The Federal government has now added another incentive to those looking to invest in property. In addition to tax deductions for interest paid, depreciation and assorted other costs, the government has now introduced NRAS – that is, the National Rental Affordability Scheme. This scheme seeks to assist low income earners into rental properties by having new homes built and then rented out at rents 20% lower than the market rent.
So for the investor, the rental income is 20% less, though naturally the vacancy rate is extremely low. But the big reward for this rent concession is that the investor receives a cash bonus from the government at the end of the 12 month period from which the property was rented, to the tune of $9,524, tax-free, for each of the first 10 years. This normally more than compensates for the reduced rental income, and so can make the property cashflow positive from an annualised perspective.
As far as lenders are concerned, there are a few caveats to this arrangement. Most lenders do not yet lend on NRAS properties for a start, so there is far less flexibility with your options on who you can borrow from. Of those that do, there are restrictions on which developers’ consortiums or joint ventures are involved, sometimes with different policies for each.
One general guideline is that borrowing over 90% of the value of the property is not permitted, so the use of existing equity is common, as is the use of Self-Managed Super Funds. Additionally, when checking the borrowing capacity of the applicants, the banks take into account the fact that you’ll be receiving less weekly rent, but won’t take into account the cash bonus at the end of the year. Undoubtedly, this reflects the banks’ need to ensure you can cover loan repayments throughout the year, not just at year end.
One of the great effects of this is that because of the positive cashflow possibilities of this scheme, there is some scope for buying more than one property and creating a larger property portfolio. Also, there is normally great satisfaction to owning an ethically pleasing investment which benefits all stakeholders.