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 .