NRAS properties – good or bad for investors?

The National Rental Affordability Scheme (NRAS) was introduced by the Australian Government in 2008 and in partnership with the states and territories, aims to provide homes and apartments to increase the supply of affordable housing for low to moderate income earners.

The NRAS scheme is not housing commission or social housing; it is a Federal and State Government backed incentive scheme created to encourage investors to:

1. Develop additional new houses for the rental market;
2. Provide an affordable rent program for average Australian wage earners as individuals, couples and families;
3. Yield higher than usual returns for investors in the residential property market, and
4. Increase the number of rental dwellings built through the stimulation of demand and investment, while supporting the building industry and related jobs and the Australian economy.

To achieve this, the Government is providing a tax incentive for investors in NRAS properties in return for the properties being rented at a 20% discount to market rent. It should be pointed out that, despite the decreased rent, investors should still be better off as a result of the tax incentive provided.

The incentive is made up of contributions by both the Federal and State/Territory Governments and equates to approximately $10,000 pa (indexed) for a period of 10 years. It’s important to note that the $10,000 pa incentive is provided as a tax credit, not a tax deduction. This means that $10,000 pa is offset directly against an investors’ tax liability, not against assessable income. In other words, it’s a genuine $10,000 benefit.

Furthermore, investors are not locked in to the NRAS scheme for 10 years, they can opt out (and therefore increase the rent to market rates) at any time. There are also no restrictions on when NRAS properties can be sold.

In terms of tenants, NRAS properties can be rented to private individuals and families with incomes of up to $108,169 pa. This means approximately 1.5 million Australians are eligible to be NRAS tenants, so rental demand is usually strong.

For properties to qualify under the NRAS scheme, strict guidelines apply. For instance, NRAS properties must be brand new with no prior rental history, close to transport, schools, shops etc to make them desirable for tenants and property investors.

There are also specified guidelines for the management of NRAS properties. NRAS properties are professionally managed, and the manager is responsible for ensuring that tenants meet the income criteria and that they are reviewed against the criteria every two years.

But are NRAS properties good investments?

Like any property investment, investors need to assess individual properties on their own merits. Whether a property has NRAS accreditation or not, investors need to determine whether the investment stacks up fundamentally first. Criteria such as capital growth forecasts, population growth, rental demand, vacancy rates, planned infrastructure and tax-effectiveness should all be at the top of an investors list.

The key to getting the most out of the NRAS scheme is to find a property that satisfies all the usual fundamental criteria. Yes, this will narrow the selection of NRAS properties to invest in, but doing this will maximise the likelihood of the investment being a success regardless of $100,000 in tax credits received during the first 10 years of ownership.

 


This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial and tax advice prior to acting on this information.Opinions constitute our judgement at the time of issue and are subject to change. Financial Planning Expert Pty Ltd does not give any warranty of accuracy, nor accept any responsibility for errors or omissions in this document.
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