Target: $200k income in 12years! Possible?

[wobbycarly]

what is a NRAS property? can you buy any property? and why 20% below market value rent? what is this about

Try http://www.nrasaustralia.com.au/
or http://www.fahcsia.gov.au/our-respo...services/national-rental-affordability-scheme

Simply, it is a government incentive whereby a landlord gets $10k (give or take) per annum to provide a property at 20% below market rent.

 

[euro73]

No. Reduce my tax bill, and less cash goes into my pocket.

How do you figure that?

I didnt say I'd reduce your income. I said I'd reduce the amount of tax you pay on that income.

Reduced tax bill = larger tax refund = more money in your pocket

 

[euro73]

Ha... really? Have all my hours of posts on here just gone right over peoples heads?

The concept is extremely simple. CASH FLOW.

Buy an NRAS approved property - rent it out at 20% below normal rent.

This generates greater losses than a normal investment property, because you are receiving less income from an NRAS property.

This in turn generates a superior tax outcome.

But in return for provding rental accomodation at a 20% discount, you also get $9981 in additional TAX FREE incentives, over and above all the normal deductible losses that you can claim on any investment property.

So, what you end up with is a heavily negatively geared property that is Cash Flow Positive by around 6K, and Tax Free! In other words, you get great tax reductions and you get to build a property portfolio, but it costs you ZERO- it makes you tax free income each year.

You use that surplus Tax Free money to start attacking extra repayments on your PPOR mortgage, and pretty soon you are starting to make a big dent in paying down your mortgage.

All that's required is equity. If you have enough equity to buy 3, 4 ,5, you get 3,4 or 5 x the tax deductions and you get 3,4 or 5 times the 6K CF+ per year. Obviously, that would mean you;'d be able to pay down your PPOR debt pretty damn quickly, and repeat, and repeat, and repeat...

The way the incentives have been designed, you get them in full no matter what your taxable income is.

You can start on a first NRAS property if you can access 60K of equity. That would be enough to purchase a 350K NRAS property. 35K for a 10% deposit. 15K for stamp duty, legals, costs plus a 10K cash buffer for carrying the holding costs for the first year.

 

[locko24]

How do you figure that?

I didnt say I'd reduce your income. I said I'd reduce the amount of tax you pay on that income.

Reduced tax bill = larger tax refund = more money in your pocket

So if i look for a rental manager who charges 20%, i'd be better off than one who charges 5%? That's tax deductable.

Can you provide an example?

 

[euro73]

maybe I need to put on a Sydney workshop for NRAS? would anyone be interested in attending something like that?

 

[locko24]

maybe I need to put on a Sydney workshop for NRAS? would anyone be interested in attending something like that?

If you can't explain it here - what makes you think you'll explain it in person?

A real-life example may make it clearer.

 

[euro73]

So if i look for a rental manager who charges 20%, i'd be better off than one who charges 5%? That's tax deductable.

Can you provide an example?

I dont understand where you are getting a 20% rental management fee from? Property management Fees for NRAS are around 6-8% and are deductible.

But here's a very simple example.

350K property. Normal Market rent of $350 per week - discounted to 280 per week under NRAS. Im forfeiting 80 per week, or $4160 per year, and Im getting $9981 back, tax free, PLUS a refund from the ATO for a percentage of the $4160 in losses from the reduced rental income.

 

[devank]

I had a look at the NRAS. I see mainly three problems.
1. Relying on consortium. What if they stuff up at some point?
2. Finding a right property at right value. Recently, I came across a townhouse for $320K. ANZ desktop valuation at 275K. I provided that report to the seller and asked them provide me with at least RP valuation. Never heard them back!
3. Most benefits are eaten up by
a. consortium fees
b. higher PM fees
c. Higher interest rate due to limited banks
d. passed on NRAS approval fees

 

[euro73]

I had a look at the NRAS. I see mainly three problems.
1. Relying on consortium. What if they stuff up at some point?
2. Finding a right property at right value. Recently, I came across a townhouse for $320K. ANZ desktop valuation at 275K. I provided that report to the seller and asked them provide me with at least RP valuation. Never heard them back!
3. Most benefits are eaten up by
a. consortium fees
b. higher PM fees
c. Higher interest rate due to limited banks
d. passed on NRAS approval fees

Devank we've had this conversation multiple times

You did NOT get a desktop valuation report. You got an ANZ "guesstimate" showing a low end, mid end and high end price range for the townhouse in question. It is not a valuation report. It is a service provided to brokers to give a best guess before they submit a loan application. It holds ZERO legal integrity and is not relied upon by ANZ in any way. You elected to focus on the low end on that document, which used comparable sales on 45 year old red brick single floor dwellings in the same suburb. You elected to ignore the top end of the report, which used newer stock. The reports upper end supported the purchase price, which is entirely reasonable on brand new stock. FYI, ANZ's valuer (Opteon) for the property in question is actually valuing that stock at contract price The ONLY valuer in the area who is having shortfalls on the stock is CBRE. Every other major valuer- WBP, propell, HTW, Opteon, LMW and Charter Keck Cramer are valuing at contract price. I think your continued comments to the contrary are unfair.

The consortiums have existed since 2008, and you are protected by a water tight agreement that has been vetted by the fed and state governments, ASIC, the ATO, the lenders and your lawyer. Im not sure what else you want? If you purchase without NRAS, I could ask...what if the ATO collapses? Or the insurer n your property collapses? or your property manager goes under? Just how much comfort do you want? No Investment can provide you with an absoluetly risk free guarantee. if you are searching for that, cash under your mattress might do it... but then again, what if there was a fire?

The consortium fees total 6-8% of the $9981 in almost all cases. There are few exceptions, and the costs are fully deductible.

The property management fees also total 6-8% of market rent, or 8-10% of discounted rent, and are fully deductible.

So from $9981 you may be paying a couple hundred extra in fees over a non NRAS property, and its all a deductible expense so I get a percentage of it back. I dont see that this equates to "all the benefits being eaten up" . I see that I am still way, way, way ahead.

Banks... this is not correct. You can walk in to just about any NRAS lender and secure absolutely any product they offer, for NRAS. Firstmac is the only exception- they have a specific NRAS product priced at 6.1%. But you can get a 3 year fixed rate at STG for 5.39% for NRAS, or 5.54% at ANZ, etc etc...

 

[sanj]

Thanks for the detailed posts Euro. Definitely an interesting strategy.

 

[dryath]

hey euro,

how does this work, say if for example you began on 0 income - (for sake of the refundable credits?). because i know you said for each property you will make a deductible loss of ~15-20k. So in this instance we are now making a loss each year of 15-20k. im a bit lost on how the refundable credits work here?

I know they reduce the amount of tax liable to pay less than zero, resulting in a refundable amount? - but is the refundable amount the entire loss? or some % of it? - this is where it loses me

thanks euro, and i think you're doing a great job educating the community on nras =) - keep up the good work!

 

[euro73]

hey euro,

how does this work, say if for example you began on 0 income - (for sake of the refundable credits?). because i know you said for each property you will make a deductible loss of ~15-20k. So in this instance we are now making a loss each year of 15-20k. im a bit lost on how the refundable credits work here?

I know they reduce the amount of tax liable to pay less than zero, resulting in a refundable amount? - but is the refundable amount the entire loss? or some % of it? - this is where it loses me

thanks euro, and i think you're doing a great job educating the community on nras =) - keep up the good work!

There are two parts;

1. deductible losses to offset your taxable income.
2. NRAS incentives.


If you have low taxable income then the losses from owning any investment property will be of little use to you, because you will receive little or no refund on your taxable income

But no matter what your taxable income, the ENTIRE NRAS tax incentive is paid to you.

 

[dryath]

cheers euro - thats how i initially thought it worked, before i read that link on the ATO site, which thoroughly confused me =)

edit: - out of interest, how many NRAS properties do you own? (if you dont mind me asking)

 

[Indifference]

I dont understand where you are getting a 20% rental management fee from? Property management Fees for NRAS are around 6-8% and are deductible.

But here's a very simple example.

350K property. Normal Market rent of $350 per week - discounted to 280 per week under NRAS. Im forfeiting 80 per week, or $4160 per year, and Im getting $9981 back, tax free, PLUS a refund from the ATO for a percentage of the $4160 in losses from the reduced rental income.

Here's a better example.........

I forgo the the whole NRAS chasing a "tax incentive" thing and look for a better yield....
Ie. buy a CIP at 8-10+% yield.

It's all about cash-flow..... right?

 

[locko24]

Good to see you deleted your little dummy spit Euro. Hope you don't insult all your clients that question you.

 

[devank]

You elected to focus on the low end on that document, which used comparable sales on 45 year old red brick single floor dwellings in the same suburb. You elected to ignore the top end of the report, which used newer stock. The reports upper end supported the purchase price, which is entirely reasonable on brand new stock.

This is from the report:
Low: 235K
Mid: 272.5K
High: 310K
I mentioned the figure 275K which was above mid!

Having said that I agree with the value around 300K mark but my point is that the seller couldn't provide anything to justify the 320K. That is my 'continued comments'.

On a separate matter, if we are getting 80% of the rent then won't the bank value the property at 80%??

what if the ATO collapses? Or the insurer n your property collapses? or your property manager goes under? Just how much comfort do you want? No Investment can provide you with an absoluetly risk free guarantee.

You can't compare ATO to a privately owned consortium. If the PM or insurer goes under then I can simply change them. Can we still get the NRAS credit if the consortium goes under?

I dont see that this equates to "all the benefits being eaten up" .

I said "Most benefits are eaten up by" NOT 'all'. My 'most' includes 20% rent reduction + 8% annual fees + 2% extra PM fees + additional NRAS compliance fees + what we don't know about.

Banks... this is not correct. You can walk in to just about any NRAS lender and secure absolutely any product they offer, for NRAS. Firstmac is the only exception- they have a specific NRAS product priced at 6.1%. But you can get a 3 year fixed rate at STG for 5.39% for NRAS, or 5.54% at ANZ, etc etc...

I'm still waiting for one of the broker to agree with this. Can we get similar discounts with major 4 banks for NRAS properties?

 

[locko24]

You can't compare ATO to a privately owned consortium. If the PM or insurer goes under then I can simply change them. Can we still get the NRAS credit if the consortium goes under?

Let's hope the ATO doesn't collapse - how will i pay less tax, to earn more money... or something. Who's the CEO over at the ATO?

 

[wobbycarly]

*snip*

On a separate matter, if we are getting 80% of the rent then won't the bank value the property at 80%??

*snip*

Interesting question! We often discuss that residential property is not valued on yield (remember georgie1's thread?) because so much of it is traded by home owners. But in the case of NRAS, isn't it the case that it must remain in the NRAS scheme? So by definition, it can't be sold to home owners? (Or is that a subtle point that I've missed?)

 

[The Y-man]

I dont understand where you are getting a 20% rental management fee from? Property management Fees for NRAS are around 6-8% and are deductible.

But here's a very simple example.

350K property. Normal Market rent of $350 per week - discounted to 280 per week under NRAS. Im forfeiting 80 per week, or $4160 per year, and Im getting $9981 back, tax free, PLUS a refund from the ATO for a percentage of the $4160 in losses from the reduced rental income.

Better to show as comparison "side by side" with numbers.
Also better to drop the tax refund spiel - clouds the main point.

So in your scenarios, if I understand correctly





Scenario 1 ("normal")

Property: $350,000
Loan: $280,000 @ 80% LVR
Interest costs pa: $19,600 @ 7% pa
Rental income ($350 pw) net of 10% management fee: $16,380 pa
Other Costs: $2,000 pa

Net cashflow: negative $5,220
Estimate after tax benefit: negative $3,654


Scenario 2 (NRAS)

Property: $350,000
Loan: $280,000 @ 80% LVR
Interest costs pa: $19,600 @ 7% pa
Rental income ($350 pw) net of 10% management fee and 20% discount: $13,104 pa
Other Costs: $2,000 pa

Net cashflow: negative $8,496
Estimate after tax benefit: negative $5,947

Then the $9981 benefit

Estimate cashflow after tax benefit and NRAS: positive $4,033


Then we can consider Devan's points from this understanding?



The Y-man

 

[HotRod]

The other costs might be say $3000 for the NRAS with the admin costs of the consortium running at about $500 to $1000 and allowing for what appear to be slightly higher PM costs through the consortium.

So, on a like for like basis, an NRAS property is about $7K better off than a non-NRAS property and gives a CF+ investment.