Nras #2

Discussion in 'Innovative Techniques' started by newbyinvestor, 20th May, 2011.

  1. euro73

    euro73 Member

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    Ethan are good operators. I have several Ethan NRAS properties and have no issues with any of them. Their role is the NRAS Approved Participant ( consortium) - nothing else. As far as property management /strata is concerned, Ethan plays no role in Strata/Body Corporate but they will appoint a Property Manager in the area to manage the property for you.... call them and speak with them if you have any concerns.
     
  2. euro73

    euro73 Member

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    Adelaide Bank also uses the NRAS incentive towards servicing, on deals up to 80% LVR, but only through their wholesale channel ( mortgage managers such as Pioneer, Better Mortgage management etc) it's not available through their retail brand at all.

    Adelaide ONLY allows it to be used on construction deals.
    FirstMac ONLY allows it to be used on anything but construction deals.

    Regarding borrowing capacity - If you use the surplus cash flow generated by NRAS properties towards reducing non deductible debt, your borrowing capacity will increase as your non deductible debt decreases..... so in fact, NRAS can add to your borrowing capacity over time, quite significantly.
     
  3. DavidMc

    DavidMc Member

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    Yes... I can see this. Interesting. I have no non-deductible debt.

    I haven't done the maths yet (hard to do without lenders DSR calcs), would anyone be able to help I wonder how long say a $300k NRAS property would take until it increases a persons DSR roughly? Are we talking around 2 years or less?

    I remember on a previous thread 3x mortgage brokers said a property needs to yield 9-12% ish for it to have a nill effect on ones DSR.

    I'm not sure how the average lender calculates DSR though, is it something like income (wages + rent x 80%) >= debt x 30%?
     
  4. DavidMc

    DavidMc Member

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    Example:
    Purchase Price $300,000

    Market rent $300pw (5.2% yield)
    NRAS rent $240pw (4.2% yield) + $190pw incentive = 430pw (7.5% yield)

    Assumptions
    Expenses (rates etc) are equal to depreciation benefits.
    4.99% loan fixed for 3 years, 105% finance

    - $15,719 interest
    + $22,360 (rent + NRAS incentive)
    = $ 6,641 surplus a year - used to reduce debt

    How much extra can one borrow each year if they reduce their deductible debt by $6,641?

    Hopefully my shoddy maths will entice someone who knows more than me to jump in! :)
     
  5. tobe

    tobe Mortgage Broker

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    ok, Ill bite..... The DSR will 'increase' by $6,641 per year. that is, they will have that amount more to go towards a new debt, because its been retired from a non deductable debt.

    the issue is, not all lenders recognise the NRAS income, so while the overall cash position is better for the borrower, depending on the lender, it may indeed reduce the DSR in any particular servicing calculator....

    If the question is,

    "Will buying a NRAS property increase by DSR?" answer, no

    "will it increase over time" answer, maybe

    "if I use the savings to reduce deductable debt?" answer, maybe, but no more than retiring deductable debt by any other means.....
     
  6. euro73

    euro73 Member

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    This is true tobe, but the question is, how to retire non deductible debt by other means without extra income or cash flow?

    Some people are able to do this, but most investors in Australia struggle to get past 1 or 2 investment properties because the capacity to run 2 loss making properties, as well as a PPOR, is about all most people can cope with.

    And for most investors, negatively geared/negative cash flow property certainly detracts from their capacity to retire non deductible debt in an accelerated fashion, and it therefore detracts from their ability to build a portfolio, because we all know there's a point that borrowing capacity simply reaches a wall using a negative portfolio, no matter how much capital growth they achieve or how much equity they have at their disposal. ( unless the investor is on an unusually large income - but that's the exception to the rule.)

    Even where an investor does enjoy a significant enough income to allow them to run multiple properties at a loss and still have the capacity to retire some non deductible debt early, they could still retire that non deductible debt even sooner with the additional cash flow generated by NRAS.

    Ultimately, the capacity to retire any significant amount of debt early is beyond most investors, at least for the first 6-10 years of owning an investment property...unless they are an exception to the rule. If it wasnt, most investors would grow portfolio's beyond 1 or 2 properties.

    NRAS isnt the be all and end all, it should just be part of a portfolio but not the only part of a portfolio, if for no other reason than to assist with the longer term objectives of building beyond 1 or 2 properties. Without it, we already know that most investors will never get past a 1 or 2 property portfolio. With it, they may get far further.

    As far as how to manage it with borrowing capacity - I advise all of my clients to use the minimum amount of equity possible to accumulate 1 or 2 NRAS properties, ensuring that enough equity is retained for use when borrowing capacity is exhausted ... and then move to Adelaide or FirstMac ( where they'll need a 20% deposit) where they can keep going...

    By using the right lenders in the right order, borrowing capacity is most definitely aided by NRAS, one way or another. Adelaide or FirstMac's policies ensure it.
     
    Last edited: 29th May, 2013
  7. DavidMc

    DavidMc Member

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    My take on all this is:

    NRAS will increase ones 'real' cash flow, however the net, short term (1-3 years) effect is a reduction in DSR in the eyes of all lenders bar two.

    For investors who are just starting out, the extra cashflow would be great however to limit themselves to two lenders early on in their investing career is probably not a good move IMO.

    For investors who have a few properties and already have a hit the major lenders serviceability wall, but had enough equity, NRAS could be the solution to get another property with FM/AB. The downside is it would be even more difficult for future properties with major lenders under current policy (policy which is subject to change of course, and it has changed a bit recently).
     
  8. tobe

    tobe Mortgage Broker

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    Its quite a simple matter for negatively geared property investors to reduce their non deductable debt, without purchasing NRAS, or a cashflow positive property. Simple debt recycling will do the trick, without the short term impact on DSR, and reduced lender pool choice/LVR restrictions etc. Obviously take your own tax advice etc.

    Im sure their are circumstances where an NRAS property is appropriate to someones strategy. I just cant think of an example where another strategy would have the same or better effect.

    Note, I may be biased in my views on NRAS and I am not a specialist in their financing or selling....
     
  9. Housos

    Housos Member

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    Tenancy demand

    Is it possible that your NRAS property remains vacant because there are not enough tenants who qualify in an area? Is there any way to find out how many qualified tenants there are in an area (and ideally are they single or families)? Thanks in advance.
     
  10. Jay84

    Jay84 Member

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    I can tell u my experience with this
    I didn't know what I was doing, and, well I still don't, so don't take this as gospel!
    My crude (primitive) due diligence consisted of looking at population growth in the area, which was quite good, *and looked at how many rentals were available in the months prior to putting down the deposit, the rents seemed to be quite good and not many rentals available and low vacancy rate.

    I was told the developers wouldn't have all the NRAS houses and units started and finished together, so they wouldn't hit the market together and cause a glut. I naively believed that.

    There were about 35 houses and units of different sizes in total from different developers.

    Anyway long story short they were all built together, landscaped together (which led to delays in completing works) and yes they all hit the market together.*
    The agent had trouble getting tenants because too many hit the market together and vacancy rates etc before paying down the deposit ended up being not really relevant.
    After 1 month vacant I took a more proactive approach advertising on gumtree, in the local newspapers and also in neighboring areas , got a prepaid sim and answered questions, sorted out who was NRAS and who wasn't and referred them to the agent and presto all the owners got tenants in the next 2 weeks.
    The 20% discount on rent went a long way to attract attention.*
    Frustrating ? Yes. But all is well that ends well and we have a good tenant now.*
    Good luck with it.*
     
  11. Housos

    Housos Member

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    Thanks for letting me know your experience and congrats on the proactive approach you took to find yourself (and others) tenants.