That’s not a very fair comment …. I own 10 NRAS properties, have sold many many more and have just had a number of mine and other clients, re-valued.

Some examples

2 bed Townhouse in Gregory Hills, Sydney – purchased 8 months ago for $370K. Re-valued at 460K. 100% of the 6 townhouses are NRAS

2 bed Unit in Elanora Heights, Sydney – purchased 12 months ago for 595K. Re-valued at 650K . 15 of the 22 Units are NRAS.

2 bed Unit in Enfield , Sydney. – purchased 8 months ago for 535K. Re-valued at 610K . 10 of the 24 Units are NRAS.

2 Bed Unit in Alderley, Brisbane – purchased 14 months ago for 350K. Re Valued at 390K 16 of the 30 Units are NRAS

2 Bed Unit in Windsor, Brisbane – purchased 14 months ago for 345K. Re Valued at 390K 8 of the 14 Units are NRAS

To be fair and balanced, there are others in SA for example that haven’t shown much appreciation over the past 12-18 months , but the clients are 7-9K CF+ on those, so they aren’t reliant on growth to keep their heads above water. Point being – if you choose well, a property with an NRAS credit can make you good growth as well as great cash flow. NRAS of itself does not equate to growth potential being handicapped.

To the OP; I wouldnt be buying anything ( NRAS or non NRAS) in a project with 100 + Units though. Strata Costs can get atmospheric. Try to focus on low rise or boutique sized projects.

• This reply was modified 10 years, 3 months ago by  loan ranger.

1. Is there anyway we could use property to reduce our CGT once we sell our shares? I suppose the only way to reduce the CGT is to drip feed them out slowly over a few FY’s?

2. So lets assume I pay cash 100% for PPOR of say 1M. I sell half the shares and use that 500k for IP’s and keep the remaining 500k in the market to collect divs etc. Would that be a wise strategy?

3. I had a little read up on NRAS (only 40,000 avail I believe) and TBH they seem like they may be difficult getting our hands on some. Forgetting NRAS – if we were to purchase standard rentals around the 400k mark as you suggest, what sort of figures would that present?

4. With all of the tax deductions, how would this all work out should we be able to retire @ 45 and have no income to offset the tax against?

1. You should seek an accountants advice on this. I can tell you all the ins and outs of NRAS, but I dont want to advise you on CGT :)

2. No such thing as a right or wrong strategy. There is certainly merit in owning the PPOR outright, then using a Line Of Credit to draw out equity for INV purposes

3. Plenty of good NRAS deals around with no valuation issues and strong yields – you just wont find many using Google. The online marketers flog anything and everything and dont give much thought to valuations. Im not allowed to advertise my services, but……

4. One of the beauties of NRAS is that the tax credit is paid in 2 parts – 75% comes from the Federal Govt via a Refundable Tax offset, and 25% comes from the State via a Non Assessable, Non Exempt cash payment. Neither payment is linked to losses. Theyv are pure tax free refunds. In other words, you receive the money whether you are paying tax or not. “Losses” only affect the negative gearing side of the equation, and if are concerned about losses not being offset against income- bear this in mind. You are 30 now, and looking to retire at 45. That’s 15 years away, so the deductions associated with high levels of gearing will still be of value to you for 15 years. By the time you are 45, the properties wont be running losses anyway, so you need not be concerned about having no taxable income to offset losses against, as there wont be any losses.

Let me give you an example. using a 350K property that currently gets 350 per week rent. The 20% discount under NRAS only stays in place for 10 years. After that, your property returns to normal market rent and you stop receiving the NRAS tax credit. So if the normal market rent for a 350K property is $350 today and increases by a very conservative 3% per annum, compounding… by year 15 ( when you turn 45) your property will be receiving @ 545per week , which is $28,355 , which equates to a yield of 8.1% PRE TAX If the same property achieved 4% compounding rental increases, by the age of 45 you’d be receiving $630 per week, or $32760 per annum, or 9.4% pre tax yield. 5% would yield 10.8% pre tax

Based on your existing combined 160K income, I’d be taking a closer look at something along these lines;

1. 6 NRAS properties. Broadly speaking, each will generate @ 20K of losses ( 1o K Cash loss, 10K depreciation) , and 7-8K CF+ after tax. So 6 of these would reduce your household income from 160K to 40K ( @ 20K each- so pretty close to tax free) And it would add @ 42-48K of additional Tax Free income. End Result… you’d go from 160K taxable household income to a combined tax free ( or very close to tax free) household income of @ 202-208K

2. If you used 90% LVR finance, you’d only have used 6 x 60K to achieve this outcome. 360K of your equity would have been used.

So if you do decide to pay $1Mil cash for a PPOR, you could draw out just 360K to get the 6 properties and effectively set yourself up with a 200K+ tax free income for your household for the next 10 years. that’s $2 Million in Tax free income in the next 10 years- more than enough to quickly pay off the 360K Line Of Credit on your PPOR and return it to debt free within 2 or 3 years. This would also leave you with an enormous amount of equity to invest elsewhere if you wanted diversification.

The secret is to maximise your tax free cash flow so that you can then maximise your $1Mil equity. NRAS is simply the best tool for that job. End of story. It’s not the be all and end all and it’s not the only good investment available, and it’s certainly not where your investing journey needs to end, but it most definitely IS the most potent and powerful place to start, because of all the multiplier effects it creates for you while you are still working and can still avail yourself of the Australian tax system and it’s very investor friendly laws ;)

Consider this; 360K of equity invested in 6 x NRAS properties basically makes you over $2 million tax free cash by the time you are 40 – before $1 of growth is accounted for. You’d have to work for @ 18 years to make $2 million after tax, based on your current taxable household income. And keep in mind, the $2 Million doesn’t account for all the incremental increases built in to NRAS. If I included those, the $2Million would be closer to $2.4 Million. You’d have to work for @21 years to achive that , based on your current taxable household income. However, I cant predict those Rental CPI increases so Ive used an assumption of zero increases to NRAS over the 10 years, to be ultra conservative.

That sort of cash flow ( $200K pr annum tax free) would allow you to pay down the 360K LOC you used to fund the 6 x NRAS deposits, within 3 years easily. So your end result would effectively be – $1 Mil unencumbered PPOR within 3 years + $200K Tax Free income + 6 Investment properties costing you Nil, Nada, Zero, Zilch. Beyond that, with all of that equity and all of that cash flow at your disposal, you can venture off to buy multiple other INV properties (non NRAS , as they aren’t available after June 30,2016) , or commercial properties, shares, magic potions or anything else that tickles your fancy :) The point is, NRAS creates the multipleir effect that you wont get from anything else. It’s the First Stage. The Cash Cow.

And don’t forget – you don’t have to be worried about “losses” holding no value or appeal for you beyond the age of 45, if you are fortunate enough to stop working then – because the 6 NRAS properties will well and truly be past their loss making days by then, as I demonstrated earlier.

NRAS is like an accelerant. It takes equity, and using high LVR lending, low interest rates and the tax system, turns the equity into d supercharged tax free yields, which get reinvested, making everything happen far quicker, creating compounding multiplier effects. You literally get the best of both worlds – great tax losses (negative gearing) AND Tax Free Cash Flow Positive after tax (NRAS Tax Credit) in one asset – at the same time. You get to reduce your assessable income by 20K AND make 7-8K tax free. 60K in. 8K tax free out = 15% tax free. But when reinvested, you get a multiplier on that. There’s nothing like it, and I dont know of any other asset class where you can get a better return on 60K (or 6 x 60K) Where else can you reduce your tax bill to ZERO, increase your after tax income significantly, get a compounding return from reinvesting that yield and get capital growth, in one asset?

Then you can go off an invest in all the other diversified opportunities and retire early on a passive income- whatever that may be . But to get there you have to put that equity to work. Squeeze all the juice out of the lemon while you have the opportunity and the taxable income and the NRAS at your disposal.

• This reply was modified 10 years, 5 months ago by  loan ranger.
• This reply was modified 10 years, 5 months ago by  loan ranger.

NRAS Round 5 funding has been cancelled in the Federal Budget, but existing incentives from Round 4 remain fully funded…

Round 5 would have provided funding for 10,000 NRAS incentives, but the incentives hadn’t been awarded yet so its not like anything has been clawed back or withdrawn. They just aren’t proceeding with the last tranche.

Where does that leave NRAS? The bottom line is that instead of NRAS being a 50,000 dwelling initiative, it is now effectively a 40,000 dwelling initiative. The 10 years of funding for the existing 40,000 is locked into the forward estimates, and is not affected in any way by the budget decision not to proceed with Round 5. Of those 40,000, approximately 18,000 were yet to be “activated” at the time of the Budget. Keeping in mind that the majority of the remaining 18,000 do not require activation until as late as June 30,2016… this means that there is still almost 2 years to accumulate NRAS approved dwellings.

You’re free to view it as a fad, and there’s no doubt that a segment within the NRAS market has sought to bastardise it and profiteer from it by using the incredible cash flow it generates to try and price gouge. So they certainly deserve to be criticised because they’ve taken what is a great investment and turned it ugly. But when you are able to purchase at fair market value rather than grossly inflated prices, it’s difficult not to concede that the numbers are impressive. 8-9K CF+ Tax Free isn’t to be sneezed at, especially when combined with good stock in sound locations.

Let me use my own situation as an example; I have 10 NRAS properties now. 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 taxable income for the next 10 years. But I will also receive 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 contrbute 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 Im effectively going to earn 330-340K tax free for the next 10 years. In other words, 600K 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, 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. 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.

Unfortunately that's not quite correct I'm afraid.

The NRAS tax incentive does not have any connection to ordinary offsets that can be applied against your assessable taxable income. None whatsoever. . 

It is paid via two components, called a Refundable Tax Offset ( not the same as a tax offset- see below) and a Non Assessable Non Exempt Cash Gift.  75% is paid via the RTO ( federal Govt pays this, and is ADDED to your tax return cheque/EFT from the ATO. Under ALL circumstances it is completely free of tax) , and 25% via the NANE ( state Govt pays this into your bank account and it is also completely tax free)   Both are paid in FULL, TAX FREE, whether you have an assessable taxable income or not.

You may be confusing a Tax Offset with a Refundable Tax Offset.  It's a common mistake, and many people who have read the misconceptions and myths perpetuated by some ill informed commentators who like to publish erroneous information about NRAS have been taken by this falsehood, but rest assured- you ( and they) are wrong and they are in fact two very different things – more information available here. Google is your friend 3 seconds of “extreme due diligence” may have been time well spent prior to posting incorrect information.  

http://www.ato.gov.au/nonprofit/content.aspx?doc=/content/00179876.htm&page=4&H4

As you will see, the NRAS Tax Incentive is completely different to and independent of traditional Tax Offsets  you are referring to. The distinction is clear, as the ATO plainly states on this link. A Refundable Tax Offset is paid to you in full, tax free, whether you have an assessable taxable income or not. It is paid to you in full, tax free, whether you have excessive tax offsets or not.  This means it also works for non residents with no assessable income from employment in Australia ( just rental income for which they submit a tax return)  

So NRAS cash flow never runs out of steam Dave .  The "steam" in fact  increases each and every year for 10 years, in line with Rental CPI.   FYI, Rental CPI has averaged 5.69% since 2008/9 when NRAS was introduced.   It started at $8000 is currently sitting at $9981. So an NRAS property will most definitely generate the NRAS tax incentive in full, tax free, every year and well beyond the 4-5 years you have indicated. Better still, with just 4% compounding rental growth for each of the 10 years , your property would roll out of NRAS after 10 years and be achieving over 8% yield ( before deductions, depreciation etc) after reverting to full market rental rates. In other workds, CF+ for life , unless interest rates hit double digits. Dont mean to be too mean, but too many people who know too little about NRAS continue to make thinly veiled criticisms of it without actually knowing what they are talking about. Building a portfolio using NRAS is much easier than building a portfolio with neg gearing. Superior deductions. Superior Cash flow. No out of pocket costs, meaning significantly higher borrowing capacity, and guaranteed equity from reducing debt on your PPOR and paying it off within 10-15 years using the ever increasing NRAS CF+ tax free surplus money generated every year for 10 years. Short of massive Capital Growth and massive pay increases, you will never get close to this with the old rusted on “buy and hold at a loss and hope for growth” that so many credit boom beneficiaries of the 90’s seem to be unable to let go of.

Take 60K of equity- buy a 400K NRAS property. It will produce at least 6K CF+ tax free in year 1. Thats a 10% Tax Free ROI. Each year the figure will increase, so you’ll not only AVOID 2K of losses each year using the traditional neg gearing model, you’ll also ADD 6K tax free each year. That’s 8K of extra funds you can use to pay down non deductible debt . That will knock 10-15 years and 150K + interest off a 300-500K PPOR 30 year term. That’s a whole lotta accelerated equity, and it happens free of charge, without a single dollar being spent on losses/holding costs. It also means your non deductible debt is reducing fast, so your borrowing capacity continues to increase, rather than decrease, as you add a 2nd, 3trd or 4th NRAS property. Now you’re talking about paying down your PPOR in well under 10 years, meaning even more equity is available sooner, with less and less non deductible debt. Again, your borrowing capacity keeps growing this way. l

The NRAS dwelling ID is isued to the NRAS consortium within 6 weeks of the property settling and a tenant moving in. The certificate noting the NRAS Dwelling ID should then be made available to you immediately

god of money, why are you surprised FirstMac is still alive?  Im just surprised you would ask that, unless you don't know much about Kim Cannon!   From what I understand, he employed a pretty deliberate strategy to roll up into a little ball and ride out the crisis, but remained pretty profitable throughout. He bought the HSBC book before this crisis hit, so he must have a few bucks… and has been quietly purchasing a host or small mortgage managers books I hear. I just saw a new product FirstMac launched which unless Im mistaken , screams a pretty loud… I'm still very much alive. Havent checked it out yet but I think it's a 3.99 100% offset 1 year fixed rate. Anyone know much about it?

In an environment like this,  and with that equity at your disposal, it's pretty difficult to ignore the merits of investment property.  Consider these points;

A- We have the lowest rental vacancies in just about forever… and it WILL stay this way for some time yet. (see point D below)
B- This has lead to significant upward pressure on rentals already. It will continue to gain momentum ( again- see  point D)
C- This is further compunded by the critical shortage of new stock in the pipeline, meaning even further upwards pressure on rentals for at least another two years. More likely the next 3 years.
D- the Credit crisis has made, and will continue to make it almost impossible for developers to find funding to get new developments started…meaning an ever widening gap between available stock and demand for stock. Even when the crisis passes in 12-18 months, there are lead times involved in getting DA's, design, planning, finance, pre sales etc… so there will be a good 18-24 month lag AFTER the credit crunch, before any sort of significant new volume of stock becomes available,  and finally
E- interest rates heading south, which does two things. Reduces mortgage stress and therefore mortgagee reposessions which have been driving valuations down, and it also boosts borrowing capacity as assessment rates reduce. In other words, there is a critical set of influences converging, which all scream  "investor opportunity" right now.

Now, I acknowledge that conventional wealth creation wisdom/methodology preaches negative gearing and capital growth, but if you can own properties that are positively geared, you can pretty much own em for free!!! Smart investors realise the power of positive gearing always beats negative gearing.  In particular, its a real bonus in your circumstance, as you are 50 and dont have 20 years to see a strategy evolve. This is a really unique opportunity to look at the facts above rather than following conventional wisdom or current "doom and gloom" sentiment, because those factors outlined above will mean that when the credit crisis has passed and sentiment has started to return, there will be significant capital gain to be made. Worst case scenario is that you will make no capital gain in the next three years, but the properties will be positively geared, so you will have no holding costs and maybe a little tax to pay. No big deal, you will see capital gain compensate for that ten fold at some stage within a few years. Best case scenario is that you will see  some gain starting mid 2009 and by 2011 you will have made a nice little profit.  Cretianly if you wish to retire at 55, it's an amazing opportunity for you. My bet is that the capital gain  you eventually realise will far outweigh any short term tax you may need to pay on an investment property.

Here's an example… lets say you buy  a 250K 2b/r unit and can rent it for $300 per week. I/O repayments on current fixed rates of 5.99 for example, or maybe on even less for variable rates by the New Year, would mean repayments of approximately 14,975 per annum. If rates get to 5.5%, it would mean $13750 per annum, etc etc.  Probability is rates will get to around 4.5-5%, so you may see repayments as low as $11250 annually. Your rental income will be $15600 , minus some management costs and strata fees etc…lets say 6% management fees and $400 p/quarter strata- a total of $2536. You will net $13065. Your holding costs at 6% are essentially $160 per month, and at 4.5% they are ZERO. Its highly likely thats where we are headed, so in reality you are looking at a situation where you can essentially have someone pay your investment property for you, free of charge.  I'd look to lock in a fixed rate when they hit the 5%ish range… rental yields already exceed 5%… so it becomes a no brainer then. Your only real costs are 5% deposit plus costs/duties. To be profitable, your property really only needs to make back about 9 or 10% in the next  4, 5 or 6 years to pay for those costs. Everything else is gravy! Chances of seeing it reach 275K ? Pretty good I would imagine, if you take the "doom and gloom" sentiment away and refer back to A-E, above.  Much more likely you'll see it reach 300+. 

Anyway, just my two cents. But all that free equity… I think you are sitting on a fantastic opportunity to accumulate 2 or 3 little 250K 2 bedders right now and watch them make you quite a tidy profit over the next few years.