NRAS and income vs growth

Timing exactly. If you purchased Perth in the last 12-24 months, its gonna be a dud deal whether nras or non-nras....

 

Hey! I purchased in Perth 8 months ago. We don't know that it's a dud deal... yet!

P.s. estimated increase in value in 9 months ~$100k and it will be a positively geared duplex site... but only if I can get the never ending reno finished

 

I'm all for growth - I ( and my clients) have been recipients of some spectacular , fast growth - but in the end , what good is a lot of equity if you cant borrow against it?

The answer is - its no good unless you sell. Which is fine if you wish to do that. If your goal is to try to pick winners, sell them and then pick more winners, sell them and then pick more winners, so that you can build up a big pile of cash , pay off your PPOR and then put the rest into shares or ETF's or LIC's or something else in order to generate an income - great

But if your goal is to build a large resi portfolio and keep it , so that you have income in later life from rent, then you need to manage your borrowing capacity., otherwise you wont be able to buy a large enough portfolio. And thats why debt reduction is so important.

Now, if I can reduce debt quickly and get great growth and do it without selling - Im getting the advantages of both strategies. And thats what Ive been delivering for my clients . I used NRAS for the last 4 years. Now Im using Dual Occ.

 

we could get in endless debate here..few minority would do well. but 95% of buy n hold of Perth in the last 12-24 months became buy and pray..

 

Agreed. Mine was anything but a buy and hold. I do love buying in a down market but you need a solid plan to add value.

In general terms for Perth 12-24 months - big drops in prices and big drops in rental returns. There will be exceptions of course but many who bought during that time will be in negative equity and negatively geared.

Even with my project I have no guarantees but it's a duplex block, so future development potential and also positively geared which makes it easy to hold. A boost in value post reno will be a bonus.

 

The trouble with nras (not euros nras) for me is anecdotal.

Being a broker through its introduction and first couple of years I would get loads of spam emails offering me huge commissions to sell nras. These deals must have been overpriced to be paying these sorts of outrageous commissions. I was also insulted being asked to sell realestate. I am a broker, I do that as well as I can. I specialise. I'm not a tax adviser, financial planner, estate agent or builder.

Regarding debt retirement, it does have an impact on future capacity. Replacing ppor debt with investment debt more so, as your also adding new rental income (discounted by 80%)

After consumer debt is retired and allowing for new rental income debt reduction doesn't have a great impact on capacity. It's basically $ for $.

However with the current changes happening with lending, paying down debt is not a bad strategy to being able to hold more property, whether that's for further income or capital growth potential.

 

Fake News !

 

Thanks @euro73 for your very detailed and insightful explanations. I must admit at being a bit dismissive of NRAS arrangements when I first heard about them several years ago, that's because I didn't fully understand or didn't appreciate the wider strategy (my fault for not looking at SS forums back then). However, your persistence in explaining your overall strategy is certainly appreciated as I have recently reached the "aha, lightbulb" moment and now comprehend.

I guess all property strategies whether buy and holds, renovations, developments, NRAS, buying in Australia / buying in America etc all have their own probability outcome and risk profile and certainly for people who invest in such strategies, they need to align the strategy with their own risk profile. However, through education and experience, one's profile can be widened. Your continuous posts have helped - so thanks again.

 

Debt reduction is king .

 

Again, without wishing to rehash things - not correct. You keep saying that an improvement to borrowing capacity only happens when PPOR debt is replaced, but its just not true. Yes, repaying non income producing, non deductible debt certainly offers the biggest improvement to borrowing capacity, but retiring income producing, deductible debt also has an impact. Less so yes, but an impact nevertheless. It is incorrect to say its a dollar for dollar/ zero sum impact.

If I have already paid off a PPOR and then pay off an INV loan, I get an additional rental income when I purchase the next property, no? In other words, if I owned 2 investment properties generating 2 rental incomes, and then I pay off one of those two properties, I still own 2 properties, right? And I have less debt, right?

So then when I come to see @tobe to organise the 3rd investment property loan, and that 3rd investment property has a rental income as well, I now have 3 x rental incomes , right? And the total of those 3 rental incomes adds up to more than the total of the 2 rental incomes, right? And @tobe inputs that into his servicing calc and that results in ???????????????

some improvement to my borrowing capacity - thats what.

And then, if I pay off another property, and go to see @tobe to organise a loan for a 4th INV property, he will input 4 x rental incomes into the servicing calc, which adds up to more than 3 x rental incomes, right?

And then, if I pay off another property, and go to see @tobe to organise a loan for a 5th INV property, he will input 5 x rental incomes into the servicing calc, which adds up to more than 4 x rental incomes, right?

The improvements arent necessarily spectacular... but they are improvements nevertheless.

 

For those of you who might be interested, I had conducted my own calculations on this following a PM discussion with @euro73 last week (who was very helpful in explaining everything) and have attached for reference. Given that NRAS is a superior after tax cashflow strategy to dual occ, I had done the calcs on NRAS to get a best case cashflow strategy scenario. This may or may not be a re-hash of what has already been said but at least offers a different perspective. The main points are as follows:

• If I'm on $100k salary, optimal NRAS holdings is 5 properties to get maximum tax refund. Total purchase cost plus govt fees = $2.1Mil
• From this $2.1Mil investment, it puts approx $54k back in my pocket each year after tax that I otherwise wouldn't have had. This figure will differ based on incomes levels and circumstances, e.g i still pay HECS but because of this strategy i avoid paying it) Total cash in pocket at EOY goes from $66k net after salary, to $120k cash in pocket after tax is all said an done.
• This cash position can be maximised if capitalizing all running costs. If running costs can be legally capitalized year on year then it bumps up my cash in pocket position to $155k (approx $35k running costs), an extra $89k p/a in pocket that you wouldn't otherwise have.
• Capitalizing the running costs is beneficial if there is a PPOR debt to reduce, in my case $450k which, with this strategy, i could clear in 3 years and have the mrs pay for living expenses. If there is no PPOR debt, then there is no point in capitalizing (other than if you just want to have more cash in hand) as the goal should then be debt reduction on the remaining investment debt. Note, if capitalizing, my investment debt is just going to increase so important to keep this in mind.
• A few questions then come up:

1. Is capitalizing running costs year on year legal?
2. Assuming we can lend up to $2.1Mil on CF strategy, can one physically lend this $2.1Mil if they were going for a growth strategy?
3. If one could lend $2.1Mil for growth, can I invest in growth assets which after selling down and after tax, return more than $54k net p/a on average
4. If we can't lend up to $2.1Mil for growth and if $1.5Mil lending is our limit, does that return same, better or worse return than the $2.1Mil CF strategy?

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In summary, if capitalizing the running costs year on year is legal, then i can pay off my $450k PPOR debt in three years without speculating on growth which is awesome. If not, it will then take about four to five years. If there is no PPOR and your on $100k income, you will only ever reduce your investment debt by an extra $54k p/a (on top of your usual salary after tax income) plus another $11k per any extra property purchased. This is obviously compounded year on year as debt reduces which makes it a little harder to compare strategies.

 

Some great questions:

1. Capitalizing of interest is legal but the question is the primary motive to avoid tax...on large amount of deductions..I would get a private ruling from the ATO to cover yourself.

2. Big assumption that you can get to $2.1m..hard enough on normal loans now..but add to that NRAS.....that will cause issues.

3. Asuumption is the premise that your CF position is as discussed and you can leverage up to $2.1m. Have you tested this with some of the better brokers?

4. FINALLY.....great to have CF but how are you going to get to $2.1m in lending without significant growth ...i.e. equity?

​

 

If I earn 100K , have no credit cards, no personal loans or car loans or HELP debt, and have 2 dependent children and $1 Million debt ( 500K PPOR debt against 1Million security value and 500K Investment debt against $1 Million security value) and generate $500 per week in rent

...and if my neighbour also earns 100K , has no credit cards, personal loans or HELP debt, and also has 2 dependents and $1 Million OFI debt , ( 500K PPOR /$1.1 Million and 500K investment/$1 million ) and also generates $500 per week in rent....

Same salary. same rental income . same dependent children. same HEM. Same OFI debt with same lenders. Same interest rates. Same everything - except his house is worth 100K more....

How does the extra 100K of PPOR equity provide my neighbour with extra borrowing capacity?

On the other hand.... if I pay off the 450K PPOR over 3 years , or 4 years of 5 years... the timing is irrelevant for the purpose of demonstrating this point ; when that 450K PPOR debt is gone , where do things stand? My neighbour doesnt pay any of his 450K debt off. But our incomes, rental incomes, HEM etc all remain unchanged......his properties triple in value though and mine dont change at all. Who has the better borrowing capacity then?

 

@euro73

Same scenario, hasn't reduced debt, comes to see me for another investment property loan, im still going to put the new proposed rental income into the calculator. Might still fail. Nras, paid debt off, put new rent in calculator, now passes. Hasn't borrowed in total more than the first guy, but can now proceed with another purchase. It's dollar for dollar, basically. Allowing for the rental income.

 

So the investor now has an additional property that the neighbour doesn't have...yay or nay?

Now has several K per month available to him, that used to go out of his account every month to pay the PPOR mortgage. yay or nay?

Can therefore utilise that surplus several K to pay down further debt , faster than would have otherwise been possible without an equivalent net payrise. yay or nay?

Doesn't need to ( can choose if - but doesnt NEED to ) sell any properties to achieve the debt reduction. yay or nay?

Therefore , doesnt need to sell any rental income. yay or nay?

So will then reach a point where he can one again reborrow the $$$$ he has paid down as $$$$$ to buy another property...and acquire an additional rental income by doing so. yay or nay?

So purchasing power is improved... yay or nay?

 

Same capacity total plus whatever 80% of the new rent can eke out.

 

Almost there..... getting warmer

 

Hopefully some of the responses to your post have satisfied your concerns?

 

Yes
Interesting stuff.

 

Well, this thread was a little taxing...