NRAS calculations

[devank]

Hi,
I created a simple spread sheet to see how numbers work in regards to NRAS properties.

Please let me know if my assumptions are reasonable.

Only the col 'C' needs to be customised if you really want.. but I believe my assumptions are ok


According to my calculations, it is about 5.5K better of by going NRAS. The question is... is it worth the hassle?

- devank

 

[Ausprop]

what is the hassle that you speak of?

 

[mumbai]

Yes, please elaborate on the hassles as NRAS is looking more promising to me now after reading the comments from Ausprop and Edge in the last thread.

 

[devank]

1. Unknowns
2. Dependency on Gov and their regulations.
3. Dependency on consortium. They could change their fees structure. 10 years is a long time. They could stop functioning.
4. Less choice in PMs
5. Less choice in lenders
6. Dependency on -ve gearing

The whole thing is depending on too many factors. Tax man, RE agents, consortium & Gov. Any stuff up in anything can blow the whole thing.
Compare this to say a GF strategy or cf+ apartment. You are only depending on the RE agents.

If cashflow is the point in this strategy then simply investing in shares may give similar returns with any of these stuff!

Anyway, I didn’t start this thread to argue these points. My aim was to do the number crunching behind the NRAS strategy.

 

[euro73]

Just a couple of comments

You have assumed 7% Interest rate... I assume you've done so to allow for fluctuations across 10 years, which is a good idea. But I think that because there are now several NRAS lenders where you can get mid-high 5's on a 4 or 5 year fixed rate, or low-mid 5's on a 2 or 3 year fixed rate. It would be more accurate to use 6%. This would obviously improve the outcome by a reasonable amount

You have used depreciation of 2%. During the first 10 years in particular, a diminishing schedule should deliver at least 2.75-3%, so I would think a figure of 10-11K would be more accurate. But conservatively, 9K would certainly be more than reasonable. This would also obviously improve the outcome.

You have used a Marginal tax rate of 31.5% for the spreadsheet. For the 2012/13 year, incomes between 37,001 and 80K are taxed at 32.5% plus 1.5% medicare levy -so 34%. Income between 80,001 and 180K are taxed at 37% plus medicare levy of 1.5%, so 38.5%. Applying these rates would further improve the outcome.

I also cant see where you have credited $9981 for the NRAS incentives?

 

[devank]

Yes... I agree. I was a bit conservative in almost all assumptions.

I also cant see where you have credited $9981 for the NRAS incentives?

Cell F16: 'Gov credit - Audit fee'

 

[euro73]

1. Unknowns
2. Dependency on Gov and their regulations.
3. Dependency on consortium. They could change their fees structure. 10 years is a long time. They could stop functioning.
4. Less choice in PMs
5. Less choice in lenders
6. Dependency on -ve gearing

The whole thing is depending on too many factors. Tax man, RE agents, consortium & Gov. Any stuff up in anything can blow the whole thing.
Compare this to say a GF strategy or cf+ apartment. You are only depending on the RE agents.

If cashflow is the point in this strategy then simply investing in shares may give similar returns with any of these stuff!

Anyway, I didn’t start this thread to argue these points. My aim was to do the number crunching behind the NRAS strategy.

1. What unknowns? ALL investment is risk.
2. Same risk applies to Superannuation, CGT, neg gearing, tax rates... NRAS legislation is no more or less a risk of being altered than any other legislation. remember- this is a bi-partisan scheme. It was designed by the Libs in 07, introduced by Labour in 08. Labour tried to cut it back from 50,000 to 35,000 dwellings in 2010 and the Libs and Greens blocked them.
3. If a consortium goes under - the NRAS incentives are simply transferred to another consortium. No consortium has folded since the scheme was introduced in 2008.
4. Not quite true. For some consortiums- this statements is accurate. QAHC for example, who operate a Head Lease and prescribe a manager. But NEJV models such as Ethan Affordable Housing or Questus, there is plenty of choice.
5. Well yes, this is true, but come on- there are at least 15 to choose from. You have far less choice of lenders with SMSF than with NRAS. You have far less choice of lenders with sub 50m2 units than with NRAS . You have far less choice of lenders for no resident loans than with NRAS. You have far less choice of lenders for non genuine savings loans than with NRAS. I think a choice of resimac, firstmac, wide bay, Adelaide Bank, members equity, nab, anz, the rock, westpac, stg, rams, bank sa, bank of melbourne, bendigo bank and BOQ is plenty. Almost all of them offer LVR's up to 90% plus capitalised LMI. A couple even allow you to use the NRAS tax incentives for servicing up to 80% LVR.
6. I dont understand this point. There is nothing that says you must run an NRAS property, or any other investment property, negatively. if you wish to contribute a 40-50% deposit and only borrow 50-60% LVR, Im sure the property would quite comfortably run positively geared as well as CF+. But when you can take advantage of both Neg gearing and still enjoy a CF+ property, I dont see why you wouldnt?

 

[euro73]

Yes... I agree. I was a bit conservative in almost all assumptions.


Cell F16: 'Gov credit - Audit fee'

You've provided for $8500... wheres the other $1481?

If for example, I secured the loan with members Equity at a fixed rate of 5.39%, the 350K property used in your example would return me about $6947 CF+ at a MTR of 38.5%, or $5730 CF+ at a MTR of 34%.

If I were to then redeploy those funds each year onto a P & I non deductible mortgage for 10 years, I'd save between 170-250K in interest from my PPOR mortgage, and between 10-17 years in time off the PPOR mortgage, depending on the size of the PPOR mortgage. And dont forget, no CGT to be paid on my PPOR if I ever sell it.

And if I had bought a non NRAS instead, Id not only NOT have made the CF+ outcome, and NOT have paid off my mortgage ultra fast, but I'd also have had to fork out about $1700 per year in after tax , out of pocket costs, just to hold the non NRAS property.

Imagine if I had an extra $1700 per year available ( plus the 6-7K from NRAS) to pay onto my PPOR mortgage!!! Id pay it off even faster.

This is the real secret of NRAS which everyone continues to miss. You can't just measure the cash flow yield in isolation. Even though its extremely impressive cash flow, it's only half the story. The whole story is the tax free surplus cash flow redployed onto non deductible debt. That's what makes it so powerful.

Bottom line. Do some basic maths. One NRAS property around 350K should help you pay off your 500K PPOR mortgage 10 years faster, or your 250K PPOR mortgage 17 years faster, based on a 6% P & I rate. It will save you hundreds of thousands in interest, which means that if you ever sell, you owe the bank a lot less. Or if you dont sell, you can instead invest over and over again using the extra equity you've created through the accelerated debt reduction. And this strategy doesn't rely on growth to work, and it doesnt cost you ONE CENT out of your own pocket! The only thing you have to put up is equity to provide the deposit and costs.

I've just shown you how to create about 200K of CGT free "wealth" without $1 of capital growth being required. Im not suggesting you wont get growth- Im just saying that NRAS will create wealth for you with or without growth, and without you having to pay one cent for it from your own pocket.

What other investment strategy can anyone suggest that is essentially mathematically certain to produce a 200K CGT free return for you without you having to prop it up with cash injections, while also getting your home paid off 10-17 years faster?

 

[BMan]

heres how it should be with the correct tax rate and NRAS incentive

im sure if you wanted to work out the compounding effect etc it would work out even better as euro73 has stated

 

[devank]

heres how it should be with the correct tax rate and NRAS incentive

im sure if you wanted to work out the compounding effect etc it would work out even better as euro73 has stated

Yes. I used the 2011/12 tax rate. It is correct to use the 34% now.

There is an audit fee which is taken out from the $9981. For example Ethan NRAS model takes out 7.5% which is about $750 per annum. May be it is fair to use $9,230.00.

 

[euro73]

Best to include that in your costs, along with property management fees, rates etc.

 

[HotRod]

How I view things attached.

The NRAS property should be putting about $5300 after tax in you pocket each year from year 1 rising to about $7700 after 10 years. Thats about $65000 in your pocket over 10 years and not having to worry about hos much it is worth or where you will find money to pay the mortgage.

The non-NRAS will cost you all up about $12000 in 10 years with you having to top it up each year until about year 9, when it turns positive.

The intersting bit is that you will have to keep working to pay for the non-NRAS property, whilst with the NRAS property you don't need to after about 5 years as the gov credit matches the pre-tax cash flow.

 

[possumcreek]

How I view things attached.

The NRAS property should be putting about $5300 after tax in you pocket each year from year 1 rising to about $7700 after 10 years. Thats about $65000 in your pocket over 10 years and not having to worry about hos much it is worth or where you will find money to pay the mortgage.

The non-NRAS will cost you all up about $12000 in 10 years with you having to top it up each year until about year 9, when it turns positive.

The intersting bit is that you will have to keep working to pay for the non-NRAS property, whilst with the NRAS property you don't need to after about 5 years as the gov credit matches the pre-tax cash flow.

Ahh...now that's looking more promising.

 

[devank]

1. Gov credit of $10,430.00 instead of $9981?
2. You removed the 'Additional PM fees'. Generally PMs charge 7.5% but NRAS ones seem to be charging 10%. That is why I initially had 2.5% as Additional PM fees.
3. Scheme Fee on Gov Credit is set at 5.5% instead of 7.5%. Why is not included in the final calculations?

 

[HotRod]

1. Gov credit of $10,430.00 instead of $9981?
2. You removed the 'Additional PM fees'. Generally PMs charge 7.5% but NRAS ones seem to be charging 10%. That is why I initially had 2.5% as Additional PM fees.
3. Scheme Fee on Gov Credit is set at 5.5% instead of 7.5%. Why is not included in the final calculations?

1. The $10430 was going off a one I was looking at here in WA. I guess change it if it is incorrect. Should make about a $400 difference.
2. I have included the extra 2.5% in the IP expenses for the NRAS property. The costs are based on the rent and not the capital cost of the purchase.
3. The scheme fee is included with IP expenses in the deductions.

 

[devank]

I thought the scheme fee is absorbed by the developer. Apparently there is a yearly audit fee and that is what I took out from the gov incentives.

 

[HotRod]

I thought the scheme fee is absorbed by the developer. Apparently there is a yearly audit fee and that is what I took out from the gov incentives.

You still get the FULL government incentive. It's just that you get the net incentive after they take their fee which is included in IP expenses.


Same as rent. You get the full rent, it's just paid to you after the PM takes their fee, which you then include as IP expenses.

 

[euro73]

Just FYI, so you know these results can be improved on even further

1. You can get such good 3 year rates at the moment its hard not to look at them as the best strategy . Members Equity allows NRAS and has 5.39% at the moment. STG allows NRAS and has 5.59%. Makes a huge difference to the cash flow when you factor these lower rates in.

2. The results can also vary depending on the consortium. Each charges a very different NRAS compliance fee. Some are as low as 5% plus GST, others as much as 12% plus GST. That could mean a fee as low as $548.96 or as high as $1317.49

3. Many of the models who use a NEJV model also allow you to select your own Manager so you can probably negotiate PM fees well under 10%

So if you can get into an "average" NEJV model at about 7.5% plus GST, with PM fees of 8%, and get the loan in the mid 5%'s, the cash flow should be quite impressive.

 

[euro73]

Quick update. STG has apparently reduced its 3 year rate to 5.49% now, so makes the cash flow just that little bit better , again

 

[euro73]

Westpac - just reduced their 3 year rate to 5.54% today.