Investing in a Defence Housing property; the pros and cons

Blog - 220313Defence Housing Australia (DHA) is a government-backed scheme providing housing to members of the Defence Force and their families.

Investors purchase a property from DHA and then lease it back to DHA. Lease terms range from 3-6 years or 9-12 years.

Like any property investment, there are pros and cons with the DHA scheme.

Without a doubt, the most attractive feature of DHA properties is there is no vacancy risk. If the property is without a tenant for a period, the government cover your rent. Other property investments typically experience at least 1-2 weeks vacancy a year.

Another attraction is you have no management responsibilities. Arranging tenants and taking care of maintenance and repairs are all part of the deal. DHA also refurbish the property when tenants move on. However, all this comes at a cost, a whopping 13-16.5% pa! For comparison, management fees in Victoria are usually around 7% pa.

When it comes time to sell, DHA properties generally move quickly. This is because people perceive them as a safer property investment for the reasons explained earlier. Other property investments may sit on the market for longer.

Now for the downsides.

As the ongoing fees are higher, your rental return will be lower. If you have funded the purchase with borrowings, this could mean your holding costs are greater than other property investments.

Next, DHA build properties in areas that are suitable for Defence members. In other words, there is no consideration given to whether the locations stack up fundamentally for investment purposes. This is an important consideration because most investors buy property to achieve capital growth and not all areas have capital growth potential.

Another consideration is that DHA typically construct a large number of properties in the one place, and all are relatively similar and quite basic. Having a large number of the same thing in the same place can reduce capital growth potential. Generally, a property will be more desirable to a buyer if it is unique and of high quality.

You also need to be mindful that you can’t improve a DHA property or increase the rent. For instance, you couldn’t install a new kitchen or put a deck in out the back. Improvements can add significant value to your investment which in turn can increase the rental yield and future capital growth.

When you decide to sell your investment, you will be selling to another investor, not to an owner-occupier. You need to be aware of this because not only do owner-occupiers make up 70% of the market, you are more likely to achieve greater capital gains if you sell to an owner-occupier. This is because they would be living in the property themselves and may therefore pay a premium for something that is unique and high quality. Given that DHA properties will only ever be purchased by investors (30% of the market) and they aren’t unique and are pretty basic, long-term capital growth may not be as strong as some other properties. This could mean you are relying on capital growth from the location alone and as mentioned earlier, there is no consideration given to the location for investment purposes.

So in the end, it boils down to this.

You pay additional fees for the life of the investment to eliminate vacancy risk and future expenses (such as maintenance and repairs) and there is no legwork to do. However, this comes at the expense of a reduced rental yield (due to higher ongoing fees) and capital growth potential which could mean you walk away with less profit at the end.

Therefore, whether a DHA property investment is suitable for you will depend on your risk and return objectives.

 


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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