Having trouble sleeping so thought I'd share a sobering experience today, some sad regrets re my own missteps with NRAS, and try to temper/nuance some investment advice I gave to good friends which has been too one-sided in the recent past.
Had another inquiry from a friend today regarding NRAS, and I was all too happy to share what had been a largely positive experience for me when I purchased it. As a subscriber to the no credit growth = no easy capital gain school of thought as well as being a firm capital city investor, I merrily chirped away describing how NRAS allowed me to buy a townhouse in a capital city at a price the bank fully agreed with, with 6k CF+ in year one.
Just as I thought I'd do a bit of quick digging to see if things had changed from last year, I stumbled across an article by Margaret Lomas on NRAS pitfalls:
http://www.propertyobserver.com.au/...n-its-own-margaret-lomas/2012120258187/Page-2
Most of it had been refuted in other articles as groundless fearmongering, but one bit of info gave me serious pause for thought: that the ATO had been clear in what appeared to be an easily generalisable private ruling about the state govt rebate ($2495) component of the govt rebate being classed as "NANE income", and therefore requiring that individual investors apportion any tax deductions they wish to claim between "eligible income" (i.e. expenses used to generate rental income" and "non-eligible income" (i.e. expenses incurred in receiving the state govt rebate). The full ATO private ruling can be found on the ATO site and also here:
http://www.qahc.asn.au/images2/ATO Review of NRAS230812.pdf
Nothing in the ruling appears to prevent it from being readily generalisable to the vast majority of individual NRAS investors partnering with one of the major consortiums, myself included. As I sat down to crunch the numbers in light of the need to apportion deductions (I'm an auditor, though not on the forefront of NRAS tax accounting) I arrived at my final figures:
Property value 351k
Loan amt 362k
NRAS rent 15k (assuming avg 50wks/yr)
Interest 20k
Other expenses 7.7k
Net annual cashflow avg over first 5 yrs BEFORE ruling assuming zero growth zero inflation 4.1k
Net annual cashflow avg over first 5 yrs AFTER ruling assuming zero growth zero inflation 2k (apportioned 86% rental 14% state govt NANE rebate)
Avg reduction per week in cashflow due to ruling -$38/wk (Michael Sloan's team acknowledges worst case of -$34/wk loss - http://webcache.googleusercontent.c...ng-the-numbers-game+&cd=3&hl=en&ct=clnk&gl=au)
Reduction over 5 yrs due to ruling -10k
Annualised return on equity 2.4%
Still CF+, but halving the profit might have been a deal-breaker for me - especially after all the research, computing the figures down to an absolute tee, and also passed up the option of renovating and flipping a bargain old unit (a strategy I have prior experience with). Exit strategy of selling to another NRAS buyer has just gotten a lot bleaker, and selling as a non-NRAS property to owner occupiers in a slightly dipping market for units even at purchase price will likely incur a bitter 20-30k loss overall (due to unrecoverable stamp duty + commissions).
All's probably not lost, and given the history of wrangling between the NRAS consortiums and the ATO, a follow-up private ruling for some consortiums may yet be issued in future. Suffice to say though, as things stand today, the "too good to be true" investment opportunity I saw 6 months ago is now only barely passable. (I see a lot of articles presumptuously comparing NRAS being CF+ with standard neg geared residential investment stock... as if neg geared junk is the only alternative to NRAS.)
I suppose the big takeaway for me is that I let myself get lulled into a false sense of security about some real NRAS risks due to what appeared to be a huge tax incentive, without realising that hunting for a good NRAS investment should be considered as challenging and time-intensive as hunting for undervalued reno units and subdivisions (which have only worked better for me and other friends in the last 2 years only because of sheer hard work and unrelenting due dil).
Not that I'd stop recommending future NRAS investments entirely, but to avoid the same mistake I'd definitely wake up to the fact that most NRAS properties, like most typical neg geared stock or buy-reno-flip opportunities, are a waste of time, and that a truly sweet deal will no doubt require at least the same level of hard work and due dil as for any other property investment. I'd look for a much higher CF++ equation (say 12k+ /yr minimum avg over 5 yrs) after factoring in a substantially higher risk of govt/ATO "rebate tampering/scrapping" and other risks such as stigma suburbs/streets, flood history, etc., as well as a minimum break-even exit strategy in spite of a zero growth zero inflation environment. Get hard facts, be ultra selective with the property and consortium, price-in all risk factors (modelling on bad-to-worst case), and have a solid disaster recovery/exit plan for when hell breaks loose.
Good luck! End of rant/sob/public penance.
Had another inquiry from a friend today regarding NRAS, and I was all too happy to share what had been a largely positive experience for me when I purchased it. As a subscriber to the no credit growth = no easy capital gain school of thought as well as being a firm capital city investor, I merrily chirped away describing how NRAS allowed me to buy a townhouse in a capital city at a price the bank fully agreed with, with 6k CF+ in year one.
Just as I thought I'd do a bit of quick digging to see if things had changed from last year, I stumbled across an article by Margaret Lomas on NRAS pitfalls:
http://www.propertyobserver.com.au/...n-its-own-margaret-lomas/2012120258187/Page-2
Most of it had been refuted in other articles as groundless fearmongering, but one bit of info gave me serious pause for thought: that the ATO had been clear in what appeared to be an easily generalisable private ruling about the state govt rebate ($2495) component of the govt rebate being classed as "NANE income", and therefore requiring that individual investors apportion any tax deductions they wish to claim between "eligible income" (i.e. expenses used to generate rental income" and "non-eligible income" (i.e. expenses incurred in receiving the state govt rebate). The full ATO private ruling can be found on the ATO site and also here:
http://www.qahc.asn.au/images2/ATO Review of NRAS230812.pdf
Nothing in the ruling appears to prevent it from being readily generalisable to the vast majority of individual NRAS investors partnering with one of the major consortiums, myself included. As I sat down to crunch the numbers in light of the need to apportion deductions (I'm an auditor, though not on the forefront of NRAS tax accounting) I arrived at my final figures:
Property value 351k
Loan amt 362k
NRAS rent 15k (assuming avg 50wks/yr)
Interest 20k
Other expenses 7.7k
Net annual cashflow avg over first 5 yrs BEFORE ruling assuming zero growth zero inflation 4.1k
Net annual cashflow avg over first 5 yrs AFTER ruling assuming zero growth zero inflation 2k (apportioned 86% rental 14% state govt NANE rebate)
Avg reduction per week in cashflow due to ruling -$38/wk (Michael Sloan's team acknowledges worst case of -$34/wk loss - http://webcache.googleusercontent.c...ng-the-numbers-game+&cd=3&hl=en&ct=clnk&gl=au)
Reduction over 5 yrs due to ruling -10k
Annualised return on equity 2.4%
Still CF+, but halving the profit might have been a deal-breaker for me - especially after all the research, computing the figures down to an absolute tee, and also passed up the option of renovating and flipping a bargain old unit (a strategy I have prior experience with). Exit strategy of selling to another NRAS buyer has just gotten a lot bleaker, and selling as a non-NRAS property to owner occupiers in a slightly dipping market for units even at purchase price will likely incur a bitter 20-30k loss overall (due to unrecoverable stamp duty + commissions).
All's probably not lost, and given the history of wrangling between the NRAS consortiums and the ATO, a follow-up private ruling for some consortiums may yet be issued in future. Suffice to say though, as things stand today, the "too good to be true" investment opportunity I saw 6 months ago is now only barely passable. (I see a lot of articles presumptuously comparing NRAS being CF+ with standard neg geared residential investment stock... as if neg geared junk is the only alternative to NRAS.)
I suppose the big takeaway for me is that I let myself get lulled into a false sense of security about some real NRAS risks due to what appeared to be a huge tax incentive, without realising that hunting for a good NRAS investment should be considered as challenging and time-intensive as hunting for undervalued reno units and subdivisions (which have only worked better for me and other friends in the last 2 years only because of sheer hard work and unrelenting due dil).
Not that I'd stop recommending future NRAS investments entirely, but to avoid the same mistake I'd definitely wake up to the fact that most NRAS properties, like most typical neg geared stock or buy-reno-flip opportunities, are a waste of time, and that a truly sweet deal will no doubt require at least the same level of hard work and due dil as for any other property investment. I'd look for a much higher CF++ equation (say 12k+ /yr minimum avg over 5 yrs) after factoring in a substantially higher risk of govt/ATO "rebate tampering/scrapping" and other risks such as stigma suburbs/streets, flood history, etc., as well as a minimum break-even exit strategy in spite of a zero growth zero inflation environment. Get hard facts, be ultra selective with the property and consortium, price-in all risk factors (modelling on bad-to-worst case), and have a solid disaster recovery/exit plan for when hell breaks loose.
Good luck! End of rant/sob/public penance.
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