Still seem to be loads of sceptics about NRAS, so thought I'd map out a 10 year scenario, in an effort to give people a little more understanding and confidence.
Let me stress upfront that I'm a fan of the less expensive NRAS properties because of the cash flow they offer. I believe the scheme's tax incentives provide the equivalent of capital gain, so theres no need to chase NRAS properties at the more expensive end of the spectrum, but in this example I'm using an extreme/ worst case mathematical scenario as a "stress test" of NRAS,to see how the numbers stack up on the most expensive NRAS properties- the ones that some forum members will want to buy, for their capital growth potential. The ones that some forum members have bagged relentlessly. Fair play to them...lets take a look. Is NRAS a great opportunity, or is it hot air?
I've used a theoretical property which is at the absolute upper end of the price range for NRAS (500K) which would normally expect to attract full market rental of $500 per week. In this example, it would rent at $400 p/wk, under NRAS. This represents a 20% discount.
Please keep in mind that the majority of NRAS properties are priced well below 500K though, so the outcomes of this scenario will be absolutely worst case. But that's the point.
For the purpose of this exercise Ive used annual rental increases of 6%, for each of the next ten years. Ive also used annual NRAS increases of 6% for each of the next 10 years, because the NRAS incentive increases in line with the national rental component of CPI, which has actually averaged more than 6% in recent years. As background, the NRAS incentive was $8000 in 2008 when this scheme launched. It increased to $8600 in 2009- which was an increase of 7.5%. It then increased to $9140 for this financial year, which was an increase of 6.28%. You can verify this data on any NRAS website or the Fed Govts DEPT FAHCSIA, website
So, here are the mathematics for the "stress test" FYI, I have rounded up and down in some cases, because no one wants to read multiple decimal points- and this site doesnt allow me to publish spreadsheet type data. But the numbers are very close to spot on. You're welcome to calculate things yourself, to confirm accuracy.
Year Market rental NRAS discount x52 weeks NRAS Incentive Difference
2011/12 $500 $100 $5200 $9688 +$4488
2012/13 $530 $106 $5512 $10269 +$4757
2013/14 $562 $112.40 $5844.80 $10885 +$5040.20
2014/15 $595 $119 $6188 $11538 +5350
2015/16 $631 $126.20 $6562.40 $12230 +5667.60
2016/17 $669 $133.80 $6957.60 $12964 +6006.40
2017/18 $709 $141.80 $7373.60 $13742 +6368.40
2018/19 $751 $150.20 $7810.40 $14566 +6755.60
2019/20 $796 $159.20 $8278.40 $15440 +7161.60
2020/21 $836 $167.20 $8694.40 $16366 +7671.60
2021/22 $886 $177.23 $9216 $17347 +8131
Total rental income you forego via NRAS, over 10 years. @$68,421
Total tax incentive received via NRAS, over 10 years @$154,175
FYI- a 4% annual increase in NRAS equals $139,224 over 10 years
a 5% annual increase in NRAS equals $145,057 over 10 years
a 7% annual increase in NRAS equals $163,483 over 10 years
Everything else about NRAS is exactly the same as any other investment property. Normal Negative Gearing rules apply. In fact you'll receive additional neg gearing benefits because you are getting less rental income, so your deductions will be greater than on a property where you received 100% of the market rental, because your "losses" ie- what you have to put in yourself, are greater.
So, as far as Negative Gearing goes for this example, if you borrow 100% plus costs to finance the NRAS purchase(which is now possible...there are lenders who will now do NRAS- see my previous posts about Westpac, St George, Rams and also Firstmac- who I believe have the best NRAS product and policy by far, if for no other reason than servicing capacity) you would have to secure 20% plus costs against your PPOR or another investment property, and 80% would be secured against the NRAS property. Using conservative interest rate figures of 8% for example (I'm factoring in a couple of rate rises for 2011) and the loans being set up as Interest Only, it should look something like this.
Loan would be approx 520K. (500K plus stamp duty and costs - may be less for house/land)
8% Interest Only. Interest payments would be @ $41,600 per annum. Based on this particular example, annual NRAS Rental Income is $20,800 ($400 p/week) Your total Loss/ deduction would be almost 21K
Normal depreciation rules also apply to NRAS properties. So in an example such as this one (a new dwelling valued at 500K) you could reasonably expect that depreciation deductions would typically be worth as much as 9K-10K per annum across Pools A and B. (For less expensive NRAS properties, the depreciation deductions will be a little less. On a 350K purchase for example, depreciation would probably be in the 6-7K vicinity)
Your other costs during the first year of ownership would be conveyancing, loan establishment costs, rates, utilities, property management fees, NRAS costs, insurance, incidentals and strata fees(if buying a unit or townhouse) and they might total somewhere in the vicinity of @ 7K-10K or more, depending on the state you purchase in, and whether you buy a strata property or not, and have to pay strata fees. For this scenario, we will assume costs of 7K
So conservatively speaking, in this example of a 500K house and land purchase, when you add all your total deductions in year one of ownership they could easily total @ 37K or more.
On a tax rate of 30%, that's going to equate to a possible 11K return, and on a tax rate of 38%, that's potentially a 14K return, or more. Then you also get the NRAS incentive of $9140 (and rising annually- see table above) so you can see how attractive the "maths" looks. Talk to your accountant to confirm this, obviously. Im only offering information on a scenario here, for the purposes of "stress testing" NRAS- everyone's got to get their own tax advice.
So assuming your accountant agrees that I know what Im talking about with regards to NRAS - and he will - 'cos I do
- at the end of the first full financial year of NRAS ownership, you'd receive somewhere in the vicinity of 21-24K back from the tax man, depending on your marginal tax rate and personal circumstances (you may receive a lot more, if you have other investment property deductions, work related expenses etc..Im purely looking at a 500K NRAS purchase in this scenario)
Now lets go back to the property. It has cost you about 28K out of your own pocket to own it in the first year. That's made up of about 21K in "holding costs"- the difference between the interest you're paying on 520K @ 8%, and the rent you're receiving, and 6-7K in miscellaneous costs , most of which were one off costs, such as conveyancing. In year two onwards, you wont have conveyancing costs, legal fees or loan establishment costs, so your ongoing miscellaneous costs should reduce by about 40-50%, to 4K or so.
That means your total ongoing costs for Year 2 onwards will be about 24K -26K. (loan interest of 20-21K, and other costs of 4-5K) This will mainly be made up of insurance, rates, property management, strata fees ( if applicable) and NRAS costs, which vary WILDLY between different NRAS models - see my previous post on the "approved participants" and do your own maths. The less expensive models only charge 5-7% of the NRAS incentive annually, so you are probably looking at $500-600 per year, plus property management fees. The more expensive charge about double that. Ive written in some detail about the different Approved Participants previously, so read those posts if you want details on the differences between them. In any event, as I said above, adding all of this up means that your total holding costs for year two onwards will float between 24-26K, most likely- depending on which approved participant you entered into NRAS with.
So, to review....in this example- designed to place a huge "stress test" on NRAS's claims of cash flow positivity, by crunching the numbers on a 500K property, rented at $400 per week..what we can conclude is that at 500K, its pretty tight. It is going to cost you about 25K out of your own pocket each year, to hold on to this property. From year two onwards, the tax man and Fed Govt are going to carry almost all that load for you, but remember that YOU have to cover it in the first year, until you get your tax done and NRAS incentives paid. You CANNOT get private rulings from the ATO for NRAS. I repeat, you CANNOT. So, the moral of the story is this...if you don't have a lazy 25K laying around unused, you'd have to have made sure you borrowed the extra 25K when you set up your loans. You'll be getting 22-25K back from the tax man after year one, so you'll only need to potentially contribute 2-3K per year after that. But you have to cover the whole shortfall in the first year. Refer to previous paragraph about trying to do a deal with the tax man.
It CANNOT be done for NRAS.
So we arrive at the end of this scenario, and having stress tested a 500K NRAS purchase, hopefully this helps you understand how all the numbers work, and that even at this extreme end, it can be close to cash flow positive after the first year, if you do your sums and you're in the right marginal tax rat etc. Not quite, but close. Hopefully you will agree that the scheme offers a fantastic opportunity to investors,l and maybe the naysayers might even admit that the numbers are pretty compelling.
What it certainly demonstrates is that the sweet spot for NRAS is definitely not at the 500K end of the market, so this is not a scheme where capital growth properties should be your prime concern. It doesnt quite get you Cash flow positive at this price point/rental income combination. But the good news is, the less expensive the property, the better the numbers work. And this is where the real potential is with NRAS.
I believe the sweet spot for NRAS is 400-440K and below. The very best cash flow can be achieved under 300K obviously, but those properties may not offer the same capital gain potential as some of the 400-440K stock, so you have to balance out your priorities. The premium buys are probably in the low-mid 300's, where you can get good property in decent locations, without losing the cash flow benefits of the scheme.
Having said all of that- Im not suggesting you all buy 350K-440K NRAS properties. Im simply saying that below 400-440K, the numbers are much less stressed. I actually think the less expensive properties are the smart buys where NRAS is concerned, if you want to build a property portfolio that will enable you to grow your wealth/portfolio more aggressively. Cash flow is just as important as equity, where borrowing is concerned. This is also why I think Firstmac should be your first call for NRAS, as they accept 100% of the NRAS incentive for servicing. Other NRAS lenders do not. This may not affect your capacity to borrow on the first NRAS purchase you make, but if you have several properties or wish to own several, every dollar you can use towards servicing makes an enormous difference.
Also remember that you need a 20% deposit for NRAS, not a 10% like conventional investment property. Remember that you have significantly higher holding costs in the first year, because you have to cover the 20% of rent you are sacrificing, and cover the interest repayments, and cover the additional legal and loan costs associated with purchasing NRAS property. Make sure you borrow that money as part of your loan.
This scheme is an opportunity to build some extremely effective cash flow into your portfolio. Remember this above all else - you're going to make a minimum 140-160K tax free out of any NRAS property, before any neg gearing and depreciation is factored in (which could be 10-12K back from the tax man annually for ten years, depending on your circumstances) No matter what price you pay for it, and no matter whether it appreciates in value or not... you get exactly the same NRAS incentive, so theres no need to chase capital gain. Why pay for a 500K property and get little or no cash flow from the scheme, when you could buy 2 x 250K properties and pocket 2 x NRAS incentives annually? The 500K property may double in value in 10 years and net you 500K profit. The two less expensive properties may only net you 300-350K in growth, but they've also netted you an extra 140-160K, and you havent had to put your hand in your pocket beyond the first year, so you've probably bought 2 or 3 other NRAS properties by then , too...netting you a further 140-160K tax free, plus any capital growth.
I don't believe NRAS properties should be purchased for capital gain exclusively. NRAS properties are perfect for a portfolio that needs cash flow. 2 or 3 NRAS properties purchased over the next couple of years would allow an investor to then add a low yielding, more premium, capital gain focused property to their portfolio... and they would have the cashflow to handle it.
So really, at the end of the day...NRAS is so incredibly powerful because of the cash flow it generates for you after the first full financial year of ownership. The less expensive the property, the more powerful the cash flow becomes. The secret to buying NRAS is getting through the holding costs in the first year, which also makes the less expensive properties a smarter option for people who dont have big incomes or mature property investment experience.
At the upper end (500K properties renting at $400 per week under NRAS) you really need about 25K-30K to cover all your holding costs in year one, until you get your returns done and get the NRAS incentive. Then you need about 3K per year out of your own pocket.
At the 350K-440K range, where properties will rent for about $300-350 per week under NRAS) you probably only need about 15-16K in the first year, and they are cash flow positive from year 2 onwards.
At the 280-350K range you probably only need about 12-13K in the first year, and they are most definitely cash flow positive from year two onwards. They will add about 5K per year to your income ( and the beauty is- its untaxed, because its coming via the NRAS incentive) You'll have to take my word for it that those figures are in the "ballpark" for accuracy, as I've done the modeling on dozens of NRAS properties in many different locations.
The bottom line is that between your deductions and the NRAS incentive, you should easily see yourself cash flow positive from year two onwards on almost all NRAS properties... but most definitely on those priced below the 440K sweet spot. The further below that price point, the better. So after year one, you should have little or no holding costs whatsoever. That's when you buy the next one
In 3 or 4 years time, you'll have a beautiful, cash flow positive portfolio of 3 or 4 different NRAS properties, ticking along nicely... and in ten years time, when they've earned you 140-160K tax free each, plus at least 90-100K in tax deductions each, you wont be worrying about the fact you didn't buy the more expensive property in the trendier area, with the better capital growth potential. The person who bought that will have loads of capital gain, but they will still be working away on getting the cash flow to make the equity work for them. You'll be sitting very pretty, having put your hand in your pocket for very little money, while still enjoying hundreds of thousands of dollars of tax benefits...and thinking about what you'll do now that you are sitting on some solid equity, with powerful cash flow.
