Why investing in NRAS property could cost you money: Xavier Perronnet
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The federal government’s National Rental Affordability Scheme (NRAS) is being used as a marketing tool to sell property. The scheme was introduced in 2008 and is designed to help meet the social need for affordable rental housing by encouraging investment in residential property through attractive tax incentives.
The scheme provides a substantial financial incentive of a minimum of $9,524 tax-free per house annually to investors who rent approved houses at 20% or more below current market rates to eligible tenants.
However, NRAS is not an investment scheme per se, it is a housing scheme. It aims to provide affordable accommodation and underpins the government’s drive to privatise public housing.
My concern with the scheme is the regulated choice investors have. Asset selection is limited to new approved developments in areas where there is a need for affordable housing. It aims to supply 50,000 new dwellings, and because these are in defined areas where approval is granted, there is a risk of clusters of NRAS properties throughout the market. This has the potential to cause oversupply issues down the track.
Further, these developments tend to be in areas where land is available at low cost, which is generally the case when there is limited demand in the area. However a key characteristic for capital growth is a high land value and limited supply.
The popularity of NRAS properties is growing as financial planners find ways to market the incentives and make money through their referrals and recommendations. Investors need to be aware that large kickbacks of 5% to 10% of the purchase price are being paid to the advisor who is making the recommendation to purchase, and that these kickbacks are simply built into the purchase price of the investment.
I have come across a number of people promoting these schemes, and the alarm bells have been ringing. In one example an investor was offered a unit backed by the scheme for $356,000. On paper the investment cashflows looked great but when subjected to greater scrutiny, the property was found to have a market value of closer to $300,000.
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