NRAS national rental affordabiliy scheme

http://www.wealthadviser.com.au/images/downloads/The_11_Greatest_NRAS_Mistakes.pdf

This is a great read on what to watch out for in a NRAS property investment.

Hi Brendan,

I'm a financial planner that was exposed to NRAS last year.  We have done extensive due diligence and found that providing the property purchase would makes sense without NRAS and you have a good NRAS consortium it is a very good proposition.

The difficulty is that most NRAS properties are sold off the plan and can be difficult to ensure values stack up.

We recently came across already built and tenanted NRAS properties 6km from Melbourne CBD that start at $315k.  These make perfect sense as NRAS generates more cashflow on cheaper properties and with a fully built, already tenanted and professionally managed property there is minimal risk.

Happy to explain further.

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

NRAS is a tax incentive, not an investment property fad.  You are looking at it all wrong.  Where else can you get a 10% Tax Free Return on your investment?   I bet your negatively geared property doesn't do that for you….

Anyway, I digress…. regarding the article you have submitted to defend your position; it is literally dripping with incorrect information. It continues to amaze me how ordinarily intelligent people just cant comprehend basic maths.

So rather than debating emotionally, let's look at this using facts.  Not myths.  Not opinions.  Just facts… freely published on Govt and ATO websites for all to see.

What Todd says-  rental increases are indexed to CPI ( 2.8%)  and are therefore too weak. I agree that 2.8% is weak, but NRAS rental increases are not linked to CPI.

What is actually true –   NRAS incentives are increased annually in line with RENTAL CPI, which is a whole different kettle of fish to CPI.   How, you ask?

Increase was 8.4% in 2009/10

Increase was 5.4% 2010/11

Increase was 4.2% 2011/12

Increase was 4.8% 2012/13

Increase is on target to be 5.4% 2013/14

http://www.fahcsia.gov.au/our-responsibilities/housing-support/programs-services/national-rental-affordability-scheme/national-rental-affordability-scheme-nras-incentive-indexation

What Todd says –  There is a 10 year lock in – Todd's got that wrong too.  It's true that the very first version of NRAS was a Head lease Agreement operated by Queensland Affordable Housing Consortium, and it was quite cumbersome and restrictive. But it's loooooong since disappeared.  All the NRAS consortiums operate a Non Entity Joint Venture now, and have since 2009/10.  I could publish links to all 138 NRAS consortiums agreements, but that seems a little silly.  If you really want to verify whether I actually know what I'm talking about, call Questus, Affordable Management Corporation, Aspire Housing, Ethan Affordable Housing, Providence Housing, Coast 2 Bay Housing or any of the other NRAS consortiums, ask for a copy of their NEJV, and see where you can find any restrictions that compel you to be locked in to any agreement for 10 years.

What is actually true-  nowhere in the NRAS Scheme Act 2008 is there anywhere that gives anyone any form of authority to lock anyone in to the scheme for 10 years.   None of the consortium agreements lock you in for 10 years.

http://www.comlaw.gov.au/Details/C2008A00121   If you enjoy dry reading- knock yourself out, but believe me, what Todd claims is simply not true

What Todd says – There are restrictions on selling to an Owner Occupier or another investor – wrong again.  Try and find any mention of that on the FAHCSIA website or inside the legislation.

What is actually true.  You can cease to participate your property in the NRAS at any time.  Or if you sell to another investor, they are allowed to take up the remaining term of the 10 year incentive, if they wish . However, they are not obliged to do so.

I can go on and on and pick apart every one of his arguments, but the simple truth is that he ( like many other critics who THINK they know NRAS because they heard someone talk about it or read a few lines somewhere one time)  doesnt know what he's talking about on the subject of NRAS. 

He is a smart guy, runs a great business and is honest. So I dont think he's trying to mislead anyone.  I just think he doesnt understand NRAS properly.

His motivation?  Hard to say, but he runs a business where he charges you 10K or so to act as a buyers advocate , sourcing old 2nd hand stock, buying it "under value" and flipping the equity into more properties. It has its place in a portfolio, but NRAS represents competition.   So I guess he may feel like attacking the competition makes sense. What is not in dispute is his right to criticise if he feels compelled to do so.  That is is absolutely fine , but it's tough to take his arguments on this issue seriously when they are so factually incorrect on every single level.

The one thing he does say where I agree, is price gouging.  But this isnt linked to NRAS- this is endemic amongst all the white shoe brigade marketers in the Sunshine state, where he directs most his attacks. That is to say,  whether the property is approved for NRAS or not, these "merchants" try and add 30-40K to every deal. So it's absolutely unfair of him to level the criticism for price gouging at the feet of NRAS.  It was going on long before NRAS, and will go on ling after NRAS.  

Sorry folks-  there isnt a single argument on his blog that holds water .

Biggest issue is valuation and purchasing the property at the right price.

However I believe in most cases the $10,000k tax free benefits, and great gearing benefits offset the overvalued prices.

Good luck getting your hands on one! try and find a well connected BA that can get you the hook up!

@Loan ranger, How is the NRAS stuff doing?? With the uncertainty around it at the moment (government reviewing it) you probably cant give it away.

I stand by what I said "it is a fad"