Nras

There's a huge amount of posts on NRAS in the forum already. Some do well from it, a lot have done very poorly. The key is to find properties where the valuations stack up to market, and don't involve too many extortionate requirements to use contractors/PM's at obscene rates - eating away at the cash flow.
 
CJAY is correct - the concept works very well when employed correctly and offers many benefits, but it's also plagued by scoundrels. It is critical to invest in NRAS approved properties at fair value so that you aren't losing a big portion of the benefits to overpricing, before you even get started. Unfortunately a good majority of NRAS investors tend to get 'fleeced" by purchasing grossly overpriced properties. Always insist on getting valuations up front - always! No exceptions.

Because NRAS properties must be brand new properties, be prepared for valuation issues. Not because of NRAS, but because they are brand new. Routinely, brand new stock will tend to be priced at a small premium and valued based on comparable sales of similar sized but older, stock. This isnt a hard and fast rule, but it's common enough. So if any brand new dwelling is 5, 10 or 15K low that's one thing ...I'd consider that a reasonably typical margin of error on new stock (whether it's NRAS approved or not) but when the valuations are low by 40,50, 60 K or more you really have to be concerned and really really shouldn't be proceeding. Unfortunately that's all too common with much of the NRAS stock out there.

It's also critical to understand how the various Approved Participants (consortiums) work, because they aren't all the same, and they have different fee structures. That being said, the differences between the majority of them aren't particularly significant and have fairly minimal impact on the after tax cash flow in most instances. Broadly speaking the differences equate to less than $300-400, out of a net tax free cash flow that is typically 7 or 8K + , so it's a fairly small impact. Still, every dollar counts and it's important to understand the numbers from all angles.

You should read the posts already available here as a first step. That will provide you with a good working knowledge with which to move forward.

I should disclose that NRAS approved property is my particular area of expertise, my business (I sell a lot of them) and I own a lot of them myself.
 
My experience with NRAS has been very positive. I've summarised my observations, both good and bad, below:

Valuations

As mentioned by CJay and Euro, there are issues associated with NRAS stock being overpriced. All this really means is that you've got to do your due diligence - because this really can be managed quite easily by you (upfront vals, research, etc).

Vacancy

What I've found is that they're rarely vacant. I have 2, and both were rented out almost instantly with multiple applicants to chose from. For instance, one of my properties in south west Sydney (a 2br duplex, there were three of them), had one opening inspection with 30 odd people through the doors, multiple applicants for mine and id assume for all three.

Spruikers

I have been to most capitals in Australia and met what feels like most of the big players in the NRAS game. There are many that are total spruikers selling rubbish deals assuming that they can input huge margins on NRAS. I strongly recommend operating with someone that's good, honest and open with you (more on this later!).

My criteria

After meeting many in the NRAS game, I've narrowed my NRAS purchase decisions down to:
1) It must value. There used to be plenty of stock that do value...but given that we're near the end point, it may be harder to find this.
2) The cheaper the stock, the greater the ROI.

Financing

Note that NRAS stock may have an impact on your overall serviceability. Most lenders do not accept the 10k grant as income (at this point at least), and will take the discounted market rent for your serviceability. This means that they'll effectively take 60-64% of the rent to assess your serviceability.

Now if you have quite a few NRAS investments, this can work against you and you're likely to reach your 'servicing wall' earlier. This isn't really an issue if your looking to have 1,2,3 or even 4 investment properties. But if your a serious investor looking to have a $10m portfolio, too many NRAS in your portfolio can work against you. This must be balanced noting that there a couple lenders who allow you to use the 10k in their servicing, which in fact increases your borrowing power. But any finance expert will tell you that you don't want to reduce your pool of lenders down to 2 if you can avoid it.

Other observations

What Ultan (euro73) didn't disclose is that his one of the few NRAS operators who do it very well, is remarkably honest (he has told me to walk away on deals before, despite being obviously incentivised to push me into it), and has impeccable service.

Go through the posts on this forum and you'll realise he knows the game inside out. It drives me nuts that agents that often sell NRAS stock have 0 idea about what it is. I've been told recently by an agent whose selling the stock (NRAS exclusive building too!) that its very similar to Defence Housing and she couldn't differentiate the two (they're nothing alike).

In fact, after meeting many and wasting a whole lot of time dealing with spruikers, you can go through the process, but i'm pretty sure you'll get to the same conclusion as me. :)
 
Agree largely with the above posts.

I have done rental valuations on a new estate in Melbourne's outer east for NRAS owners and is an area where a lot of stock is coming on the market. Purchasers are going to get a low vacancy rate but is often off-set by paying a 'premium' - as a sales agent it's a great marketing ploy to con non-property professionals.

Also remember that value = supply v demand. If you buy in an area close to increasing supply it will stunt capital gains so first determine what your motivations are and weigh up alternatives.

As mentioned above - do you due diligence and ensure you don't get taken for a ride. There are opportunities out there.
 
I'm still haven't seen a property (> 1 bedder AND > 50 sqm) where valuation stacks up (and located well).
Due to the 20% rent reduction, you get higher negative gearing benefits. That means you are relying on your day job (paying tax). It is a double hit if you loose your job.
Financing options are is not always straight forward or as easy as Non-NRAS.
 
It means your relying on income - it can come from your day job, other positively geared investments, your company dividends, etc. Not just your day job. And realistically, the very large majority rely on some form of 'personal income'.

Financing options - you can go to 90% + cap LMI with quite a few lenders. No problem really. Cant do 95, but its usually difficult to get loans at those LVRs anyway, and they're generally not popular with investors (additional cost of LMI is quite dear for extra bit of leverage).

I've touched on the real finance issues in my above post.

Recent stock that I've seen in good areas: Nundah, Alderley, Windsor (all within 10kms of Brisbane CBD), Yagoona stock selling for 380k in 2012 and then selling again for 450 in 2014, South West Sydney (Gregory Hills), Northern Beaches Sydney, Brunswick Melbourne, Auburn development very recently, etc. In the ACT, my own apartment has some NRAS, and its the nicest new apartment stock in the area.

To be frank, if you haven't found anything with that description, you haven't looked hard enough. Of course its harder to find, but its not only a supply issue. Good NRAS stock gets sold very very quickly. From my experience, connect up with some good people, and you'll find what your looking for. Going on realestate.com is unlikely to work for you. Albeit, its more difficult to find this stuff now, but there's still bits around.
 
I'm still haven't seen a property (> 1 bedder AND > 50 sqm) where valuation stacks up (and located well).
Due to the 20% rent reduction, you get higher negative gearing benefits. That means you are relying on your day job (paying tax). It is a double hit if you loose your job.
Financing options are is not always straight forward or as easy as Non-NRAS.


Unless you are one of the very few investors in Australia who is able to buy pre tax CF + properties , you use negative gearing anyway, Devank. It's not like it's exclusive to NRAS, so that's a non argument. That same "problem" of needing to work to get negative gearing benefits...if it is in fact a problem at all, is investment property related, not NRAS related.

I'd actually argue the opposite. Because the NRAS credit is a Refundable Tax Offset and NANE cash gift which requires ZERO assessable taxable income in order to receive it, you are looking at the numbers incorrectly. If you lost a job through injury or illness or redundancy or recession, having NRAS would save your backside by allowing you to stay afloat without negative gearing :)

It would obviously be a less potent CF+ outcome without the Neg Gearing - that's a given.... but it would still save you from what may otherwise be a financial disaster.

If you are seeking Utopia in an NRAS deal, you will always find a reason not to transact. You arent able to just stick NRAS on anything you want. You are limited to certain choices. But there are many excellent choices , well located and well priced. So while others are building portfolio's, reducing taxable income, maximising after tax cash flow and setting themselves up for a comfortable future, let me share my own situation with you;

I now have 10 NRAS properties. With each property generating an average of 10 K pre ? tax loss per annum and 10-12K depreciation per annum, they generate a combined 200-220K of deductions for me annually. Each property also produces 8-9K CF+ after tax, and that will increase annually because of the NRAS indexing. So with a salary of 250K, my assessable income will be reduced to @ 20 or 30K. With 18,200 being the tax free threshold , this means I?m going to pay little or no tax on my 250K taxable income for the next 10 years. But I will also receive ( conservatively) an additional 80-90K tax free from NRAS after tax cash flow ( 10 x 8-9K CF+)

I?ve invested @ 50K of equity for each purchase ( 10% + stamp duty) plus a 10K equity buffer to cover the first years pre tax loss, which gets replenished by the combined ATO refund and NRAS tax credit, meaning I dont ever put a cent of my own cash in. So a total of @ 60K per property has been invested from equity, ( this includes the 10K buffer to cover me for Year 1) Across 10 properties, this equates to 600K of equity invested (which again, I dont contribute ANYTHING to because of the CF+ nature of the investment) and conservatively speaking, it means I will pay little or no tax on 250K, PLUS receive 80-90K extra tax free dollars? so I'm effectively going to earn 330-340K tax free for the next 10 years. In other words, 600K of equity invested in 10 properties makes me 3.2-3.3 Million in Tax Free dollars over 10 years ? and that?s before any growth is accounted for. How much growth do you otherwise need to make on non NRAS properties, after accounting for losses and CGT, to match 3.3 Million Tax Free?

Whats my worst case scenario? If my 10 properties don?t increase $1 in value, I?ve made over $3 Million Tax Free anyway, just from cash flow. And I havent impacted my existing household budget one iota because the portfolio costs me absolutely nothing to hold. If I suffer a reduction in income, the properties still make me a lot of tax free cash flow- it will just be less because I?ll lose some negative gearing as a result of having more losses than income. But I?ll still be earning the maximum amount of tax free income my situation allows for. The NRAS is a refundable tax offset, payable whether I have an assessable income or not, so I will still be CF+ on all 10 properties no matter what! And if the property market crashes, or rates increase, or we have a recession? The NRAS cash flow keeps me CF+ up to rates of 14-15%

Investing doesn?t have to be exclusively about growth. The certainty of Cash Flow can be equally as appealing, and in any balanced portfolio, within any asset class ? that is the investment norm. After all, you wouldn?t invest in loss making shares or term deposits or bank accounts, and hope for growth. Yet we seem happy to invest in loss making property with the exclusive goal of growth.

I guess my argument is this?. if you could invest your money in any other asset and earn 14-15% Tax Free, would you? because 60K of your equity or cash invested into 1 x NRAS property that makes you 8-9K CF+, is precisely that? a 14-15% Tax Free Return. And that?s without any growth whatsoever.
 
Solid post there Euro. I'm all for the power of NRAS, but I don't believe NRAS is best deployed as a be all, end all strategy.

At the end of the day, each 500k purchase you make, gives you around 100k in your pocket after 10 years. After tax of course.

Comparing this cash flow strategy with a neutral investment growth strategy, a 500k investment will need to be worth around 630k to get the same 100k return (50% CGT discount, 38% tax rate).

Very achievable (some smashed those numbers last year alone). Both strategies have merit.

I think the power of NRAS (and other cash flow plays) is at its best EARLY in a portfolio and LATE (wind-down, need lots of passive income, etc). With a limited pool of equity, you may be able to get yourself 2/3/4 NRAS properties. That means you'll has positive cash flow of nearly 20/30/40k a year. You can then purchase a new property each and every year for the next decade (more growth friendly, etc) without funding it from savings/relying on growth.

Noting that, its very easy to run into finance issues with an overly NRAS reliant strategy. Most people aren't on 250k a year and wont have the servicing power to continually borrow with that many NRAS in their portfolio. Of course, there are a couple lenders that can be used to negate this, but you will need to use more equity for each purchase, significantly reducing the ROI.
On top of this, you don't want to reduce your lender pool to a couple lenders.
 
Euro73 could you please explain something to me. You say you use equity to fund the deposit etc and the 10k short fall in the repayments for the first year, all up about 60k, and this doesn't cost you one iota because the portfolio costs you nothing to hold. I think I'm missing something here. When you use equity doesn't it come from somewhere, ie PPOR, meaning you still have to pay it back. How can you take 60k out of your equity and not have to pay it back? I'm a bit confused and on "L" plates at the moment. I appreciate your help
Cheers
 
I think he means that NRAS are positive cash flow investments. If you own them, they MAKE you $$$ every year, even on 100% finance.

So you'd be 'paying' for the 60k of equity you pull out of your PPOR, but because the property makes you money, the property will pay for that cost and then return you 6-10k in your pocket.

Re the buffer, the positive cash flow (the NRAS grant) hits your account (depending on when you buy) at tax time. So you may need a buffer to get you to that point.

Sorry to jump in euro73. :)
 
Redom is correct ...


Quick example. Broad brushstrokes, using a 350K strata titled property as an example.

Loan 1 - secured against whichever property provides equity - 60K
10% deposit = 35K. Stamp Duty = 13K. legals 2K. 10K Cash Buffer.

Loan 2 - secured against the NRAS INV property. 320K (90% + LMI)


EXPENSES
Total amount borrowed is 380K, for the purchase of a 350K property. Remember- the 380K includes 100% of the purchase cost. 100% of the legals. 100% of the LMI and 100% of stamp duty. It also includes an additional 10K "buffer"

In this example, the 380K is borrowed at 5% I/O, so your repayments = 19K annually.
In this example, you also have an additional 5K in ownership costs - Property Management, Rates, landlord insurance, NRAS compliance fee, water, body corp fees.
In this example, your total expenses therefore = 24K per annum. (19K + 5K)

INCOME
In this example, Market Rent is $350 per week. NRAS requires a 20% discount to the Market Rent, so you will receive $280 Per week, which equates to $14,560 Per Annum

INCOME @14.5K EXPENSES @25K = pre tax loss of @ $9500
This is what the 10K buffer covers.


So, you've had the property for a year, and it's time to do your taxes. After submitting your tax return and claiming all allowable deductions, depreciation and whatnot, you will be entitled to a refund. That refund will be determined by a number of things, such as your income, marginal tax rate, other deductions etc... But whatever that amount is, you are also entitled to receive an additional $10,661 of tax free money as the NRAS credit. ( as long as you have a) rented it at a 20% discount. b) rented it to an NRAS eligible tenant and c) had less than 13 weeks vacancy )

How do you get the money? 75% of the $10,661 is paid by the Commonwealth via a Refundable Tax Offset , so it is simply added to your ATO refund ( whatever that amount is ) The other 25% of the $10,661 is paid by the State via a NANE payment, and that hits your account around mid-late September usually. The important thing to understand is that all of it - the 75% RTO and the 25% NANE, is completely Tax Free.

What this all means for you? Generally speaking, all things being equal you'll receive a combined ATO refund and NRAS credit in the vicinity of @ 16-18K. ( again, depending on your particular circumstances)

Now, imagine for a moment that you have just received 16-18K from the ATO and NRAS payments, and it's sitting on the table in front of you... Simply take 9.5K-10K of it to replenish the cash buffer , and you have covered the YEAR 2 pre tax cash loss. Use the remaining 7-9K that is still sitting on the table for whatever you wish.

My strategy...use it towards aggressive reduction of your PPOR mortgage. This creates several compounding benefits

1. You are aggressively reducing the remaining term of your PPOR loan
2. You are aggressively reducing the amount of interest you will pay the bank - this is money that effectively stays in YOUR pocket. For example- if you ever sell your PPOR and owe the bank 150K less than you otherwise would have owed them, that's a CGT free 150K in YOUR POCKET
3. You are aggressively accelerating the creation of equity, allowing you to purchase additional INV properties sooner.
4. You are improving your future borrowing capacity by reducing debt

Everything about NRAS is about the multiplier effects it creates. The Tax Free cash flow is what does that for you - as long as you don't waste it.

No one is suggesting this is the be all and end all...but it's one very simple, low risk way to get way ahead of the curve, using equity and the tax man to do all the work for you. Anyone relying on growth as their sole strategy for wealth creation is, in my view ignoring the role that cash flow plays in any form of strategy. All the equity in the world is useless without cash flow. Just like all the cash flow in the world isnt much use without equity.

So when I say NRAS will reduce your tax bill, increase your after tax income, pay down your mortgage fast, build a portfolio and do it all with nothing out of your pocket - this is how it's done. It's not rocket science :) It's just putting dormant equity to work, generating a tax free cash flow from that dormant equity and redeploying it towards debt reduction so that you can get ahead of the curve faster than you'd otherwise be able to.

Once you have your mortgage paid down, you can chase the big growth properties, knowing that you have the spare cash flow to carry a portfolio of loss making properties while you wait for that pot of capital growth at the end of the rainbow.

But there's a reason why only 3% of investors in Australia own more than 3 properties- they simply cant afford to sustain all the losses associated with property while they wait for the growth. Most investors never get beyond 2 or 3 properties because of that - and if they weren't able to get beyond 2 or 3 properties during the last 15-20 years,during the golden age of easy, cheap money and once in a lifetime property booms - what hope do they have now, starting out at today's entry level prices? Buckleys and none, basically.

NRAS is just an accelarant. 2,3,4 NRAS properties will get you to the 4th,5th,6th and 7th properties in years to come- which wont be NRAS .
 
I went to a seminar last night (first time) and their biggest thing that they "spruiked" was exactly as you wrote above Euro, with the exception of NRAS they were educating how to make money from you income+tax returns. Whole point was to pay down PPOR as fast as possible via Off-set.
 
My concern with that is how they actually generate the cash flow, without NRAS.

There's a lot of smoke and mirrors and trickery with the strategies promoted by those sorts of groups. Used to be promoted using Lines Of Credit - now its promoted using Offsets. But unless they can show you how you can generate a genuine CF+ outcome, I cant see how they can actually achieve what they say.

With the NRAS however, the numbers are very easy to understand, and don't rely on any smoke or mirrors or trickery. NRAS is a legislated tax benefit. It is clear and easy to understand how the CF+ outcome is achieved.
 
Hi all.
Thanks for the explanations above, fairly comprehensive replies. I now understand the returns etc that you get but I I'm still stuck on the bit about " it doesn't cost you one iota".
If you take 60k out of your equity for all expenses, so now your loan has gone back up by 60k which you have to repay. Then after your tax return you have 7-9k in your hand which you can put back into the loan, you are still 51-53k short which you are repaying to the bank out of your pocket. It is going to take 6-8 years to repay that 60k.
I don't understand how it doesn't cost you.
Please correct me if this is not correct as it is doing my head in.
Cheers :confused:
 
Haha saying that it doesnt 'cost one iota' isn't the full picture. Breaking it down, it just means that the property will pay for the interest cost and then pay down your debt...not out of your pocket, out of the properties positive cash flow return. :)

Hope that helps,

Cheers,
Red
 
ok, ill bite

does NRAS work for someone earning $25k part time? with heaps of deductions from existing IPs?

given that they will only be paying like 17% on 13k income above the tax free threshold
 
Helps sure - but not nearly as much. Your cutting the c/f by about 4k p.a. Also depends on whether theres an expectation to be on 25k p.a over the next decade.

You may be better of just buying other positive cash flow property when you cut the numbers down to 3-5k p.a+.
 
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