

[euro73]

Thats OK it only started two days ago. Makes the numbers a little easier but still have to find the lower price points. You are right not being a canetoad is a disadvantage in many ways aside from football. Still trying to find a stamp duty calc that takes into consideration that saving from off the plan.

Generally speaking, you'll definitely save on stamp duty where you purchase land first, and then build. Some states are also doing stamp duty exemptions for OTP. What you'll save will be determined by the various stamp duty rates applicable in each state. Best place to check stamp duties is on the various state revenue websites, such as Office Of State Revenue NSW, Vic, etc. Be mindful that there's not a huge amount of OTP NRAS in the market for the moment. There is some around but it may not suit your budget. Then again- it may

The house and land process is a very popular selling point amongst property marketers specifically because of the duty savings, and rightly so, BUT like all things there are also downsides to consider. ie- It means carrying non deductible debt (from the land loan) and then carrying further incremental increases to non deductible debt for whatever the construction period is (as the progress payments are made by the bank or lender for the construction loan) PLUS waiting until you can get a certificate of occupancy, THEN entering the property into the NRAS, and THEN waiting however many months to get all or a proportional amount of the NRAS incentive.

All in all it can mean significant additional holding costs, none of which are deductible during the construction period - although you should seek tax advice on this to be sure. If the construction is going to be quick, this isn't much of a headache as long as you factor in the costs, but if the land isn't registered yet and the build is delayed for any reason- it can add up to a sizeable headache if you dont have surplus cash flow to carry you through.

You should also seek tax advice on whether a tax variation is possible with NRAS. There has been some varying opinion on this forum about it. I believe the normal depreciation and deductions associated with investment property can be used towards a monthly variation, but I suspect the NRAS components ( state and federal) cannot be considered, as they are not based on monthly eligibility. They are paid only when the property is proven to be compliant for the entire period it has been entered into the NRAS for that particular year.

 

[Rolf Latham]

BUT like all things there are also downsides to consider. ie- It means carrying non deductible debt (from the land loan) and then carrying further incremental increases to non deductible debt for whatever the construction period is (as the progress payments are made by the bank or lender for the construction loan) .

Hi Euro

I think the interest would be deductible in both cases here on the basis of Steele V ATO, since there is clear and obvious intent to rent.

I guess what yiu are trying to say is there is NO positive cash flow, and that indeed can usually blow out the Stamps savings of a land / build over a finished product

ta

rolf

 

[euro73]

Hi Euro

I think the interest would be deductible in both cases here on the basis of Steele V ATO, since there is clear and obvious intent to rent.

I guess what yiu are trying to say is there is NO positive cash flow, and that indeed can usually blow out the Stamps savings of a land / build over a finished product

ta

rolf

Tell me (well, all of us actually ) more about Steele v ATO, if you can Rolf. That sounds really interesting. I guess as I said in my post, people should definitely seek tax advice, but it was certainly my understanding that the debt wasnt deductible during the build. Happy to be corrected, for sure.

Gee these forums are handy sometimes

 

[euro73]

Actually - found it. t's a bit of a technical read but here 'tis...

http://law.ato.gov.au/atolaw/view.h...s at 18 March 1993)&recnum=3&tot=6&pn=ALL:::E


And there's also this... http://www.ato.gov.au/content/downloads/IND00191817n17290609.pdf

see page 14- Similarly, if you take out a loan to purchase land on which to build a rental property or to finance renovations to a property you intend to rent out, the interest on the loan will be deductible from the time you took the loan out

Thanks for the good oil, Rolf

 

[Rolf Latham]

Tell me (well, all of us actually ) more about Steele v ATO, if you can Rolf. That sounds really interesting. I guess as I said in my post, people should definitely seek tax advice, but it was certainly my understanding that the debt wasnt deductible during the build. Happy to be corrected, for sure.

Gee these forums are handy sometimes

I learn things like that everyday from my client interactions, and lots from this and other forums too.

I dont provide tax advice, I just happen to know this one from personal and lots of client experience.

I always recommend a client seeks their own tax, legal and investment advice, because not only does it make sense, but new lending laws preclude us from providing anything but credit advice.

ta

rolf

 

[abbyfresh]

I have done generalised number crunching - so please no one shoot me down!
These are simply opinions - and may not be fact or have any substance.
Take it as you will!
My summary - but take it in good account if you are thinking of buying NRAS.
On average NRAS properties are inflated by at least 5% compared to a similar new build in that given area or recent build in area like 1 or 2 years old.
Do the maths on how much more you could be paying there. That means higher interest to hold property because you have already spent more to be begin with. Does that make your Tax Credit look less good now?
For it to work in your favour (irrespective of the Tax credit as that should not be the driving force only of such a purchase) - you should be buying a NRAS property at least 5% or 10% less than a comparable property. Not similar or more. Then you are on reasonable level playing field, as the 20% less rent, + audit fee, and lower LVR are all red-tape that can minimise your options and hold you down.
A NRAS should represent a decent buy without the Tax Credit, and the Tax Credit just the cherry on the cake. Not the icing and flounder mix.
Plus you have a good $15k+ with holding & legal costs on your money from order to it being rentable. You may pay less on stamp duty but this makes up for it.
On average you will be paying 2%+ more on property management. Not much, but do the math’s on that over 10 years.
$1,000 + p.a in audit and extra admin fees. Not much, but still a lot over 10 years.
The Tax Credit is more attractive in the first few years. By 5 years or more, rents are rising faster than the CPI increase in Tax Credit, but you are still hitting a 25% less income return. Do the maths on a change in market rent of $350 from year one to $450 on year 5. 25% of $450 is a much bigger hit than 25% less income on $350. Your interest to hold property is likely the same.
In summary, the Tax credit will not save you if you pay too much for the property to begin with, and the discounted return will equally not save you particularly as market rents rise a lot in subsequent years.
All in all if you are putting down 20% as your own cash into it, then in the first few years it may be pretty cool, then after that you are evening out and heading south compared to buying non NRAS.
Everyone’s situation is different, and I can appreciate for many what I am saying doesn't apply or is incorrect.
Most people talking up NRAS are the marketers or people that have heard about how good it may be. You'll find very few outstanding case studies or testimonials from people who have actually bought some time ago with huge success.
At the end of the day, you are subsidising tenants that are eligible for special government housing deals. If you are worse off in 10 years compared to buying a comparable non NRAS property, then you have invested more in government housing as a community service, and not strictly property investment whereby maximum beturns be it rent, CG or both are the name of the game.
For those that feel personally responsible or would like to invest in public or more affordable housing in conjunction with the Government, then if the dollars don't always stack up your way, then there should be no harsh feelings, as you are fulfilling other good community deeds too.

Tread your own path as Scott Pape says

 

[euro73]

I have done generalised number crunching - so please no one shoot me down!
These are simply opinions - and may not be fact or have any substance.
Take it as you will!
My summary - but take it in good account if you are thinking of buying NRAS.
On average NRAS properties are inflated by at least 5% compared to a similar new build in that given area or recent build in area like 1 or 2 years old.
Do the maths on how much more you could be paying there. That means higher interest to hold property because you have already spent more to be begin with. Does that make your Tax Credit look less good now?
For it to work in your favour (irrespective of the Tax credit as that should not be the driving force only of such a purchase) - you should be buying a NRAS property at least 5% or 10% less than a comparable property. Not similar or more. Then you are on reasonable level playing field, as the 20% less rent, + audit fee, and lower LVR are all red-tape that can minimise your options and hold you down.
A NRAS should represent a decent buy without the Tax Credit, and the Tax Credit just the cherry on the cake. Not the icing and flounder mix.
Plus you have a good $15k+ with holding & legal costs on your money from order to it being rentable. You may pay less on stamp duty but this makes up for it.
On average you will be paying 2%+ more on property management. Not much, but do the math’s on that over 10 years.
$1,000 + p.a in audit and extra admin fees. Not much, but still a lot over 10 years.
The Tax Credit is more attractive in the first few years. By 5 years or more, rents are rising faster than the CPI increase in Tax Credit, but you are still hitting a 25% less income return. Do the maths on a change in market rent of $350 from year one to $450 on year 5. 25% of $450 is a much bigger hit than 25% less income on $350. Your interest to hold property is likely the same.
In summary, the Tax credit will not save you if you pay too much for the property to begin with, and the discounted return will equally not save you particularly as market rents rise a lot in subsequent years.
All in all if you are putting down 20% as your own cash into it, then in the first few years it may be pretty cool, then after that you are evening out and heading south compared to buying non NRAS.
Everyone’s situation is different, and I can appreciate for many what I am saying doesn't apply or is incorrect.
Most people talking up NRAS are the marketers or people that have heard about how good it may be. You'll find very few outstanding case studies or testimonials from people who have actually bought some time ago with huge success.
At the end of the day, you are subsidising tenants that are eligible for special government housing deals. If you are worse off in 10 years compared to buying a comparable non NRAS property, then you have invested more in government housing as a community service, and not strictly property investment whereby maximum beturns be it rent, CG or both are the name of the game.
For those that feel personally responsible or would like to invest in public or more affordable housing in conjunction with the Government, then if the dollars don't always stack up your way, then there should be no harsh feelings, as you are fulfilling other good community deeds too.

Tread your own path as Scott Pape says

On average NRAS properties are inflated by at least 5% compared to a similar new build in that given area or recent build in area like 1 or 2 years old - I don't agree this is a fair assessment. I would agree that SOME developers try this on, and SOME developments are over priced, but banks use valuers for a reason. If the valuation doesnt stack up on a particular investment purchase (whether it's NRAS or not) dont buy it. But a 5% Variation when compared to 2 year old stock isn't a valid comparison, unless you don't believe prices have increased @ 5% in the last 2 years? The only reasonable comparison you should be making is like for like. ie brand new. same size, land area, location, etc.- and if a valuer says its overpriced based on valid comparisons, dont buy it- find something else, somewhere else, that isn't over priced.

For it to work in your favour (irrespective of the Tax credit as that should not be the driving force only of such a purchase) - you should be buying a NRAS property at least 5% or 10% less than a comparable property. Im not sure what you're trying to say...

Then you are on reasonable level playing field, as the 20% less rent, + audit fee, and lower LVR are all red-tape that can minimise your options and hold you down. - The NRAS incentive more than compensates for the reduced rental income, and other associated costs. That's the whole point. The scheme is all about giving up a little bit to get back a little bit more. No one is suggesting the entire NRAS incentive is pure cream No one is suggesting NRAS is a magic bullet. All it does is make a property cash flow positive- and therefore more affordable for an investor, and more attractive as a cash flow prospect. Most people posting here have recommended NRAS as part of a portfolio because of the cash flow benefits- not the only stock in a portfolio. 90% LVR is available if you want to use it. This is no different to conventional investment property LVR's.

A NRAS should represent a decent buy without the Tax Credit, and the Tax Credit just the cherry on the cake. Not the icing and flounder mix.
Plus you have a good $15k+ with holding & legal costs on your money from order to it being rentable. You may pay less on stamp duty but this makes up for it. You have holding costs on any investment property. NRAS or non NRAS. The holding costs happen to be 20% greater on NRAS, but only after the property is completed and tenanted, and those costs are deductible and you also receive an incentive. The 15K you refer to isnt 15K more than a non NRAS. For a non NRAS purchase, holding costs may be 12-12.5K for example. Its a 20% difference, not a 15K difference. And the non NRAS owner doesnt get an additional $9524 back, tax free this financial year

On average you will be paying 2%+ more on property management. Not much, but do the math’s on that over 10 years. Yes, but also deductible

$1,000 + p.a in audit and extra admin fees. Not much, but still a lot over 10 years. Yes, but also deductible. You aren't qualifying what you are saying with numbers. Any side by side comparison of 1 smith street (3 bedroom, 500m2 land, non NRAS for example) and 3 smith street ( same house next door, but with NRAS) will confirm that you are significantly better off financially with the NRAS property, after 10 years

The Tax Credit is more attractive in the first few years. This isnt correct- It's tied to the rental component of CPI

By 5 years or more, rents are rising faster than the CPI increase in Tax Credit, but you are still hitting a 25% less income return.[/B] 25% only applies to the QAHC model. For everyone else its 20%.

Do the maths on a change in market rent of $350 from year one to $450 on year 5. 25% of $450 is a much bigger hit than 25% less income on $350. Your interest to hold property is likely the same. Yes, but the NRAS incentive will also have increased in line with the rental component of CPI , and the property will have been cash flow positive for 4 years, by year 5.

In summary, the Tax credit will not save you if you pay too much for the property to begin with, and the discounted return will equally not save you particularly as market rents rise a lot in subsequent years. I agree- paying too much is silly, but that applies to any investment purchase - so I refer back to the first point- dont buy it if its overpriced. Thats what valuations are for Your post seems to be based on the absolute assumption that all NRAS property is priced unfairly, and that's just not the case. Where it is the case, your arguments carry some validity, but as long as an investor can buy at a reasonable price- all your other points are , respectfully- hard to support

All in all if you are putting down 20% as your own cash into it, then in the first few years it may be pretty cool, then after that you are evening out and heading south compared to buying non NRAS. all investment is a risk. Why would a property with an NRAS allocation be any more likely to devalue than a property next door or across the road,without an NRAS allocation?

 

[euro73]

Here's a very basic side by side comparison - by no means comprehensive
400K property. 100K income

1 smith street - 400K
Income from normal market rental $450 per week. - $23,400 p/a
Property Management Fees @ 6% of $23,400 - $1404
Interest on 400K @ 7.5% $30,000
Depreciation @ 7K
Insurance @ $600
Rates @ $1200
Total Loss/deduction = $16804
Taxable Income is now $83196 so you get @ $6217.48 refund if you paid tax on PAYG 100K during the year.

3 Smith Street- 400K (exact same builder, lot size, floor plan, etc)
Income from NRAS rental (20% BELOW MARKET) $18720
PM Fee (based on 10% )$1872
Interest on loan 30K
Depreciation 7K
Insurance $600
Rates $1200
Total Loss/deduction $21,052
Taxable Income is now $78,984, meaning a $7715.60 refund PLUS $9524 (minus a 5-7% consortium fee -lets use 7% ie $666.68 ) = $16572.92

Items marked in BLUE are the differences between NRAS and NON NRAS

Obviously there are other deductions and what not, but this gives you a pretty simple idea of how the "concept" works. Do your own number crunching of course. This is by no means meant to be a complete and comprehensive example.

 

[Fairsjk]

Does anyone have any experience or have had a look at the Brisbane Housing Company properties and if so what are your impressions? 14% total management fees. Is that excessive? Assuming that is a combination of the actual property management fee and the other fees associated with NRAS properties.

 

[russellpeter]

Does anyone have any experience or have had a look at the Brisbane Housing Company properties and if so what are your impressions? 14% total management fees. Is that excessive? Assuming that is a combination of the actual property management fee and the other fees associated with NRAS properties.

14% total management fees is way over market in brisbane
I manage NRAS properties and there are no other fees you should be charged from your PM.

 

[euro73]

are you referring to all the fees associated with the property management and compliance? ie- the PM fee, plus the Brisbane Housing Company admin/compliance fees? Or are you saying that the PM fee alone is 14%?
If so, that seems really, really excessive. But if the 14% is made up of a 5 or 6% compliance fee, which is pretty standard amongst the consortiums, plus a PM fee of 8 or 9%, that sounds about right.

 

[Fairsjk]

are you referring to all the fees associated with the property management and compliance? ie- the PM fee, plus the Brisbane Housing Company admin/compliance fees? Or are you saying that the PM fee alone is 14%?
If so, that seems really, really excessive. But if the 14% is made up of a 5 or 6% compliance fee, which is pretty standard amongst the consortiums, plus a PM fee of 8 or 9%, that sounds about right.

I believe it is the total fee. Because you buy with them are you required to use their PM? They are selling some studio's that are in our price range (well before the last few days on the market/bloodbath). Do banks have the same view of studio's in NRAS that they do out of it, or are they even stricter?

 

[euro73]

Pretty tough finding funding for sub 50m2 studios at the best of times, but when you add NRAS - really tough.

Brisbane Housing Company operates a Head Lease Agreement and only Westpac, STG and RAMS lend against their model, as far as I'm aware.
(Although maaaaaaaaybe you can get NAB to take a look)

If the studio's you are referring to are in the Newstead development, I think they're well under 50m2, maybe down around 40m2, so you're probably going to have a pretty tough time with finance (but you would have a really tough time anyway, even if they didn't have NRAS allocations)

If that's the stock you are in fact referring to - those studio's have been on the market for quite some time- maybe about a year? It's probably fair to assume that's because finance isn't very easy to find for them.

Best bet is probably STG, who do NRAS and will consider sub 50m2 up to 65-70%LVR. But I'd be surprised if they hadn't already reached their maximum exposure inside that development, seeing as there are 19 or 20 of them there which are sub 50m2 and NRAS, and they've been around a year or thereabouts.

As I said earlier, NAB may also be an option, as they're apparently adding a couple of NRAS consortiums to their approved list this week (there will be 4 now, but I dont believe BHC is amongst them- I think its QAHC, Questus, Ethan and AMC) and they "may" look at it for you at 65-70%LVR, as they do sometimes take sub 50m2 stock. Worth asking them at least.

Westpac is out. Rams is out. Firstmac is out. Although all three might be willing to do a one off at a 60ish LVR.

 

[onlyifamppowered]

Anyone got real experence? ie , own one ??

HI all
I have just finished reading most of this thread ( it's kinda long and old to start with ) and am in the process of buying an NRAS properity at Augestine Heights in Ipswich. All makes good sense to be with the gov incentives etc but lots of knocker too.
I would love to hear from anyone how their NRAS is going, good or bad?
Rob