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How good is NRAS?
August 21, 2012 7:21 PM   Subscribe

Do you have any experience of investing in an NRAS (National Rent Assistance Scheme) house in Australia? Or the Australian property market in general?

I'm hoping to invest some money and came across the NRAS system which seems too good to be true. Basically you invest in a house, rent it out at 80% of the market rate, and in echange the goverment gives you ~ $9500 a year. I met with a investment property management company yesterday and it seems you can invest in a house through NRAS and get all the negative gearing benefits of a negative cash flow property as well as getting positive cash flow from the government refund. Basically, paying the interest only on the loan would be covered by the rent and tax savings, and then the goverment money could all be money in the bank (tax free).

I'm new to investment as a whole, and property in particular, so I'm not sure if there's something I should be watching out for. Also, from what I understand the Australian property market is still somewhat overvalued, though I can't seem to find a consensus on what that may or may not mean for the future. I'm in South Australia.

I guess my questions are: have you had any experience with NRAS, good or bad? And would it be unwise to invest in Australian property when the market is a bit of a mystery?
posted by A Very Muddled Alpaca to Work & Money (2 answers total) 2 users marked this as a favorite
You might find the Government's NRAS site useful.

Are you hoping to start a new NRAS property, or accquire an existing NRAS property? The NRAS incentive is only available on a property for 10 years, so be sure to check how long remains on any property you're interested in, if you're accquiring an existing NRAS property.

Basically, paying the interest only on the loan would be covered by the rent and tax savings, and then the goverment money could all be money in the bank (tax free).

Are you talking about an interest-only mortgage here? An interest-only mortgage is a bet that the market is going to rise. If you're not sure that the market is going to rise, then don't get an interest-only mortgage.
posted by kithrater at 8:33 PM on August 21, 2012

I recently looked in NRAS as part of my own investing activities. I don't know whether you've seen this yet, but i would definitely check out the exact income restrictions that quality renters into the scheme. The concern i had was that the income restrictions, in combination with the (reasonably high) rental for the apartment i was considering would narrow the pool of eligible people very significantly. What percentage of their income would a low-income applicant have to spend to rent your property? Bear in mind that NRAS income limits increase with the number of people staying in the property: if your property won't hold a five-person family, that will further limit the income your NRAS tenants will be earning.

How expensive is the property you're looking at buying (relatively speaking)? Because NRAS provides a constant incentive to knock off a percentage of the rent, it seemed to me to be better on lower-end properties. (And, of course, you're trying to attract a low-income tenant). All of that said, my understanding that NRAS is genuine, and that it delivers the benefits it claims to if you get an NRAS tenant.

I would not enter a mortgage under the assumption that rent/NRAS will pay for the interest. Be prepared to pay the mortgage if you're without tenants for some time, and i would not factor end-of-financial-year returns like NRAS/negative gearing into your calculations as to whether you can afford it day-to-day. I would also try to stay well beneath the maximum amount a reputable bank is prepared to loan you. The entire industry will advise you to incur the maximum amount of debt possible, which is only a good strategy when capital growth exceeds the interest rate by a significant amount. If capital growth is modest, then you're simply wasting your money paying interest, and the fact that the government gives you some of the money you lost back through negative gearing doesn't make up for this.

How likely do you think you are to find a tenant (NRAS or otherwise)? Will you be able to pay the mortgage if it takes months to find a tenant? I believe it takes 90 days to exit NRAS and rent normally, so you'll need to be able to finance it for a number of months if you can't find an NRAS tenant, after you've just emptied your savings into downpayment and stamp duty. Also, are you prepared to pay land tax annually?

No-one knows what australian real estate is going to do over the next while. You need to remain solvent (read: pay your mortgage) if the market continues to decline, or potentially even crashes. If you can afford to hold your property for the long-term (and thus don't care as much what the market will do short-term), then now may be a good time to shop for a bargain.
posted by nml at 7:53 AM on August 23, 2012

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