$100000 tax-free cash for property investors

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					Invest | NRAS properties                                                                                                                                                                                                                           Invest | NRAS properties

                                                                                                                                     door is open for individual property         Table 1: Overview of NRAS
                                                                                                                                     investors to benefit as well.
                                                                                                                                                                                  Investor perspective         Government aims
                                                                                                                                     The largest investor incentives              New property only            Stimulate economy through construction of
                                                                                                                                     in history                                                                 new housing
                                                                                                                                                                                                               Increase supply of rental properties to reduce pressure
                                                                                                                                     While Australian investors enjoy                                           on rentals
                                                                                                                                     the benefits of negative gearing (ie,        Rents discounted 20–25%      Provide ‘critical infrastructure workers’ (eg, teachers,
                                                                                                                                     offsetting property losses against           off market rental             nurses, police) with affordable rental properties
                                                                                                                                     other income) and depreciation, these                                     Provide more ‘affordable’ housing for welfare
                                                                                                                                     pale at an individual investor level                                       recipients
                                                                                                                                     in comparison to the government’s            10-year commitment to        Long-term program to provide affordable housing
                                                                                                                                     NRAS incentives.                             NRAS
                                                                                                                                        Investors holding NRAS qualifying         $8,672 ‘tax free’ annual     Large incentive to attract sufficient number of
                                                                                                                                     properties are entitled to 10 years of       incentive payment             investors to build 50,000 properties
                                                                                                                                     annual ‘tax free’ incentives, starting at    Annual payment increase      Ensure investors not disadvantaged by rising market
                                                                                                                                     $8,672 in 2010.                              at same rate as national      rentals over time

                                                                                                                                        For investors with a marginal tax
                                                                                                                                     rate of 30%, this equates to $12,388 in      Cumulative incentives
                                                                                                                                     pre-tax dollars (ie, $238/week rental        likely to exceed $100,000
                                                                                                                                                                                  over 10 years
                                                                                                                                     top up). It’s even better for investors on
                                                                                                                                     the top marginal tax rate of 47%, with

     $100,000 tax-free                                                                                                                                                               … a stampede has occurred with more
                                                                                                                                     NRAS equating to $16,362 in pre-tax
                                                                                                                                     dollars ($315/week).
                                                                                                                                        Each year, the incentive increases           than 30,000 applications received in the

     cash for property investors
                                                                                                                                     according to the rental component
                                                                                                                                     of official inflation. With rentals             first two rounds… over 10,500 NRAS
                                                                                                                                     increasing at their highest rate in
                                                                                                                                     20 years, this means that the annual         properties have been approved …
                                                                                                                                     NRAS incentive increase for 2010 will
                                                                                                                                     be 8.4%.                                     NRAS qualifying criteria                       The government intends to issue
                     In our November issue, we looked at the                            affordable rental accommodation for             In total, an NRAS investor will           NRAS incentives are available only          50,000 NRAS licenses (10,500 issued
                                                                                        two broad classes of renters.                receive a total of approximately             on select properties that meet its          to date) for properties that meet these
                     basics of investing in NRAS properties. This                          First, the so called ‘critical            $104,000 in tax-free incentives over 10      qualifying criteria, being:                 criteria – meaning there will be a finite
                     month, Flynn De Freitas examines this new and                      infrastructure workers’ such as              years. While incentives are calculated        New property (including off-the-          number of properties that investors can
                     exciting class of cash flow positive properties                    teachers, nurses, fire fighters and police   on a national basis, increases in rents        plan) only                                obtain NRAS incentives.
                                                                                        who had been priced out by rents in          are calculated based on the growth rate       Rented to ‘approved tenants’ at 20-25%
                     and finds out if the marketing claims are true                     many areas they worked.                      of market rents in the capital city of the     below market rentals (for the region)     Buying an NRAS property
                                                                                           Second, the low income/welfare            state the property is located.                Managed by an ‘approved manager’,         While the federal government initially

            ax free money for your next        10,500 properties across Australia now   recipients who were being pushed                Not surprisingly, these incentives          which is required to select tenants,      intended that NRAS properties be
            investment property? Is it         qualify for NRAS incentives.             further and further away from capital        come with certain obligations to               set rents and manage the property         owned by large institutional investors
            possible? How about $100,000         Before we look in detail into          and regional centres due to rising rents.    ensure they meet the government’s             The property is rented in NRAS            (eg, corporate super funds), developers
     over the next ten years?                  NRAS, let’s first examine why the           Developers and not-for-profit             stated goals of providing Australians          for 10 years (except in certain           and not-for-profits/charities, there are
        There’s nothing like a financial       federal government is offering such      organisations were invited to apply          with more affordable rental properties.        circumstances)                            ways in which individual investors can
     crisis to encourage governments to        unprecedented incentives.                to round one of NRAS in July 2008,                                                                                                    purchase an NRAS property.
     give away bucket loads of cash, and                                                round two in December 2008 and the                                                                                                       The process involves the little known
     Australia is no different. First it was   Government’s aim with NRAS               current round three.                         Table 2: Forecast NRAS incentives                                                        concept of ‘non-entity joint venture
     the $900 stimulus cheque and then the     The federal government announced in         Like all free money exercises, a          Year                      Incentive               Annual percentage increase             partner’. This effectively means an
     First Home Owners Grant boost. Now        July 2008 that it would allocate $623m   stampede has occurred with more than         Year 1                         $8,672                         8.4%                       individual investor enters into a joint
     the federal government is unveiling       to build 50,000 new dwellings as part    30,000 applications received in the first    Year 2                         $9,019                         4.0%                       venture with an institutional investor,
     the most generous cash handout – a        of its affordable housing initiative.    two rounds. After numerous delays,                                                                                                    charity or developer that qualifies
                                                                                                                                     Year 3                         $9,380                         4.0%
     $100,000 tax-free cash give away!            Recognising the severity of           over 10,500 NRAS properties have                                                                                                      for NRAS (JV Partner). Once a JV
        Called the National Rental             Australia’s housing shortage and the     been approved, with construction for         Year 4                         $9,755                         4.0%                       Partner applies and is granted an NRAS
     Affordability Scheme (NRAS),              vital role investors play in providing   these well underway.                         Year 5                        $10,145                         4.0%                       licence for a particular property, it can
     property investors can now receive        new rental properties, the federal          The federal government has                Year 6                        $10,551                         4.0%                       then sell this property to an investor.
     annual, tax-free incentives courtesy of   government decided to ‘go hard           primarily intended to target                 Year 7                        $10,973                         4.0%                       The investor purchases the property
     the government. Sound too good to be      and go early’ with a generous, long-     developers, ‘institutional’ investors        Year 8                        $11,412                         4.0%                       and then generally enters into two
     true? How much is it worth in 2010? A     term scheme that would incentivise       and not-for-profits/charities with the                                                                                                agreements. Firstly, a head lease with
                                                                                                                                     Year 9                        $11,868                         4.0%
     cool $8,672!                              investors to provide rental properties   NRAS incentives to ensure better                                                                                                      the JV Partner (who holds the licence)
        Well of course there are conditions    at 20-25% below market rentals. The      compliance and save on administration        Year 10                       $12,343                         4.0%                       and, secondly, a management agreement
     but they are pretty mild, and over        federal government wanted to provide     and red tape costs. However, the             Total                       $104,117                                                     with the approved manager. The

38                                                                                                           www.yipmag.com.au       www.yipmag.com.au                                                                                                                     39
NRAS specialists                                                                                                                                                    Sponsored section | NRAS properties

1. Aztec Developments                          Chart 1: Example investment structure
A     ztec Developments (Qld) Pty
      Ltd is a family-based business
experienced in the development of
                                               for individual NRAS investor

                                                                                                    NRAS compliance
quality investment properties in areas                                       NRAS JV Partner                                      NRAS
of high growth. ’
   “All NRAS properties are high quality                                                               Incentive
                                                                      NRAS compliance
homes, in desirable areas, designed to                                                  Incentive
                                                                Management agreement                               2. Sub lease
provide affordable housing for middle
Australian families on good incomes                                                                 Rent collection etc
                                               1.Head lease                Approved manager                               Approved tenant
but unable to acquire deposits or to
afford a mortgage payment needed for
                                                                                                    Discounted rent
a home ownership,” says Jenny Hall of
                                                                   3. Manager fee       Incentive
Aztec Developments.                                                                     Rent
   “Rising rents and lower than average
vacancy rates for rental properties
particularly in the Caboolture                                                     Investor                               Approved property
Statistical Division means that tenants
are finding it harder to find suitable
affordable rental housing. The jump in
sales prices of houses and townhouses
in the area over the past few years
have also meant that fewer people are
                                                 It is important that the whole
able to enter the housing market and             process is correctly set up, so that
instead need to continue to rent rather
than buy their own home. Therefore,              you (as the investor) can ‘tax free’
affordable rental housing in the area
will provide much needed relief for low       receive the incentive
to moderate income earners. Investors
earning as low as $50,000 a year can          manager is responsible for selecting all          19 Joyce Street, Burpengary, Qld,
invest in NRAS properties and could           tenants, managing the property, setting           is a group of townhouses offered
earn a positive income of $63 in the          rents, and ensuring compliance with               for sale by NRAS specialist, Aztec
first year,” she says.                        NRAS requirements and paper work.                 Developments. Located 30 minutes to
                                                 The federal government then pays               the Sunshine Coast and Brisbane, the
For more information, please
                                              75% of the NRAS incentive to the JV               three-bedroom townhouses are due to
call (07) 5491 2717 or visit www.             Partner, who then passes it on to the             be completed in June 2010.
aztecdevelopments.com.au                      manager, who in turn passes it to the                Assuming a loan of 90% LVR,
                                              investor. Investors apply directly to the         lenders mortgage insurance of 1.5%,
2. Awesome1 Investment                        state government for the remaining                interest rate of 6% and tax rate of 30%,
                                              25% of the incentive (see Chart 1).               19 Joyce Street is $3,531 after tax, cash
Properties (A1IP)                                It is important that the whole process         flow positive in 2010 (see Table 3).

T   he Queensland-based property
    investment group specialises
in sourcing NRAS properties in
                                              is correctly set up, so that you (as the
                                              investor) can ‘tax free’ receive the
                                              incentive. JV Partners will have applied
                                                                                                199 Norris Road, Bracken Ridge,
                                                                                                Qld, is a group of townhouses that
Queensland, NSW and Victoria.                 to the Australian Taxation Office                 have been offered for sale by NRAS
  CEO, Laura Castelli says that A1IP          for a ‘private binding ruling’, which             investment specialist, Awesome1
found that they preferred NRAS                investors should ask for and have their           Investment Properties. Situated 19km
properties in the eastern states rather       accountant check before purchasing an             from the Brisbane CBD, some of these
than Western Australia, given these           NRAS property. There are also other               34 three-bedroom townhouses are
properties are substantially cheaper.         JV Partner arrangements that do not               expected to be granted NRAS licences
  “As the NRAS incentive is the same          operate under a head lease structure but          in round three with joint venture
regardless of the price of the property,      are similar in effect. Again, a private           partner, Queensland Affordable
                                              binding ruling should be requested and            Housing Consortium.
from a cash flow perspective, it’s better
                                              shown to your accountant.                            Assuming a LVR of 90% on the
to buy a cheaper property over a
                                                                                                purchase price of $360,000, interest
more expensive one. For example, the
                                              Too good to be true?                              rate of 6.00% and investor marginal
annual after tax, cash flow difference        Sounds good but let’s look at a couple of         tax rate of 30% (31.5% after Medicare
between a $360,000 property and               real life examples:                               Levy), Norris Road is $2,428 after
                    ›› continues on page 44
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Sponsored section | NRAS properties
                                                                                                                                                                               NRAS specialists
                                                                                                                                                                               ›› continues from page 40
                                                                                                                                 tax, and cash flow positive in year one
                                                                                                                                 (see Table 4). This equates to a pre-tax      $460,000 property is about $2,000.”
                                                                                                                                 gross yield (ie, rent + NRAS divided            “That said, NRAS is a 10-year
                                                                                                                                 by purchase price) of 6.5% and a post-        scheme and for a little extra, investors
                                                                                                                                 tax, net yield (ie, cash after all expenses   can buy into a higher growth area
                                                                                                                                 divided by purchase price) of 0.7%.           that will deliver better capital growth
                                                                                                                                    On the key investor metric of              over the long run.”
                                                                                                                                 ‘cash on cash’ return (ie, post-tax, net        “This is why we source properties
                                                                                                                                 yield divided by total cash needed            from $320,000 to around about
                                                                                                                                 for purchase), the returns are 5.2% –         $420,000, so that investors can make
                                                                                                                                 equivalent to putting the $42,000 in          their own choices.”                          Table 4: NRAS example –
                                                                                                                                 funds required to buy the property in           Interested investors can view              199 Norris Road, Bracken Ridge, QLD
                                                                                                                                 the bank and it earning 5.2%.                 A1IP’s extensive list of NRAS
                                                                                                                                    While this mightn’t sound too                                                                                                                      Traditional              NRAS
                                                                                                                                                                               properties on their website, www.           Purchase price                                                                                        Difference
                                                                                                                                 exciting at first glance, the beauty                                                                                                                   $360,000               360,000
                                                                                                                                 about NRAS properties are that they
     Table 3: NRAS example – 19 Joyce Street Burpengary                                                                          are generally located in traditional,         com.au
                                                                                                                                                                                                                           Stamp duty and legals (off the plan)                             $5,000            $5,000
     Investment cash flow analysis                                                                                               higher capital growth but negative                                                        LMI (1.5% of purchase price)                                     $5,400            $5,400
                                                                                                                                 geared areas rather than the standard         3. Surat Basin Homes                        Deposit (10%)                                                   $36,000           $36,000
                                                                                                                                 positive cash flow areas (eg, mining                                                      Cash required                                                  $46,400                                            0
      Purchase price
                                                                                                              Difference         towns, inner city apartments, etc).
                                                                                                                                 Consequently, investors are likely to
                                                                                                                                                                               S    urat Basin Homes is a local building
                                                                                                                                                                                    company located in Chinchilla and
                                                                                                                                                                               currently offers NRAS stock priced
                                                                                                                                                                                                                           Rent ($380/week market)                                         $19,760           $14,820               ($4,940)
                                                                                                                                 enjoy solid capital growth over the ten                                                   Vacancy (2 weeks)                                                ($760)             ($570)
      Stamp duty and legals                                        ($11,500)           ($11,500)                                                                               from $344,000 for a 3-bedroom house         Interest (6.00%)                                              ($19,440)           (19,440)
                                                                                                                                 years of the investment.
                                                                                                                                                                               to $609,000 for 2 x 3-bedroom villas.       Joint venture fee ($12/week)                                                         -$660
      LMI (1.5% of purchase price)                                   ($4,875)            ($4,875)                                   The fact that the federal government
                                                                                                                                                                                  “Investing in NRAS properties is         Management fee                                                 ($1,672)           ($2,090)
      Deposit (10%)                                                ($32,500)           ($32,500)                                 has selected NRAS properties out of
                                                                                                                                                                               no different to any other investment.       Expenses (ex-depreciation)                                     ($5,450)           ($5,450)
                                                                                                                                 thousands of applications also means
      Cash required                                               ($48,875)           ($48,875)                              0                                                 You still need to consider if the           Pre-tax cash flow                                             ($7,562)                                 ($5,828)
                                                                                                                                 that it is likely to be located in a
                                                                                                                                 ‘higher’ demand area.                         fundamentals for the investment is          Tax benefit* (30% marginal tax rate)                             $5,311            $7,146
      Rent ($320/week market)                                        $16,640             $13,312                   ($3,328)                                                    good without NRAS. Ask yourself,            NRAS incentive                                                                     $8,672
      Vacancy (2 weeks)                                                ($640)               ($512)                               Investment considerations                     would you buy in that location if NRAS      Post-tax cash flow                                            ($2,251)             $2,428                 $4,680
                                                                                                                                 Investors need to consider NRAS               was not available? To be more specific,
      Interest (6.00%)                                             ($17,550)           ($17,550)                                                                               is there good population growth in          Gross rental yield                                                  5.5%               4.1%
                                                                                                                                 properties as long-term investments,                                                      Gross NRAS yield                                                    0.0%               2.4%
      Management fee                                                 ($1,408)            ($1,760)                                as they need to be held in NRAS for           the area to ensure tight supply so
                                                                                                                                                                               you’ll get good capital growth on           Total gross yield                                                  5.5%               6.5%                     1.0%
      Joint venture fee                                                                  ($1,000)                                10 years. Some JV Partners make
                                                                                                                                                                               your investment, and are the rental         Expenses                                                          (7.6%)             (7.8%)
      Expenses (ex-depreciation)                                     ($4,450)            ($4,450)                                it hard for some properties to be                                                         Tax benefit                                                         1.5%               2.0%
                                                                                                                                 removed from NRAS, which may                  returns good enough for you now? If
      Pre-tax cash flow                                             ($7,408)          ($11,960)                    ($4,552)                                                    the answer is yes then NRAS will be         Net yield                                                        (0.6%)               0.7%                     1.3%
                                                                                                                                 lead to legal wrangling.
      Tax benefit (30% marginal tax rate)                              $5,386              $6,819                                   However, there are circumstances           the icing on the cake and you’ll have       Weekly rent                                                         $380              $285
                                                                                                                                 in which investors can effectively            a great investment,” says Colin West,       Tax benefit                                                         $102              $137
      NRAS                                                                                 $8,672                                                                              sales director of Surat Basin Homes.
                                                                                                                                 leave NRAS. Firstly, they can sell to                                                     Weekly NRAS                                                                           $167
      Post-tax cash flow                                            ($2,022)              $3,531                     $5,554      another investor who agrees to retain            “Don’t fall into the trap that you       Effective weekly rental                                             $482              $589                     $107
                                                                                                                                 the property in NRAS, which allows            must buy a NRAS property without
      Gross rental yield                                                  5.1%                4.1%                                                                             worrying about the location; although       Yield on cash required                                           (4.9%)               5.2%                10.1%
                                                                                                                                 capital gains to be crystalised.
      Gross NRAS yield                                                    0.0%                2.7%                                  Secondly, should the JV Partner be         most NRAS properties should be good,
                                                                                                                                                                                                                           * Tax benefit includes 1.5% medicare levy, year one $8,017 depreciation and $1,240 in loan costs written off
                                                                                                                                 able to find another property suitable        you still need to research the area for
      Total gross yield                                                  5.1%                6.8%                       1.6%
                                                                                                                                 for the NRAS licence then they can            the best results.”                             Finally, as mentioned previously,                          consultant and investment banker, he
      Expenses                                                          (7.4%)              (7.8%)                                                                                With over $100bn of proposed             investors should ensure that their                            provides research and assistance to property
                                                                                                                                 apply to transfer the licence to the
      Tax benefit                                                         1.7%                2.1%                               other property.                               major resource development in the           accountant checks the JV Partner’s                            investors and investment groups. For
                                                                                                                                    This then enables an investor to           Surat Basin bringing in thousands of        private binding ruling to make                                more information, please visit www.
      Net yield                                                       (0.6%)                 1.1%                       1.7%
                                                                                                                                 remove their property from NRAS               workers to the area, the rental prices      sure that there are no complications                          omegainvestments.com.au.
      Weekly rent                                                         $320                $256                               or sell to an owner-occupier (and             and house values are set to soar.           with receiving the NRAS incentive
                                                                                                                                 potentially capture higher capital               “We understand that supply of            tax-free.
      Tax benefit                                                         $104                $131                                                                             houses will be very tight, therefore the
                                                                                                                                 gains). In all other cases, investors can                                                                                                               DISCLAIMER:
      Weekly NRAS                                                                             $167                               generally exit NRAS but will either           average wage earner won’t be able to        Flynn De Freitas is Principal of Omega                         All comments made in this article are of a
      Effective weekly rental                                            $424                $554                       $130     lose the current year’s incentives or         afford to live here unless there’s some     Investments, a boutique property research                     general nature and should not be construed
                                                                                                                                 only be able to pro rata claim the            sort of assistance like NRAS,” says West.   company specialising in positive cash flow                    as investment advice. Each reader’s
      Yield on cash required                                          (4.1%)                 7.2%                     11.4%      incentive according to the number                                                         properties such as those in NRAS and                          financial situation is different and specialised
                                                                                                                                 of days the property was in NRAS              To view Surat Basin’s NRAS offering, go     in mining towns. Utilising his training                       independent accounting, legal and investment
     Disclaimer: Aztec Developments (Qld) Pty Ltd is not a licenced financial planner and this information is only a guide
     to assist in making an informed decision, however professional advice should be sought at all times.                        that year.                                    to www.suratbasinhomes.com.au               and experience as a former management                         advice should be sought.

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