NRAS - $300K IP or $600K IP?

Hello,

I see alot of thread about NRAS. What i dont see is discussion and selection when buying NRAS properties in different price range and what affect it would have to the investor?

for example.

Property 1: Sale price $300K with full NRAS incentive of $11K in good regional area

Property 2: Sale price $600K with full NRAS incentive of $11K in CBD area

I understand for capital gain purposes one would select property 2.

BUT if it is purely for cashflow purposes wouldnt it be better to buy two 2x $300K properties and receive 2x $11k?

Could someone please clarify which option is better? buying property 1 or 2 ?

 

The cheaper the better as the incentive represents a greater percentage of the price.

Biggest thing is not overpaying for the property in comparison to non NRAS in the same location.

 

For these really simple calcs, I used
https://www.moneysmart.gov.au/tools-and-resources/calculators-and-apps/compound-interest-calculator

Assumptions:
NRAS CF+ = 8,500 (8.5k is more realistic)
Regional CG = 2.5%
City CG = 5%
Interest rate = 4.5%, I used basic compounding interest over 10 years


For the city property
After 10 years
Value = 600k + 332k CG which will be taxed
NRAS = 104k tax free

For regional property
After 10 years
Value = 2 * 300k + 2 * 166k CG
NRAS = 2 * 104k tax free


Questions:
Are the assumptions realistic?
You can sell the 2 regional properties over 2 years so you will reduce CGT, but by how much?
Exit strategy for city vs regional?

 

Definitely cheaper the better if looking for yield and purchasing as a pure cash flow strategy.

NRAS numbers doesn't make as much sense at higher price points (unless your a developer holding stock).

E.g. If renting for $700 p/w in Sydney for an NRAS property, you discount it by $140 to get $200 back. Add in NRAS complaince costs of ~$10-20 p/w - and your barely ahead. Also the income limits on NRAS may mean your tenancy pool is quite small (i.e. hard for incomes sub $120-130k to afford higher rental costs).

 

I think you doubled up on your CG in the regional location.

 

If your principal goal is to reduce to reduce debt, 2 x cheaper properties will get you there faster. It could be argued that if you achieved sufficient CG then sold the property, you could do the same thing - but no one can guarantee CG, no matter what they say. But you can calculate the cash flow to a fairly high degree of accuracy.

There's also the question of affordability. Are you better off deploying your available equity and cash flow into 2 dwellings or into 1 dwelling?

My personal approach to this has been... my first half dozen NRAS were sub 350-400K. I wanted to get maximum cash flow back from minimum equity deployed. The priority was to pay off my PPOR mortgage. Because that is life changing.

Once that was done, I then moved toward more expensive /blue chip locations - I was happy to pay more and get a weaker cash flow result ( although still very good) because Id paid off my PPOR already.

I ended up with a great mix of cheap and cheerful, and some great growth. If I had focused only on blue chip from day 1 - I wouldnt have achieved as much cash flow or as much growth - because without paying the mortgage off I couldnt have borrowed as much money/purchased this many properties.

 

I used the wrong value in the calculator. Thanks! It should be

For the city property
After 10 years
Value = 600k + 377k CG which will be taxed
NRAS = 104k tax free

For regional property
After 10 years
Value = 2 * 300k + 2 * 84k CG which will be taxed
NRAS = 2 * 104k tax free

 

Thank you for your reply.

OK. The risk i see with buying in regional properties may be that due to regional population there may be a time when the property become vacant?

Euro73, do you have NRAS properties in regional area? if so, how are they going with rental income in terms of stability?

 

how do you locate these NRA's I have looked on the website and there is only 6 listed? are they low stock or am I missing something?

 

If you are doing cashflow modelling do not forget that sometimes the tax certificates take a long time to issue. I have seen some clients go into these expecting a refund in July and the tax certificates issue in January.

 

@Ross what do you mean by tax certificate?

Thank you all guys with your input.

 

Once Ross, in 2015 financial year. All previous years were issued by August/September. This years were on time as well. That's one late year since 2008. Just saying.....

 

I own 2 in Orange . I own 2 in Port Macquarie. I own 1 in Dubbo. All are tenanted... havent had any vacancies on any of them so far. Orange and Dubbo I have owned for 2 + years . Port Mac just settled @ 1 month ago.

 

You talk to me

 

what sort of price range are they @euro73?

 

You talk to me offline