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NRAS

Discussion in 'General Property Chat' started by Cactus, 20th Jan, 2016.

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  1. Cactus

    Cactus Well-Known Member

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    Ok so I see Euro talk a lot about NRAS and he makes some compelling points, but a lot of people are very negative to NRAS. I previously tried to get NRAS approval on some developments i was doing for a client in Pakenham and got declined. I have always been interested in it as the cash flow is compelling (even if the CG is not as good due to area etc). The main fear I have had is that reselling NRAS may be more difficult during the incentive period. If you hold 10 years and escalate rent at end to market rates then no different to any other sale (other than area may be lower CG).

    Looking for some insight from people as to why they have or have not made NRAS part of their strategy and if you have how has the investment performed. Any CG? Poor CG in comparison to rest of market?

    Also was finance hard to get on NRAS property, and after NRAS purchase was finance easier/harder to get on following non-NRAS purchases?

    I feel there is probably a decent argument for using a couple of NRAS properties to support a few Neg geared CG properties.

    Not looking to bait an endless argument here if possible!

    Cheers for all info.
     
    Last edited: 20th Jan, 2016
  2. Cactus

    Cactus Well-Known Member

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    wow 25 views and not one opinion.
     
  3. EN710

    EN710 Well-Known Member

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    Patience grasshopper! 25 views can be 5 people reloading the page 5 times each depends on how the analytics of this forum works.

    Was considering it a long time ago when I was really really know nothing, decided that I should not make purchasing decision based on tax alone, plus all the property I found are kinda overpriced and smaller land compared to existing residential. I.e. too much unknown, too many spruikers selling hence not part of my strategy.
     
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  4. Cactus

    Cactus Well-Known Member

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    haha

    I agree not to purchase on the tax benefits alone, and my portfolio will be all cash flow neutral to positive (pre depreciation) once i complete all new builds so its not actually necessary but i'm still a bit interested in it.
     
  5. Vassago

    Vassago Active Member

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    You can always remove the NRAS from the property anytime, for mine the cost is $300 from memory.

    I have a few NRAS properties.

    I had no problems getting finance for them or since. They do eat into your finance capacity more than a normal property due to rent being lower and the incentives not included in serviceably calcs.

    I haven't monitored the CG due to them being long term holds, all were originally purchased below market value based on others at the time.
     
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  6. wogitalia

    wogitalia Well-Known Member

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    My biggest issue when looking into them was the difficulty in actually finding them. They don't have a function on RE.com to find them and the people selling them are almost all spruikers of the highest order selling crappy products for well above market rates because of the NRAS.

    The numbers on them do look really inviting though, that's for sure.
     
  7. Vassago

    Vassago Active Member

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    I agree finding good ones is hard.

    Search for keyword "NRAS" on realestate.com.au

    Also try to get onto the mailing lists.

    In any case be prepared to act real quick if something good does come up, they seem to go within a day.
     
  8. Cactus

    Cactus Well-Known Member

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    Didn't know that thanks!


    That is a big negative, wonder if some creativity around trust ownership could change this effect.

    I do this too.
     
  9. euro73

    euro73 Well-Known Member Business Member

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    Most NRAS approved properties found online are marketed through project marketers who add hefty comms to the deals... but this is nothing new for project marketers selling new developer stock and is not NRAS specific - it was happening long before NRAS and will go on long after NRAS - but somehow a stigma developed that all NRAS is in poor locations with massive overpricing.

    The truth is - it's simply not true if you look hard enough. These forums are full of posts about great NRAS deals. There were plenty of excellent NRAS deals to be had across the last few years, but the reality is that NRAS opportunities are now almost all gone.

    I specialise in the NRAS space, and I have sold over 350 NRAS properties in the past 3 years, and to date I have only ever had 1 valuation shortfall from all of those sales, and it was quite modest...around 9 or 10K from memory. Many dozens of those sales have been to forum members so they can confirm or refute what I'm posting as they see fit.

    But all NRAS is new stock ( unless you are buying used NRAS with less than 10 years remaining) so developers expect premium pricing for new stock whether it has NRAS or not. I work really hard to find deals that value on the button or very very close to it.

    Locations for those sales have included regional areas such as Bendigo, Ballarat, Orange , Goulburn , Dubbo and Port Macquarie , as well as smaller cities like Wollongong and Newcastle, and metro areas in Sydney such as Castle Hill, Elanora Heights, Rose Hill, Wentworthville, Harris Park,Gregory Hills, Enfield, Bunya (Bungarribee) . Metro Melbourne areas such as Ringwood, Brunswick, Collingwood and Travencore, and metro Brisbane areas such as Cannon Hill, Mt Gravatt, Annerley, Alderley, Windsor, Taringa , Nundah, Gaythorne, Sherwood, Wynnum and Zillmere, and other bits n bobs in WA and SA....

    I have stayed away from the mass market NRAS attached to house /land estates in SE Qld - so if you align yourself with reputable NRAS experts, you can find strong deals.


    Finance is easy. It's been at least 4 years since most lenders started accepting NRAS. Westpac, STG, BOM, RAMS, Adelaide, NAB, CBA, ANZ, Macquarie, BOQ, Resimac, pepper, JFirstmac, Homeloans Ltd and others are all NRAS friendly. Some to 80% LVR. Some to 90% LVR. Genworth LMI are fine with NRAS to 90% coverage.

    Adelaide Bank and Firstmac also accept the NRAS as income. they take 80% as untaxed allowable income as long as your LVR is below 80%.

    The other way to purchase NRAS is on RE.com.au or Domain... divorces, deceased estates etc sometimes have to offload NRAS so you can occasionally find some really solid "used" deals with 7 or 8 years remaining... being sold via local agents who dont really know a thing about NRAS

    If you find a "used" deal like this, be sure to ask some key questions..

    Who is the NRAS provider/consortium?

    Is it a Head lease or a Non Entity Joint Venture NRAS model? This is key because it can affect the cash flow and finance options you have. Two NRAS providers run a Head Lease and they reduce the rent by 25.1% instead of 20%, and their fees are higher than elsewhere - so it can also affect cash flow marginally vs other NRAS models which discount by 20% and have lighter fee structures.

    Always have your broker do a couple of different bank valuations to make sure you arent paying severely over the odds. And always ask the agent selling the used NRAS property, to ensure you are provided with the necessary NRAS transfer of ownership paperwork required by the NRAS provider/consortium. In my experience, they often don't know to do this and the NRAS consortium continues paying the credits to the old owner because they havent been informed of the change of ownership.
     
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  10. Observer

    Observer Well-Known Member

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    For me the biggest issue with NRAS is finance for future purchases because of below market rent and thus issues with serviceability in the current apra lending environment. How many of those an average Joe would be able to buy before hitting the serviceability wall? I'd imagine very few.
     
  11. Bran

    Bran Well-Known Member

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    I've spoken to Euro about this recently.

    I don't completely understand the process for one, but my biggest issue initially was choosing a NRAS property in a location, rather than choosing a location then the property. If one came up in an area I knew, I feel I could make a better decision, knowing what the NRAS vs non-NRAS path would deliver.

    I haven't written it off completely.
     
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  12. euro73

    euro73 Well-Known Member Business Member

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    Unfortunately NRAS allocations were finalised in December 2014 and thats the stock you can choose from..
     
  13. euro73

    euro73 Well-Known Member Business Member

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    I see it completely the other way. 20% reduced rent on 1 property doesn't have much impact on servicing... for starters, most lender calculators factor in neg gearing as an add-back, so the real impact of 20% less rent afterNegative Gearing for a Marginal Tax Rate of 32.5, 37 or 45% is applied is far less than 20%. It is more like 11 - 14%. So this argument, perpetuated in recent years on these forums by some who dont understand servicing calculators at all, is quite overstated , to be brutally honest. And besides, if you are happy doing 80% LVR deals, you can always use Adelaide or FirstMac where 80% of the NRAS is used for servicing - and it's used as untaxed income so it adds substantially to borrowing capacity right out of the gate, per NRAS - and that's like adding a significant payrise for each NRAS in your portfolio.

    But setting FM and ABL aside, even using "normal" lenders and policy , I see it this simply - the surplus money generated by NRAS annually, if reinvested, will over a few years, make a material difference to reducing other debts as long as you redeploy it towards those purposes - which is the underlying philosophy I teach to all my clients - aggressive debt reduction using NRAS cash flow - pay down PPOR's, credit cards, personal loans etc- these are the keys to improved borrowing capacity- not modest rental increases. These actions will assist borrowing capacity far more than 11-14% reduced rent will detract from your capacity .

    Let me outline my personal position just so I am not accused of fudging figures - IO have always been very open on these forums and with all of my clients about precisely how I use NRAS . For me, I operate NRAS as a highly leveraged, property backed dividend reinvestment plan using fully franked NRAS tax free dividends reinvested year in, year out.

    Here are the nuts and bolts;

    I pay myself 200K per annum from my company. From that I pay personal income tax throughout the year.

    I have a dozen NRAS properties and a few non NRAS properties. The non NRAS are all CF+ pre tax, but the NRAS all generate between 18-20 K on average in deductible losses . Approximately half from pre tax losses and the other half from depreciation. So I generate over 200K of deductible losses. The deductible losses are more than sufficient to reduce my assessable taxable income below the tax free threshold of $18,200...so I get a rather nice refund from the ATO

    But I also generate between 8.5-10K of additional surplus tax free cash flow from each of my NRAS properties, so if we work on an average of 9K, that equates to @ 100K of additional tax free money ...

    End result. 200K salary becomes tax free. 100K additional tax free from NRAS credits. 300K tax free annually - for the next decade. Thats $3 Million in tax free money, with or without any capital growth.

    I paid off my 440K PPOR mortgage in less than 2 years. My portfolio is currently valued at a touch over $6 Million. I am carrying @ $4 Million in debt. If I get just 50% growth across my portfolio in the next 10 years, it will have a value of@ $9 Million. If during that 10 years I reinvest 250K of the
    300K tax free I earn ... ( remember, I have no PPOR debt and my portfolio requires ZERO contributions from me ) and that 2.5 Million grows just 50% to 3.75 Million, I will pretty much be able to pay own all my debt after 10 years and be left with a 9 million portfolio generating several hundred K of passive income.

    So in my view...NRAS is a very valuable tool precisely for these post APRA times, within a portfolio... because it facilitates a dividend reinvest/mortgage reduction plan which ultimately will carry your borrowing capacity far far further...
     
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  14. abbyfresh

    abbyfresh Well-Known Member

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    One way to read this is:

    You are losing / negative gearing 200k pa from losses.

    This wipes out 80-100k out of your personal tax bill.

    This leaves around 100k of losses still after tax.

    The NRAS credits then square this 100k off.

    End results is a neutral cash position against all NRAS properties at current interest rates if I am reading into this correctly.

    From here I do not know where this accelerated huge surplus cash on top of your neutral position is coming as you have outlined.
     
  15. euro73

    euro73 Well-Known Member Business Member

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    Not quite reading it right, abbyfresh

    Where you are mistaken is that 100K of the deductions are not losses from cash flow- they are depreciation deductions that do not require any contribution from me, other than the small fee I pay to BMT to produce a quantity survey/depreciation report for each property - once, and can be used for 40 years.

    Net position is not 200K tax free. Net position is 300K tax free.

    Pre Tax
    Income 200K
    Cash Loss 100K ( Deduction #1 )
    Non cash loss from depreciation 100K ( Deduction #2)
    Total deductible loss 200K, reducing my income below the tax free threshold of $18,200.
    This is the negative gearing part , which gets me back all the tax I paid on the 200K - so it gets be back to 200K tax free

    Post Tax
    Income 200K tax free
    Then comes the NRAS surpluses which are an additional @ 100K tax free . It is completely separate from the negative gearing- it is paid IN ADDITION to whatever negative gearing I am able to take advantage of.

    Net
    @ 300K tax free

    And that is where the significant surplus cash flow comes from., which can then be reinvested for further compounding returns


    Even with just 1 NRAS property generating 8.5K CF+, if you redirected that onto a 4.5% P & I 30 year loan, it would have the following impact


    250K P&I 4.5% - 15 years saved. 108K saved ( which is CGT free profit when you sell )

    Screen Shot 2016-01-20 at 10.45.44 PM.png


    350K P&I 4.5% - 13 years saved 129K saved ( which is CGT free profit when you sell )
    Screen Shot 2016-01-20 at 10.50.16 PM.png


    450K P&I 4.5% - 11 years saved 145K interest saved ( which is CGT free profit when you sell)

    Screen Shot 2016-01-20 at 10.48.44 PM.png


    Thats pretty good going - and thats why I make the argument an NRAS property in a portfolio will have significant long term value in the borrowing capacity it creates because of the debt reduction it creates. All done with just the deposit + stamp duty to get started, which comes from dormant equity, and with 10 years of zero out of pocket costs, this allows you to focus on every dollar of salary, every dollar of rent and every spare dollar you can find leftover from your household budget, being directed towards aggressive non deductible debt reduction, because your INV portfolio isnt draining you of it - which ultimately means massive amounts of equity AND cash flow /borrowing power continues to build, without any financial strain on your household budget.

    But if that doesnt sound impressive enough to warrant a review of the real value of NRAS - here's what 3 NRAS (24-25K per annum) properties would do to a 250K, 350K and 450K P&I mortgage


    250K P&I 4.5% - 22 years saved. 151K interest saved ( which is CGT free profit when you sell)

    Screen Shot 2016-01-20 at 10.53.43 PM.png

    350K P&I 4.5% - 20 years saved 195K interest saved ( which is CGT free profit when you sell)

    Screen Shot 2016-01-20 at 11.00.27 PM.png

    450K P&I 4.5% - 18 years saved. 232K interest saved ( which is CGT free profit when you sell )
    Screen Shot 2016-01-20 at 11.01.07 PM.png

    And keep in mind, these figures are extremely conservative, as I havent factored in the incremental indexed increases for the next 10 years, which would take the tax free surplus amounts well beyond 8.5K per property as they evolve... you will very likely achieve far greater results than what these calculations show.
     

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    Last edited: 20th Jan, 2016
  16. Westminster

    Westminster Tigress at Tiger Developments Business Member

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    Hey @Caltan I viewed but didn't have time to post. Anyway I was fortunate enough to get my own allocations to use on my own developments so I have the best of both worlds. I managed to get some transfers from Round 4 allocated developments that didn't go ahead - via @euro73 . Unfortunately that isn't possible anymore as transfers closed a year ago.
    I have them for 2 of my developments which are blue chip inner city locations.
    I am pro NRAS. For all it's faults (mainly caused by govt red tape and change of govts) it is an extremely powerful vehicle.
     
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  17. Bran

    Bran Well-Known Member

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    For those considering it, the locations are simply not as widely available as the non-NRAS market. Surely location and initial purchase price is still a factor @euro73 ? And they are still prone to the same vacancies, maintenance and issues with any other RIP?
     
  18. Westminster

    Westminster Tigress at Tiger Developments Business Member

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    I consider them pretty much like for like or better in terms of other dwellings in the areas. Better if you are comparing to established properties and the NRAS is newer as it would generally need less maintenance and has warranties etc. I personally think that vacancies would be less, once a person/couple/family is within the NRAS income limits they will generally want to stay with their 20% discount rather than move to a non NRAS dwelling. If their income goes up they will still want to stay as they have a year or 2 grace to stay in an NRAS dwelling and be over the income limits.
    So after all that the important thing is location and price - and I do believe they are important.
     
  19. euro73

    euro73 Well-Known Member Business Member

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    yes thats true now Bran - definitely fewer choices around , although it wasnt true a few months back when lots of NRAS supply was still available in lots of great locations....

    But I guess I dont see them as "just" a CG /property play Bran, so location is less important to me than the vehicle they create. I see them as more than CG plays - I see them as cash cows designed to get me past a dozen or so properties, and on to 20+ properties, without borrowing capacity constraints. ie - a dividend reinvestment plan. Who is richer - Warren Buffett or George Soros? Buffet buys for yield and stability, reinvests that yield and repeats...and allows time and compound to do what it does... Soros speculates, shorts and makes a lot of money, but its much more speculative and Buffett has him well beaten....

    If Soros was in property he'd have won across the past 25-30 years because credit rewarded speculation. Buffett would win the next decade though, in the regulated environment we are entering. When credit was freely available and undergoing an expansionary period, I held a different view as well. I was George Soros, like many on here. Growth, growth, growth - but I recognised some time ago what many are seeing only now - equity is a fairly useless beast without the borrowing capacity to access it - unless you sell. I was a banker by trade in my previous life, and specifically I came from a background working with large global and smaller local securitised banks, ( HSBC and FirstMac) so I understand mortgage funding mechanics far better than most here - how products are manufactured and funded and securitised, and how the game would change.

    I called the reduction to borrowing capacity long ago and embraced NRAS as a sensible and clever aid to help counter it over the medium term... I have always seen NRAS as a tool for a particular job - thats all. A mortgage reduction/debt reduction/dividend reinvestment tool where the reward is slow and steady but mathematically assured, rather than simply a property purchase where the reward cannot be as assured as in past decades. I have always argued that it is simply an accelerant that when viewed within a portfolio, has a different job to do that just churning out growth.

    We are entering a decade where regulatory tightening will firstly demand and then in time reward deleveraging, and simultaneously slow / impede/ penalise ( that may be too strong a word so lets say disincentivise) speculation, before eventually the pendulum swings back the other way, and I want all the cash flow I can get my hands on to take advantage of it during the transition... and most importantly I dont want to have to sell. I want the largest possible footprint so that I have the largest possible passive income for retirement- cos I sure dont think there will be much by way of pension available- and the way the share markets are, we may all have next to nothing in super in 20 + years....

    So I dont make the mistake of viewing or assessing the worth of NRAS approved properties in the same way I would assess non NRAS properties, where all they can offer me is growth as a reward. Not in this next few years under these regulatory constraints, where equity holds little value unless I sell. I see NRAS properties as accelerants that will position me far ahead of the curve when the regulatory constraints fade and the credit expansion re-commences.

    Consider a pretty horrible (ish) scenario for a moment - This doesn't necessarily apply to me or some of the wealthier investors here - but consider a youngish, newish investor for a moment with a PPOR mortgage, a couple of kids, maybe slightly above average incomes , but definitely ambitions of getting 7,8,9 properties or more and building a passive income for life over the next 10-15 years... or consider an investor with 4 or 5 properties already, a PPOR and sufficient capacity to get just 1 more property or 2 more properties before they hit a servicing wall.

    Imagine they buy 1 or 2 NRAS properties - and imagine in this horrible scenario that they got absolutely zero growth from either NRAS investment over the next 10 years , but the cash flow from those properties deleveraged them to a point where they knocked over their PPOR mortgage 20 years sooner , freeing up several thousand dollars per month along the way to reinvest elsewhere. Is that not something they should be exceptionally pleased by? Especially as the holding costs to achieve this were ZERO. Does all of that equity now become something more than just paper equity ... doesn't it now become accessible equity which can actually be deployed/borrowed against in a significant meaningful way to purchase several more properties? and without having to sell anything to do it... allowing them to continue to build towards the passive income for life ? Wouldn't they have the right to feel pretty pleased with that outcome even if they achieved zero growth?

    Now, some might argue they could do this the conventional way that investors of the past 25-30 years have done... I say thats very unlikely. Every advantage afforded that generation has been fully exhausted. Low entry prices. expanding LVR's that went rapidly from 80% LVR's back then and expanded to 90 through the mid 90's , then 95 by the late 90's... lower and lower barriers to entry. Then new products - Lo doc, no doc. Aggressive and never ending improvements to servicing calcs. addbacks, neg gearing...depreciation...actuals... overtime, bonuses.... all during the decades where we saw massive increases in double income households and massive increases in wages ... all coupled with falling rates..... and CGT concessions.

    Just about all of that has exhausted itself now. The elasticity has been used up. There is nowhere for LVR's to go. They are in fact being reduced modestly ... but that means larger deposits are required for each repeat purchase than just 6 months ago. There are signficant pull backs on servicing calcs, and wages have plateaud. There is just no argument that can be made that can support the next decade being like the past decades...until significant deleveraging occurs.

    So for most, it's no longer going to be sufficient to have equity to keep on buying, because the money in many cases just wont be gettable... simple as that . Equity wont get most punters into their next property, or their next one, or their next one......its borrowing capacity alone that will decide the next decade for most punters in a way they have never had to deal with for 25-30 years.

    Conventional thinking needs to be challenged a little bit from time to time - which is why I said earlier that the vehicle , and what it does for a portfolio, is more important to me for the current environment , than the location... Even a horrible outcome like zero growth rewards me with opportunities I wouldnt otherwise have.

    Now that doesnt mean buy any NRAS. It just means that investors should be a little less pedantic about whether they see short term growth potential or not. This is a 10 year + play designed to position one for the long haul. If the stock is solid and valuations are solid, and the yields are as they should be - see it for what it is... a portfolio builder/ accelerant .

    In any event - there are now very few solid NRAS opportunities available anyway...
     
    Last edited: 21st Jan, 2016
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  20. euro73

    euro73 Well-Known Member Business Member

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    This is where we look at things quite differently. I look at the impact of all the components /levers that affect servicing on a portfolio, not the isolated impact of 1 lever within a portfolio.

    To begin with, its important to understand how bank servicing calcs actually work. The reduced rental income of 20% for NRAS is not how it is calculated on a servicing calc. For non NRAS properties, banks typically accept 80% of rental income, not 100% . For NRAS, they take 65% of rent. This is the widely accepted policy everywhere , based on 80% of 80% - I guess they just decided to round it up from 64 to 65% to keep their policies simple for their assessors.

    So on a bank servicing calc , there is a 15% difference in the GROSS treatment of how NRAS v non NRAS is treated. If viewed against a $400 per week property ( 320 NRAS) , that's $60 per week. ( 320 v 260) Or $3120 per year.

    But thats not where the calculations end. Bank calculators also have macro's built in that then apply neg gearing to any losses , so you can reduce that $3120 ( $60 per week) figure down by a further 37% to $37.80 per week, or 1965.60 per year. Call it 2K for the purpose of the debate .

    Now you need to look at the other side of the equation. If I am paying 9-10K off a non deductible mortgage each year as a result of redeploying the 9-10K of surplus cash flow from NRAS, and that debt is being assessed at between 7 and 8% P &I , it only takes 25-30K of debt reduction until that compensates for the 2K I have lost from the rental income side of the equation.

    Paying off 25-30K will only take @ 3 years. So in other words, for the first 3 years , borrowing capacity will suffer very modestly for each NRAS property purchased, but thereafter it will be neutralised and from year 4 onwards my capacity will start to improve because of the debt reduction effects as I pay down additional 9-10K lump sums per annum.

    This is, as I have said time and again - simple dividend reinvestment. Deploy 6-70K of dormant equity towards the 12% + stamp duty for the purchase of an NRAS dwelling. Reap 9-10K fully franked dividend ( which is a 15% tax free return on 60-70K) . Reinvest it into non deductible debt reduction. Repeat.

    I have years and years and years of lending experience. I can assure you I know my way around servicing calculators as well as anyone here, and I can also assure you my theories are correct. Better yet- they are proven - just ask fellow forumites who have done exactly what I have just outlined above - they will tell you this simple, effective, potent strategy works - reinvestment of surpluses from NRAS will absolutely have a net positive impact on borrowing capacity over time.

    This is precisely why I advocate that most investors will find genuine benefits from including at least one or two NRAS in a portfolio. Eventually most investors will hit a servicing ceiling and no amount of equity will resolve it. Only cash flow /debt reduction will.