More and more property investors consider National Rental Affordability Scheme (NRAS) as a method of generating cash flow positive investment property wealth.

NRAS is a Federal and State Government program that provides property investors with exceptional outcomes. However, when deciding on NRAS as an investment option, there are many risks and potential drawbacks that both experienced and inexperienced property investors need to consider to avoid encountering critical mistakes.

NRAS has been established to increase the supply in affordable rental dwellings; reduce the rental costs for low and moderate income households and encourage large-scale investment in affordable housing.

The primary focus of NRAS is to facilitate and give assistance to property investors in building new, yet affordable rental properties with a provision for significant incentives received for a ten year period. However, investors wanting to receive these incentives must submit necessary forms and applications and follow specific procedures. Investors should be aware that upon NRAS approval, the Australian Government will not endorse guarantees and secure the investment as NRAS property schemes are not government operated.

NRAS is not a public housing program; it is a tax incentive to induce more private investment in the lower price range of residential construction. Scheme incentives are more likely to be granted to specific types of residential developments. Investors should familiarise themselves with all specific scheme operator agreement and seek good property advice prior to deciding on a particular investment.

Tenant eligibility, under NRAS has been created to ensure a wide range of household types on low and moderate incomes meet the criteria. It is estimated that 1.5 million households are currently eligible to rent NRAS properties. NRAS dwellings should be rented at a rate of at least 20% below the existing market rates and 30% below the market rates for select property types such as inner-city apartments.

NRAS dwellings are private property and can be bundled with non-NRAS properties. The scheme is managed and regulated under the legislative framework provided through the National Rental Affordability Scheme Act 2008 and has received a 10 year commitment from The Australian Government. However, NRAS property schemes are not operated by the government despite the initiation and incentives being funded by the federal and state government.

Failing to understand the difference between head lease and direct tenancy structures and the costs associated with head is a common mistake in NRAS property investment. The head-lease structure allows an operator to lease the property from the investor for a 10-year period while he/she sub-leases it to an eligible tenant. This structure allows the investor to have little or no control over tenant and property manager selection. On the other hand, direct residential tenancy structure allows the investor to select a property manager and enter residential agreements directly.

The property types included under each structure are indistinguishable from other ‘middle market’ dwellings and can vary considerably, with some scheme operators targeting suburban three-four bedroom house & land and medium-density properties whilst others focus on inner-city and under-infill one-two bedroom apartments. Although finding high quality NRAS property in high-growth areas such as inner-city and CBD locations can be difficult, it is not impossible and these are the investment properties you want to secure.

To reiterate, NRAS agreements are for a 10-year time period. Although a good property investment is always set with 7- to 10- year goal, 10 years is a long period no matter how you calculate it. The ability to terminate the agreement with the scheme operator during the 10-year NRAS incentive period varies between schemes with some being very restrictive and others providing more flexibility.

Incentives are currently set at the following rates but it is still subject to change on a yearly basis in accordance with the CPI:

  1. $7,486 Commonwealth Government Incentive per dwelling yearly as a refundable tax offset or payment.
  2. $2,495 State Territory Government Incentive currently per year in direct or in kind financial support that will total $9,981 incentives for the current financial year.

By knowing what NRAS cash flow offers, would you buy a property without these incentives?

NRAS property investments can be effective inside Self-Managed Superannuation Funds (SMSF) despite the 15% tax rate drop. To illustrate, a $375,000 investment through NRAS within a SMSF could generate cash negative by only $11/week versus $95/week negative outside of NRAS. This demonstrates that NRAS can efficiently work inside SMSF especially when capital gains tax benefits are considered when going to sell a SMFS asset. Although, when using NRAS within a SMSF, you must contribute a larger deposit to gain bank financing.

NRAS is an exciting program that can offer outstanding cash flow and exciting capital growth prospects for investors. However, there are many issues and mistakes than can be made if the appropriate research is not conducted. Seeking advice from financial and accounting specialists prior to making any final decisions will avoid any oversights.