Second hand NRAS property

[OKFFW]

The CF+ seems to be a bit low considering you have 2 dual occ which means you are receiving $40k from NRAS incentive. Looking at previous Euro's post, the projected CF is expected to be $10k per unit. Not having a go, but just want to learn what have gone wrong apart from the rent. Were the expenses understated when you did the due diligence?

Sorry for not being clearer.

I meant the CF from the Gladstone property alone is positive $13k pa. The Townsville property is positive about $16k pa.

I also have a Toowoomba NRAS property I didn't mention previously as it is single occupancy and I was responding to the questions about dual occupancy NRAS. It is positive about $6k pa.

So with 5 NRAS entitlements I am CF+ about $35k pa. I don't have the exact figures handy but we put in about $150k combined to get the deals done. So that is a ROI of about 23% pa over the portfolio.

 

[imbi3]

So with 5 NRAS entitlements I am CF+ about $35k pa. I don't have the exact figures handy but we put in about $150k combined to get the deals done. So that is a ROI of about 23% pa over the portfolio.

Thanks for clarifying. I know 10 years is still far away but what would be your exit strategy once NRAS incentive is finished and depreciation claim would be lower by then?

 

[imbi3]

All NRAS will be CF+ - but exactly how CF+ a particular property will be , and how strong the ROE will be, is determined by a number of things;

Hi Euro73, can the government terminate or not paying the incentive half-way through the 10 year period, say for example in order to save some money for the budget?

 

[euro73]

Thanks for clarifying. I know 10 years is still far away but what would be your exit strategy once NRAS incentive is finished and depreciation claim would be lower by then?

If you were to do a quick calculation on a 400K property that gets $400 per week today, and assumed 4% compounding increases to market rent were to occur ( rental CPI has averaged 5.2% since 2008 so 4% is a conservative figure to use) you'd be receiving $575 per week after 10 years. That equates to almost 30K per annum.

Assuming you were carrying 430K debt (400K + stamp duty, costs and 10K buffer) that represents a pre tax yield of approx 7%. Depreciation would still likely be @ 5K per annum, and other costs ( p/mgt, rates, water, insurance, strata etc) that started at $5000 today would be @ 7K by then ( assuming 3-4% inflation ) so you can quickly calculate that unless interest rates were very high, the property would remain CF+ even after the NRAS ceases.

The idea is...hold them beyond 10 years. There seems to be an assumption that NRAS properties will all be sold after 10 years of ownership, but I dont see why that would be the case . Sell if you wish to, but why sell an asset that is costing you $0 to hold, even after the NRAS tax credit ceases? The longer you can hold it, the greater probability of realising a significant profit. In the meantime, the first 10 years has created sufficient surplus tax free CF to be reinvested in aggressive reduction of non deductible debt, and has helped pay off a PPOR much faster, or has helped boost super, or has helped with whatever else you may have redeployed the surplus cash flow towards.

Some properties it will be 6-7K per year. Some might be 8 or 9K per year. some (such as very inexpensive stock or dual occ stock) may be 13,15, even 20K CF+ . All however, will assist in paying down a PPOR 12-15 years sooner and that means equity is being created even in the event of a flat market. It also means borrowing capacity is being improved over the longer term by the removal of non deductible debt.

Take a small amount of dormant equity ( usually 60-65K) invest it in an asset that yields 6,7,8 K or more of tax free CF, then use that surplus cash flow to create a multiplier/compounding effect by reinvesting it towards something else. All done with $0 out of pocket - equity , negative gearing and NRAS funds the entire thing.

 

[euro73]

Hi Euro73, can the government terminate or not paying the incentive half-way through the 10 year period, say for example in order to save some money for the budget?

I guess they "could" . But I guess they "could" change neg gearing, CGT or any other tax law tomorrow as well Point being - tax legislation ( and lets be clear, NRAS is a tax initiative) IF it is changed, is not usually applied retrospectively.

The treasurer had his chance at the last budget. He cancelled Round 5 , effectively reducing the Governments commitment from funding 50,000 NRAS credits to only funding 40,000. At the time of the budget only 20,000 of the 40,000 had been activated, so they could easily have closed off the last 20,000 but they didnt.

Since, there has been a senate housing affordability enquiry and the Govt has reaffirmed that funding is in place for 40,000 NRAS credits . It is locked in to forward estimates until 2027. make of that what you will...

 

[Redom]

Hi Euro73, can the government terminate or not paying the incentive half-way through the 10 year period, say for example in order to save some money for the budget?

Dont think this is ever going to happen, not under any government. Generally the tax policy experts just rule any retrospective changes that would influence pre-existing investment decisions off the table before they start.

Theory behind it is it increases 'sovereign' and 'uncertainty' risk. If governments say one thing and a decision is made, then flip flop and change investment returns on the decisions already made, then it reflects poorly on Australia as an investment destination. Sometimes it may happen on a very macro policy level (e.g. adjusting the company tax rate, etc), but for things like NRAS and Negative Gearing - nothing to worry about.

If they changed negative gearing, it'd be grandfathered too (i.e. apply to new purchases only).

Cheers,
Redom

 

[Redom]

Thanks for clarifying. I know 10 years is still far away but what would be your exit strategy once NRAS incentive is finished and depreciation claim would be lower by then?

Good question imbi3 - i thought a fair bit about this before investing in NRAS myself (hope you dont mind me jumping in OKFFW!)

There's a number of articles from the naysayers about the doom and gloom in year 10. The way i see it though, IMO after taking $350k in positive cash flow, can come up with quite a few exit strategies:

1. Sell, after having made 22% ROI every year. There may be some capital gains there too - which makes that ROI even bigger.

2. Hold and adjust rents up - same play as a buy and hold. They will be significantly positive cash flow without the NRAS grants in 10 years time (assuming some rental growth), so holding will generate 10-20k roughly p.a. instead of 35k. By my conservative calcs, it'll be around 2-3k less in absolute terms in YEAR 10 than YEAR 1 (so 6-7k each).

Cheers,
Redom

 

[OKFFW]

Thanks for clarifying. I know 10 years is still far away but what would be your exit strategy once NRAS incentive is finished and depreciation claim would be lower by then?

My financial plan has my wife and I paying off our total portfolio of 6 properties and being debt free in 10-12 years. We plan to retire and live on the rent after that. Net after tax income in today's dollars should be around $75k pa.

So no real exit plan barring some sort of catastrophe that forces us to sell because we need the money desperately.

 

[Blikkies]

Lucky you, we haven't received the NRAS grant for any of our properties and it's almost time for 2014/15 TAX year only a few months away. I will not buy NRAS again although if it's a perfect investors world the NRAS grant (deal) is really a good way to get into the investors market.

Cheers

 

[imbi3]

Lucky you, we haven't received the NRAS grant for any of our properties and it's almost time for 2014/15 TAX year only a few months away. I will not buy NRAS again although if it's a perfect investors world the NRAS grant (deal) is really a good way to get into the investors market.

Cheers

Now, this is one of the major risks I think. May I know of this is yout first year to receive the incentive, who the consortium is etc?

 

[imbi3]

1. Sell, after having made 22% ROI every year. There may be some capital gains there too - which makes that ROI even bigger.

Hi Redom. Worst case scenario, if prices havent gone up by then and you sell, I believe you will still be up for CGT given you have claimed some of te building depreciation. Unlikely prices wont go up by then but you never know given I would expect some reno are well overdue by end of year 10

 

[euro73]

Now, this is one of the major risks I think. May I know of this is yout first year to receive the incentive, who the consortium is etc?

You can read posts elsewhere on the forum, explaining why this years credits have been delayed It's Uncle Tony and Uncle Joe playing politics. Nevertheless, for the moment the best idea is lodging a tax return , getting the neg gearing refund, and then lodging an adjustment when the Refundable Tax Offset certificates are issued.

 

[imbi3]

You can read posts elsewhere on the forum, explaining why this years credits have been delayed It's Uncle Tony and Uncle Joe playing politics. Nevertheless, for the moment the best idea is lodging a tax return , getting the neg gearing refund, and then lodging an adjustment when the Refundable Tax Offset certificates are issued.

Hi Euro. Yes, I saw your previous posts and understood. I am just a bit worried with the risk of the consortiums not passing the credits or delaying payments to the investors. Trouble is, NRAS agreements are between them and the government, so if anything happens then it is between the investors and the consortiums. Much risky compared to if the agreement is between the investor and government. As you mentioned before, nothing like this has ever happened so fingers crossed