I attended a seminar on Tuesday hosted by MoneyTree and Spring financial planning services that laid out the mistakes that can catch NRAS investors or even people who won’t consider NRAS because of some of the perceived stigma around owning such property.
MoneyTree and Spring are a one company structure that gives financial advice, sets up SMSF, managed fund investing and property investing. Spring side of the business is heavily involved in real estate and works closely with real estate agents.
The speaker from Spring Financial Group, Keith Cullen is very knowledgeable on the topic and knows most of the developers and operators that run NRAS. Furthermore, he was clear in saying that not all banks will fund certain operators, even though they may have a solid reputation. The reason that certain banks may not fund NRAS with particular operators may simply be that the bank may not have completed their due diligence process.
So let’s get down to the 11 mistakes people make with NRAS.
1) Not looking at NRAS seriously. There are opportunities for capital growth and as a NRAS owner you will have hard working, educated tenants who do qualify for NRAS! For example, if I were an Australian citizen, I would qualify for NRAS and I have a B.Sc. in Biology and an MBA.
2) Falling in love with cash flow
3) Failing to do due diligence. When looking to buy NRAS property, it is of paramount importance to seek areas with jobs for nurses, tradies, young professionals and other job profiles that fall within NRAS defined salary rates. For example, an area with a hospital will mean there will be plenty of nurses, and being close to a business centre will ensure there will young administration professionals and junior level staff who will take advantage of NRAS.
4) Not assessing the balance between price and tax rate. The notes on this are that marginal tax rate has a big effect on effectiveness. Lower purchase price has more impact on NRAS incentives. However, you shouldn’t go too low in the value of the property because you will sacrifice the capital growth potential.
5) Not assessing the level of required rental discount. Please note that when renting out your NRAS property, you may have to go as low as 30% below market value.
6) Not considering the timing of the tax incentives. Please be aware that the tax incentives are a lump sum paid once a year.
7) Not considering financial restrictions. Not all lenders will finance NRAS. Please call Home Loan Experts and one of our brokers can help you find the best lender to suit your needs to finance your NRAS property.
8) Not understanding head lease vs. direct lease. Under head lease, you will lose control but this is the preferred way to manage your property as it will save you lots of headaches.
9) Not understanding termination. Your property must stay NRAS for 10 years. Many people don’t make provisions for this.
10) Whether property meets local demands. Unfortunately while NRAS is a government proposal, it is not run by or supervised by the government. As a result, greedy developers are building up in areas where there isn’t a significant problem with high rents. This will ultimately mean they are driving the rents in the area down and there will not be demand for NRAS property.
11) Not obtaining professional advice. Some of the wealth building methods you see on TV, read on the internet or hear about from friends are performed by professionals and should come with a ‘Please don’t do this at home’ warning. When taking financial steps it’s very important to get guidance from a professional.
I hope this has been helpful. I welcome and comments and additions. If anyone else was at the seminar, can you fill in the blanks on anything I may have missed?