Introducing NRAS

The National Rental Affordability Scheme (NRAS) is an initiative developed by the federal government together with the states and territories. Under the scheme, investors are provided with tax incentives to provide quality housing at rental prices which are lower than market rates.

These incentives are available to investors owning NRAS investorsproperties for 10 years post settlement. The scheme is set to run until 2015.

For an investor, the NRAS scheme system works as follows. After buying your investment property and renting it through the scheme to an approved tenant, you price the rent as a 20-25% discount on the standard market rental rate. In return, the government provides a tax-free incentive payment of $9,579 each year for the next decade.

From a tenants perspective, instead of paying $400 per week in rent, the price may drop to $300 in an NRAS property. This saves the tenant $52,000 across 10 years – it’s no surprise that NRAS properties are in high demand from prospective tenants.

There are a number of criteria and restrictions that regulate the scheme. For example, the property must be brand new and approved for inclusion in the NRAS-approved scheme, and similarly the tenant must also be approved under the scheme (approximately 1.5 million Australians qualify). The property’s rental rate is assessed compared to market values after years four and seven of the 10-year NRAS agreement (which the investor can end at any given time). There is also a limit on the number of NRAS approved properties available in any one development, with only 20-30% approved in any single development.

If your property meets these criteria, there are a number of benefits of investing in NRAS properties.

Many of theseNRAS properties are positive cash flow (some more than $70 per week) in prime suburban locations, in property types that are designed to meet the requirements of local rental markets. Locations are selected for in areas with high-growth potential thanks to local demographics, employment and infrastructure, which also results in extremely low vacancy rates. Approved properties must conform to stricter criteria than normal, meaning that each has been built by a higher caliber of builder or developer.

From a financial perspective, investment in NRAS-approved properties can made through a variety of structures, including personal names, trusts or SMSF. There are 10 years of tax-free incentives in excess of $100,000 and maximum depreciation is claimable on each property.

Not surprisingly, these NRAS properties enjoy high demand from both a rental and re-sale perspective, given the incentives are transferable to new owners of the property after selling.

Staying safe with NRAS

In some ways, the NRAS scheme sounds too good to be true, which is not surprising when you combine “Government approved tax incentives” and “property investment” in the same sentence. However, like most areas of property investment, there are a number of possible pitfalls to avoid to ensure your NRAS investment is successful.

Here is a brief overview:

What’s in a name?

There are a number of companies who have jumped on board the NRAS bandwagon and have incorporated the NRAS acronym as part of their business name (or their websites address). Some go even further, suggesting they are part of the scheme in some officially approved capacity, instead of merely as vendors for NRAS-approved properties. If the company you are dealing with has NRAS as part of their name, they should also have a prominent disclaimer alerting potential customers to the fact they are not part of the government run scheme. If they can’t e honest about this, why would you expect them to be completely honest when dealing with you?

Don’t trust the media. Again.

NRAS has a long and complicated history, where regulations and criteria have changed over the years thanks to different governments and changing policies. While a positive result of this evolution has been the scheme as it currently exists, a negative impact has been the amount of misinformation that has been generated about the scheme over the years. Some of it may have been right two years ago, but the scheme has changed since then.

Some myths which are still out there: NRAS properties are not available to individuals (they are) and NRAS approved properties are committed to the scheme for 10 years (they are not). Unfortunately these myths were once true, and journalists often rely on outdated information to write stories about the NRAS scheme.

Don’t trust the industry either.

Unfortunately it’s not just the media that has got it wrong – there is plenty of ignorance about NRAS across the real estate industry as well. From mortgage brokers to accountants, there are plenty who haven’t heard about the scheme. Without naming names, I recently spoke to a valuer from the largest valuation firm in Australia who hadn’t heard of it either!

Perhaps a result of this ignorance is the behavior of many lenders, who refuse to finance NRAS properties. It seems counter-intuitive, as lenders should be making NRAS properties a priority instead of writing them off. Currently NAB leads the way from the big four in NRAS lending.

So make sure you deal with someone who knows the scheme (and is up-to-date on the latest changes to it).

A final word

There are many benefits to investing in the NRAS, but you must keep in mind that almost all the fundamentals of property investing still apply whether you buy a property under the scheme or not.

For example, you will need to stay on top of your cash-flow situation, perhaps through lodging an income tax variation form (although you’ll need to discuss this with your accountant).

You will also still need to be aware of lemons. Some NRAS properties are priced above their fair value, and not all NRAS-approved properties will be suitable investments for a variety of reasons. Also, once you have found an appropriate property you will also need to pay attention to the leasing model, as some are costlier than others or may have different finance limits.