The nra scheme

[trisha6543]

How many, or what percentage of, new dwellings is the maximum permitted by the NRAS in any one new complex/estate in NSW. Is there any Government legislation which stipulates/substantiates this? My reason for inquiring is that I found the following question and answer in your forum:-

Are there NRAS "ghettos"? (I know that the idea is to build where there is the most demand for affordable housing but in my searches there are suburbs that look to be over represented and could suffer from lower prices as the scheme winds down and investors sell off.)

NO. No more than 30% of any estate or development can be NRAS approved. In reality, most developments hold less than 15% NRAS approved property. Many hold less than 10%. There are exceptions for developments of 50 units or less, where 100% can be NRAS approved, but I have only ever seen ONE such development, in labrador, Qld. There may be a small number of others I havent come across, but the point is - NRAS is spread far and wide and it's rare to come across concentration levels above 15-20%.

 

[euro73]

The first assumption; that investors will sell after 10 years, is one I would argue is flawed. There is no real reason why an investor will be required to sell after 10 years, just because the NRAS tax credit stops.

While it is true that the NRAS tax credit will cease after 10 years, it is also true that the property then returns to full market rent at the beginning of the 11th year.

Mathematically, the property is likely to remain CF+ after the 10th year of NRAS is finished. Using a 350K property as an example, and assuming just 4% annualised rental increases , this would see a $350K property that would start at $350 per week (market rent) today, achieve $538 per week by year 11 , when the NRAS tax credit expires . That represents almost 28K per annum from Year 11. Assuming you had geared 100% of the 350K purchase price + stamp duty + a cash buffer to purchase the property today (375K total debt) and assuming you still had 375K of investment debt because you had directed the 10 years worth of surplus cash flow from NRAS towards paying down non deductible debt, that would equate to a yield of approx 7.5%.

But you would also have other deductions that will contribute to the after tax yield. For example, your other expenses ( property management, rates, water, strata ) would conceivably be 8-9K annually by the 11th year, and you'd also likely still have 4-6K of depreciation. That adds an additional 12-15K of deductions. You'd receive a refund on that at your marginal tax rate. That would equate to an additional 1.5-2.5% of after tax yield

So it is not unreasonable to expect that your true yield ( after tax) will be 9-10% ( 7.5% from rental income, and 1.5-2.5% from the ATO) So unless interest rates are in double digits, the property would remain CF+.

It wont be AS CF+ as it is during the 10 years of NRAS, but it will likely remain CF+ nonetheless, so it would allow an investor to continue to hold the asset at no cost.

Of course, if rents were to achieve better than 4% compounding increases, you'd be seeing a better yield. Point is, your property simply becomes an 11 year old INV property like any other 11 year old INV property, after the NRAS credit ceases. Any broadly speaking, 11 year old properties arent usually still running a negative pre tax cash flow... so you can hold the property well beyond 10 years with no cash loss dragging on your household budget.

That all being said- the Govt prefers 30% concentration limits for NRAS. There are some examples where Ive seen more than that, but in most projects I have seen, the NRAS mix has actually been significantly less than that.

I guess you could also ask the question - what happens to any INV property anywhere, where a large percentage of the particular development or suburb has been purchased by investors, and they all decide to sell simultaneously? Or if Neg gearing rules are altered?

 

[skater]

While it is true that the NRAS tax credit will cease after 10 years, it is also true that the property then returns to full market rent at the beginning of the 11th year.

While this is what will happen in theory, I'm betting you will get a heap that stay of the discounted rate "because they are good tenants".

Even if you wanted to increase rents to market at year 11, I'm betting it would be quite difficult (too big a rise in one hit) unless you gave your tenants notice & got new ones in.

 

[Scott No Mates]

Probably a lot of missed rent review opportunities/myth-conceptions as well, keeping rent below market.

 

[euro73]

While this is what will happen in theory, I'm betting you will get a heap that stay of the discounted rate "because they are good tenants".

Even if you wanted to increase rents to market at year 11, I'm betting it would be quite difficult (too big a rise in one hit) unless you gave your tenants notice & got new ones in.

I certainly don't see any issue with getting new tenants in, if required. The scheme is designed to assist people for 10 years. Beyond that - time to pay full freight

 

[Redom]

How many, or what percentage of, new dwellings is the maximum permitted by the NRAS in any one new complex/estate in NSW. Is there any Government legislation which stipulates/substantiates this? My reason for inquiring is that I found the following question and answer in your forum:-

Are there NRAS "ghettos"? (I know that the idea is to build where there is the most demand for affordable housing but in my searches there are suburbs that look to be over represented and could suffer from lower prices as the scheme winds down and investors sell off.)

NO. No more than 30% of any estate or development can be NRAS approved. In reality, most developments hold less than 15% NRAS approved property. Many hold less than 10%. There are exceptions for developments of 50 units or less, where 100% can be NRAS approved, but I have only ever seen ONE such development, in labrador, Qld. There may be a small number of others I havent come across, but the point is - NRAS is spread far and wide and it's rare to come across concentration levels above 15-20%.

Hmm cant claim to be an expert on the nitty gritty of policy - but I have seen a few developments that are entirely NRAS. From memory they were <50 units though.

I spent a fair bit of time thinking about the 11th year before purchasing...i'm really not sure how it'll play out.

Under current policy design, investors are not exactly incentivised to sell (CGT at POS). Not sure about rental inflation in that year either - it may be a period where a new tenant is necessary, or a slower adjustment back up to market rent.