NRAS - "To buy or not to buy"

Thinking about buying an NRAS investment property... think long and hard first.

In principle NRAS sounds like a great investment...

You buy a property with NRAS approval and place a tenant from a service industry like a Teacher, Fireman or Police Officer at a reduced rent of 20% below market.
In exchange the Govt will give you about $10,000 p.a. (Tax Free) for the next 10 years.

You dont have to be a mathematical genius to work out that a 20% discount is about $60 - $80 per week and the Govt $10,000 pa is about $200 pw before taking into account the Tax benefit. So it is more like being about $260+ before Tax. Sounds too good to be true... that is nearly $200 pw positive cash-flow, so what is the catch?

Well there are some catches, that they don't necessarily tell you about when you are lining up to buy one...

The first one is, there are some fees that you are going to be charged because it is a scheme that needs to be reported to the Govt regularly. Those fees will vary greatly from one organisation to another but let's ignore that for the moment.

Let's start with the type of tenant because it is the tenant that helps you pay the mortgage.

They say that they are aimed at servive industry workers like Teachers etc. but when you look at the maximum income that the tenant can earn under the NRAS rules, you could only get a Teacher, Fireman or Police officer that was working part-time... and only about 50% of a week at that.

So what sort of tenant are you really going to attract?
The answer is unfortunately, in many cases a social housing tenant. And realistically that makes sense... the Govt are not doing this to make the investor rich. They are doing it to provide affordable housing to those people that cannot afford to rent a home for standard rent.

We are getting reports from Property Managers (admittedly in Qld because there are more NRAS houses in Qld) that tenants in NRAS houses are less likely to pay the rent and more likely to do damage. But it will likely be that case in SA and other states equally.
Crazy isnt it... you give people a great deal with lower rent and they abuse it. That is unfortunately human nature.

But that is not the end of the problems with these NRAS houses.
Some of the people that have invested have decided that because of the non payment of rent and other hassles it is not worth the hassle so they have decided to sell the property... only to find that the house is not worth what they paid for it.
We are hearing stories that some of these houses are now worth $50,000 - $100,000 less than was paid to buy them. How can that be?

"Whenever there is a great opportunity there is an even greater opportunist."

What has been happening in some cases is Property Marketers and/or Builders have inflated the price because the deal is so attractive that people will pay more to buy it....
And of course these houses are often in areas that are already either over supplied with properties or in areas that are more affected by recessions and periodic slow downs in property prices.
Hence there may be a higher turnover of properties and therefore a lowering of prices, to make sales.

Prediction: We have all seen the stories of the tenant from hell is a Housing Commission house. Well look forward 10 or so years and i think we will be seeing those stories about people in NRAS houses.
If you have already bought one i hope, for your sake, that i am wrong... at least with yours.

The moral to this story is:
If you want to make money out of property investment you need to buy the best house you can afford and put in the best tenant that can afford your rent. Then will get consistent growth.
Where are those houses?
Generally closer to the CBD of the major cities. It is those areas that are less affected by the economics of downturns because the people that live there are in higher paying jobs and less likely to be laid off. Therefore they are in a better position to pay your rent. That means that you have less hassles and will make more profit over time.

If you would like more information on how to find a property that will make money for your future give us a call...

On 1300 131099

The Wealth Effect... and why now is the time to invest.

And perhaps more so now than anytime prevoiusly in our lifetime.

 

Here are the comments from an industry expert:

 

"Have you felt  the (Wealth Effect) lately?
The wealth effect... Do you know what the hell I'm talking about? ...it's not a bad thing, actually a pretty good, more than just a warm and fuzzy feeling. Please explain?

 

I will shortly.  But first...

Everyone knows I'm bullish on house prices this year.

The cycle has already turned, and the housing market is quickly gathering steam. It's a pretty common view now that 2013 will be a good year for capital growth, particularly through the second half of the year.

But at the same time I've been making it pretty clear in these posts that I don't see interest rates going anywhere anytime soon.

Someone asked me about this the other day. How do you square these two away? Normally if house prices are rising the RBA is gearing into a tightening cycle. Won't that be happening this time around?

That's a very good question. I'm glad you asked.

The answer is, No. Not this time. Interest rates will start edging up at some point down the track, but by then, house prices will be long out the gate.

Such sweet conditions like these don't come around every day. House prices are rising fast and interest rates are stuck on a super-stimulatory setting... But this can't go on forever either!

So how did we get here? To understand it, we need to pick apart the connection between house prices and interest rates a little bit.

In normal times, by which I mean the pre-GFC era, if house prices were rising quickly then interest rates were rising too. The lynch-pin was consumption.

It's called the 'wealth effect'. The basic idea is that if house prices were rising, households felt wealthier, and felt more inclined to consume.

And as consumption ramped up and the economy found another gear, the RBA started to get worried about inflation, and started pulling on the interest rate hand-brake.

That's "normally" how it goes. (Though when have things ever been truly "normal"?)

The actual size of the wealth effect is difficult to pin down. However, researchers at the University of Sydney published an interesting paper a few weeks ago that found that for every $100 increase in house prices, annual household consumption increased by around $8. The Fed published some similar numbers for the US.

So, say you had a house worth $300,000, and it increased 5 percent in value. That extra $15K in equity would, by itself, increase annual consumption by around $1200.

So, in the old world, rising house prices were a solid plus for the economy, and sooner or later, the RBA would try and throw ice on the party.

But that's how it used to be. It won't play out this way this time round.

One of the key findings from the USyd paper was that rising house prices increased consumption because they helped "relax household credit constraints".

That is, households who found they had more equity in their home often used it take on more debt, which helped fund higher consumption levels.

But following the GFC, attitudes to debt have done a full 360. Around the world actually.

People have become a lot more hesitant to take on more debt, especially to fund non-productive consumption of plasma TVs and so on.

In a speech a couple of days ago, RBA Assistant Governor Phil Lowe noted that Australian households were net dis-savers in the lead-up to the GFC, but are now saving more than 10 per cent of their disposable income.

That amounts to $90 billion a year that is now being saved, rather than spent.

This chart here, (taken from a speech by ex-BHP head Don Argus) shows just how much the game has changed.

Through the 90s and up to the GFC, household debt, as a percent of GDP, increased from a little under 50 percent to a peak of around 110 percent. Since the GFC though, it's pretty much been tracking sideways.

But with a household to debt ratio of over 100 percent, Australia still has the most indebted households in the OECD, and where debt ratios have come down across the world, they remain elevated in Australia.

This suggests that households are likely to continue deleveraging into the near term. And if house prices are rising, households will be using this increasing equity to pay down debt, rather than funnelling it into consumption.

All of which makes the wealth effect a thing of the past.

So imagine that the RBA keeps rates at record lows, but Australian business doesn't take the bait. Perhaps they're scared of the damage the high Aussie dollar is doing, and are reluctant to invest.

In that case, record low interest rates are feeding straight into asset prices, as people take the cheap and easy money and invest it in profitable assets, like property. The wall of money creates a super-surge in property prices.

But without a wealth effect, there's no pick up in consumption, and the 'heat' in the economy is unchanged.

The RBA then has no reason to raise rates, because there'll be no signs that the economy is over-heating. And an uncertain foreign situation will make them extra wary of pulling the trigger too early.

So until households deleverage back to more comfortable levels, and consumption picks up again, the main beneficiaries of record low interest rates are going to be the owners of assets - particularly property.

And so what we have, and what I reckon we'll see over the next 18 months or so, is a massive disconnect between property prices and interest rates...

... and this creates an incredible window of opportunity for investors.

You'll be enjoying a massive ramp up in capital, while your funding costs, tied to interest rates, will remain on the cheap.

Who could ask for more?

These are uncharted economic times. The rules of the game are changing. But that doesn't mean that there isn't money to be made, if you know what you're doing.

Stick with me. I'll show you where these opportunities are hiding.

Signed with Success,

Jon Giaan
Knowledge Source

 GIVE ME A ALL CALL... if you would like to know how and where to make the best of this opportunity.

Or if you would like to attend our next FREE information and training Seminar

Graeme Clark

www.investmentpropertyfinders.com.au

1300 13 10 99

A nice little story about Stamp Duty... if there is such a thing

Hi Graeme,

Look I don't mind paying tax... Really.

Yes seriously! I figured out many years ago that the more tax I paid, the more wealthy I am from an asset and wealth perspective.

So in effect I love paying tax... and looking to pay a lot more in the future.

But, there is one tax that is absolutely crazy and it is quit frankly holding the economy, first home buyers and property investors to ransom.

It's the stupid tax called, stamp duty.

But there is light at the end of the tunnel and its from a very unusual source.

 The ACT government, that hot-bed or radicals, has announced that it's going to phase out stamp duty on property transactions over the next 20 years.

Good on 'em. This will be good news for the property market, but the stamp duty on property itself is a stupid tax, and it's about time the States broke their addiction with it.

If you ask me, Stamp Duty on property is the Cane Toad of Australian taxation.

Cane Toads were brought over from South America to eat the Cane Beetles in Queensland. As it turns out, the beetles in Queensland lived up in the cane, rather than on the ground like they did in South America. So it's questionable as to whether the Cane Toad ever actually ate a single Cane Beetle.

But once cane toads were introduced, they quickly slipped the leash of their handlers. Now they've become a monster completely beyond anyone's control.

In a compelling parallel, Stamp Duties as a concept were first introduced in the Netherlands all the way back in 1624. It soon spread in popularity among the European aristocracy, always fond of finding new and creative ways to crush and punish the peasants. William and Mary started levying stamp duties in the England in 1694 as a way of funding the war with France.

In time, stamp duties were passed down through our legal DNA until 1886, when NSW introduced a stamp duty on property as way of funding a war with Victoria over the right to play rugby...seriously, google it.

But likewise stamp duties have long since slipped the leash of their handlers, and they have become a monster completely beyond anyone's control.

Now this isn't a rant against taxes in general. I can see that in the modern world, taxation and the public provision of some services is a good thing.

...and I said it earlier, I love paying it!

But some taxes are better (less bad?) than others, and the stamp duty on property is about as bad as it gets. It is a stupid and inefficient tax that is holding the property market back from its full potential.

I say it's time to crush this cane toad once and for all.

My biggest gripe with the stamp duty on property is that it becomes an incredibly prohibitive upfront cost. If you're looking at a bill of $20-30,000, particularly on your first home, this can really take the wind from your sails.

And for what? The Cane Toad started out as a simple filing fee - a small cost to have your documents branded with the governments stamp and become legally recognised.

Now I know the public service is inefficient, but you can't tell me that $20,000 is a reasonable fee to pay for processing - particularly since they phased out actual stamps!

I mean, one study found that the stamp duty in NSW accounted for about a quarter of upfront costs, including deposit, moving costs, and legal work.

The property market relies on a constant supply of new entrants in the housing market, beginning their journey from entry-level homes into the palaces of their dreams, to keep things kicking along.

We should be doing everything we can to encourage them. Slugging them with a massive fee, just to get started, is an incredibly stupid idea. If it wasn't part of our legal and cultural heritage, there's no way you could get anyone to buy into such a blunt and damaging tax today.

The crazy thing is that it's not that great for the government either. Since it is a marginal tax, the fee is determined on the value of the property. However, the amount of revenue the government actually receives is a function of property values and the volume of property transactions in a given year.

Trouble is, the volume of transactions can swing wildly. I remember back in 2007 and 2008. The number of properties sold in Sydney fell a massive 19 percent. As a result, the amount of stamp duty raised in NSW fell 30 percent, smashing a whopping $1.2 billion hole into the budget.

So what this means is that in the presences of cycles (which are an constant feature of the housing market), the stamp duty needs to be higher than it otherwise would be, to compensate for the years when volumes, and revenue, fall.

It's just adding worse to bad...

The other trouble with stamp duty is that it is a transactional tax. In the principles of efficient tax design, you always try to minimise the impact on the number of transactions taking place.

(The obvious exception is the case where you're targeting a particular 'bad', such as smoking for example, where the point is to actually reduce use.)

But otherwise, economic transactions are the very life-force of the economy. In general, you want to keep the engine as lubricated as possible.

A big fat ugly stamp duty on selling your home, creates a massive obstacle for efficient market functioning. And the downsides of these market inefficiencies can play out in all sorts of way.

Not only does it deter new entrants to the market, as I said before, but it also stops the market adjusting to changes in conditions. Say for example the kids move out and your thinking of moving into something a bit smaller, closer to the beach. Or you get a new job on the other side of town.

Or maybe you feel a bit overstretched on your current mortgage and want to wind it back a bit.

A transactional tax like a stamp duty will mean that people hold off on making these decision for longer than they otherwise would have. The market is slow to react.

And when a market is slow to react, boom and bust cycles become exaggerated, which, as I said, exaggerates swings in government revenue.

So the case against is pretty compelling. The real trouble though is that the States are completely hooked on licking the cane toad. Stamp duty now accounts for about a full third of State taxation revenue every year.

That's why the ACT is giving itself a good twenty years to slowly wean itself off the habit.

Thankfully, there are other options. The 2010 Henry tax review suggested shifting more weight to existing land tax regimes, and scrapping stamp duty altogether.

Land tax avoids a lot of the traps stamp duty falls into. In particular, the same amount of revenue could be spread over the life of property ownership, rather than being front-loaded into the purchase price. This would therefore improve affordability and take some of the burden off first home buyers.

But whatever the case, the other states need to follow ACT's lead and break their addiction to property stamp duty.

And then perhaps we can be rid of this ugly cane toad once and for all.

Signed with Success,

Jon Giaan
Knowledge Source

Big Money is Moving ...and you'll be shocked where it's going!

Las Vegas.

Proof that all that glitters ain't gold.

Elvis impersonators, flashy lights, pretty girls with costumes made up of more feathers than fabric... it's got it all.

And every casino in Vegas is crammed to the rafters with suckers looking for an entertaining way to throw all their hard-earned money away.

You roll past the poker, the black-jack, the roulette wheel. But hang on, who's that over there? It is! It's Warren Buffet!

What's he doing in Vegas? You don't become the world's third richest man by backing a rigged game - unless you know the game is rigged in your favour.

And who's that sitting next to him? It's old boy Larry Fink, the chief of Blackrock - the largest money-management firm in the world. And to his left is John Angelo, from Angelo, Gordon and Co.

Together, these guys control more wealth than many nation states. So what are they doing in Vegas? What game are these guys backing?

Property!

What, are they crazy? Everybody knows the US property market is a disaster zone. Sure, there have been some solid signs lately, but property prices nationally are still 30% lower than they were at the peak almost 6 years ago, way back in mid 2006.

And a lot of Americans still find themselves financially deep underwater.

But as you're scratching your head, you remember the golden rule of investing.

Buy low, sell high.

And that's exactly what these guys are doing. If you follow the big money in America right now, it will show you that the serious investors believe that the property market has bottomed, and we're launching into an upswing dynamic.

And if you follow the scale of funds being directed into property, it tells you that these guys believe that a lot of property markets over-corrected in a big way in the downturn. That is, prices fell too far and a lot of high-performing properties are massively undervalued.

Las Vegas is a case in point.

In the run up to the housing peak, Las Vegas and Nevada led the country is housing construction, and it was one of the hottest housing markets in the country.

Then the bubble burst.

Between 2006 and early 2012, house prices in the city of lights fell a staggering 62%. It was the biggest fall in any US metropolitan centre, and the real estate market was smashed to pieces.

But while it was clear that prices were over-valued before the crash, prices seem undervalued now. A lot of people got very badly burnt in the crash, and as the saying goes, once burnt, twice shy. This is keeping a lid on demand for what are now, very cheaply priced homes.

And this gap in demand is being filled by Buffett and the boys. They know that the market has overcorrected on the down-side - and there are some awesome bargains to be found.

And so large investment funds have been snapping up land and properties in Las Vegas and other cheap markets across the country. They've also been very active in the foreclosed property market, where they've been snaffling up some incredible bargains.

They're not bound by sentimentality and fear, and just see an investment for what it is - the promise of a particular return at a particular price.

And though the eyes of a cold-blooded accountant, investing in US property makes a lot of sense right now.

This is all a classic play for Warren Buffett. He's not a short-term, get in and out quickly kind of investor. He's made his fortune by backing major macro trends, and keeping an eye on the big picture. He's a master at positioning.

And he's also done it by keeping a level head, and knowing when the market has lost touch with reality. He gets out when things are too hot and people are too excited, and he gets in when people become too pessimistic and the market is undervalued.

He zigs when they zag.

And this is just what he's doing in property. He's buying up bargains because people just don't trust property right now - for no good reason. Just fear.

Fear that the normal cycle in housing is somehow busted. That the good times will never return. Sure it was the mother of all downturns, but in Buffett's words, "housing will come back - you can be sure of that."

That's why Buffet has been aggressively bidding for billions of dollars of distressed loans and underwater properties. He's also buying up mortgage brokers and their loan portfolios, real-estate vendors, and even brick-making companies.

Brick-making companies.

He's going all out to take on a massive exposure to the US property market.

And will he be right?

Well, no one knows the future. But I can tell you one thing: no one has made much money betting against Warren Buffett in the past 50 years!

And while it does seem clear that some markets in the US are massively undervalued, there are also some tried and tested recovery dynamics on his side.

In a cyclical market like housing, it all comes down to supply and demand.

On the supply side, the crash knocked out a lot of supply. A lot of real-estate vendors and homebuilders went underwater. This is holding back the markets ability to respond to increasing demand, which therefore gets translated into increasing prices.

Sure, there was probably an over-supply of houses during the peak. But that was six years ago. The market is a lot tighter than what it was.

The other key factor is demand. The US economy is holding up and confidence is returning.  During the GFC, a lot of young people returned to the nest, creating 'doubled-up' households.

In 1985, only11 percent of 25-34 year olds lived with their parents. In 2010, that percentage had almost doubled to 21.6 percent.

I remember being 25 and I remember being 30. I guarantee you this is about economic necessity, not choice.

So as America's economic fortunes continue to improve, and as young people feel more and more financially secure, they'll be super-keen to head out on their own. They'll be eager to form a household of their own.

Between 2008 and 2011, America added an average 650,000 households a year. In the year to September 2012, that had spiked to 1.2 million households.

This translates into a huge pickup in demand. And with supply still constrained, that will quickly translate into an increase in prices.

These are the fundamentals that are pulling the big money to the table.

...and with that  momentum, remember you can't pick bottom. Well at least I can't.

But, I'm not silly enough not to recognise momentum and we now have it in the USA market.

You can sit on the side-lines and watch, be a spectator and miss yet another opportunity or you can get on your bike and pedal like crazy...

I know what I will be doing.

What will you do?

There is also a yield play, and an exchange rate play for Aussie investors, but more about that another time..

Signed with Success,

Jon Giaan

Independent, Insightful, And Profit-Driven Muses From
A Self-Educated Multi-Millionaire Investor, Jon Giaan

This is no Nigerian scam... Read on

Reprinted from an email I received and this guy writes some interesting stuff:

It goes:

I got an odd email the other day.  It said,
"Dearest trusted friend, I am writing to you because I need your urgent respond relating this mutually beneficial business. I must to deposit $1 trillion in your account..."

Yeah! Yeah! Yeah! I've heard it all before. Someone out there is just giving money away for nothing.

But then I read to the end. And what do you know, it was signed:

Ben Bernanke
US Federal Reserve

So I looked into it and guess what?

It turns out that this one is legit. I've never met this guy Ben, but right now, he is doing everything he can to make me a very rich man.

Remind me to buy him a beer one day.

And he's not the only one. He's got friends at the Bank of England, the Bank of Japan, and even Super Mario Draghi at the European Central Bank has put his name on the card.

I know it sounds crazy, but they are all doing everything in their power to send a wall of money barrelling my way.

In fact, you're going to actually have to work pretty hard to avoid it!

"Quantitative Easing" is the new fad in central banking and it's all the rage. From New York to London, from Paris to Tokyo, everybody's doing it.

Another way it's been coined is "kicking the can down the road."

Interest rates are so 1990s.

In pretty much every economy that matters, interest rates have hit the floor and have nowhere else to go. In the US and the UK it was the GFC that finally broke the camels back, but Japan has had an official cash rate of zero percent since the late nineties.

And in Japan, the "zero interest rate policy" was a bust. Growth averaged less than 1 percent a year in the 2000s, and inflation was negative. Japan now has not one, but two lost decades.

But when the GFC hit the states, Buffalo Ben Bernanke at the Federal Reserve wasn't about to lose a decade on his watch, no sir!

Knowing that letting the price of money sit at zero percent wasn't going to help America any more than it helped Japan, The Fed had to get creative.

So with the price of money locked in at zero percent, the Fed started targeting the quantity of money. And so we entered the Quantitative Easing era.

But what does Quantitative Easing mean in practice? Printing money. Pure and simple.

There's no printing press cranking up beneath the Fed building in New York, but in the digital era, there doesn't need to be. Just a few clicks of the mouse and the Fed trillions and trillions of new dollars start gushing into the economy.

As public policy, it's the kind of idea that would have got you kicked out of economics school in the eighties, but desperate times call for desperate measures. And the Fed had run out of options.

And no one is sure that Quantitative Easing is actually going to work. So far, it hasn't had much success in getting the American economy going.

But that hasn't stopped every major central bank from jumping on the Quantitative Easing bandwagon - the UK, Europe and Japan.

They all find themselves in the same boat...

... without a paddle.

What's the theory behind QE? Basically it's about targeting liquidity. Back in the old interest rate era, if you wanted to give the economy a nudge, you knocked 25 basis points off the cash rate. Banks then passed this on to their customers, making it cheaper for consumers to consume, and business to invest.

Economic activity was given a boost.

But how do you make it cheaper for consumers and businesses if your cash rate is already zero? The idea behind QE is that if you just get so much money slushing around the economy, banks will start falling over themselves to lend it out to paying customers. Competition between the banks will drive rates even lower.

Side Note: I am going to write about this phenomena later in the week... move over Glen and the RBA, the "big bad banks" are cutting rates...with no RBA assistance... Go figure.

Anyway more later...back to my thinking and analysis.

Let me fill you in on the big secret.

What is going right now should be called,

....the wealth effect.

And 99% of investors are either missing out on this "wealth effect'' or will wake up and it will be to late.

The Central Banks know that if you send truckloads of cash into a market economy, first and foremost it will get directed to where returns are greatest.

The money will eventually find it's way to Mr and Mrs Jones to help them buy a plasma screen TV, but not before it finds its way into high yielding assets first, things like stocks and particularly real estate.

The banks know that all this cheap money is going to have a MASSIVE effect on asset prices.

And what are they going to do about it?

Nothing.

If asset prices rise, fine, let them rise. In fact, the central banks are actually banking on it creating what is called a wealth effect. That is, as people's assets rise in value, they feel wealthier, and they're more inclined to spend and consume.

Brian Sack, the markets chief of the New York Federal Reserve, the man with his hand on the actual printing press (sorry, mouse), let the cat out of the bag:

"[QE]... can still lower longer-term borrowing costs for many households and businesses, and it adds to household wealth by keeping asset prices higher than they otherwise would be."

Yep, you heard right. The Fed's implicit strategy is to pump up asset prices, and make people who own assets, wealthier. And then pray that this wealth effect gets consumer spending going again.

And so in a world where all the central banks that matter are trying to pump up asset prices, what's the most logical thing to do?

Own assets, of course.

I don't know if QE is actually going to get the world economies going again, but it is definitely going to ramp up asset prices. All that money has to find its way somewhere.

This is the beginning of a long bull run. Investment giants Bain & Co. reckon that this
"superabundance of capital" is going to keep the world "awash with money" until 2020, when financial assets will be worth 10 times the size of the entire world economy!

After that? Who knows? The world might muddle through or it might come undone.

But the take home lesson is that right now, there are unprecedented global forces - trillions upon trillions of dollars, and the biggest central banks in the world - all doing every thing they can to make you wealthier.

It's going to be a wild ride, but if you play your cards right, there's going to be a lot of money to be made.

Stay smart, stay invested or get going. You'll seriously kick yourself if you miss out on the next 12months.

My preferred asset class is of course real estate...the time is perfect.
 
And of course, remember to send Ben some flowers.

Signed with Success,

Jon Giaan
Knowledge Source

DHA and NRAS do they need ASIC intervention?

Below is an article published in The Advertiser on 1st December 2012. It vindicates what i have been saying in my Seminars for over 12 months. The article is brief on the pitfalls of NRAS but clear on the fact that they are not good investments. If anyone is interested in the remainder of the pitfalls please message me here or give me a call.

Help us put these property spruikers out of business by passing this message along...

 

 

 

Time ASIC eyed Government role in pushing dodgy property to unwary.

By Monique Wakelin and published in The Australian 1^st December 2012

ASIC Commissioner Peter Kell recently told The Australian that self-managed super funds should not be “the preferred vehicle for dodgy property spruikers”.

To show it means business the Australian Securities Commission is establishing a task force on aggressive marketing of speculative property developments.

But while ASIC is to be applauded for its proactive stance on the issue, is the Federal Government guilty of sending out mixed messages about investing in property?

I am afraid that while ASIC is on the lookout for dodgy property spruikers, other arms of the Federal Government are spruiking dodgy property to unwary investors.

The most high-profile example is Defence Housing Australia. This offshoot of the Defence Department is tasked with accommodating defence staff and their families. Typically, it builds or sources properties within 30kms of Defence facilities, sells them to investors at a non-negotiable price, leases them back and manages the property on behalf of the investor for a fee.

I am wary of Defence Housing properties as an investment. The buy-in price is often artificially inflated and the property management fees are very high at about 16%, twice those for conventional property management by Real Estate Agents or other property managers. You can only sell to another investor, which means homebuyers who represent 70% of the market are excluded. This limits resale value.

But my greatest concern with DHA properties is that most of the properties have been built in low land-value areas which are not prime prospects for capital growth – the main game when it comes to selecting investment property.

While you may find rare examples of DHA housing showing satisfactory capital growth, the DHA’s mission is to provide housing for our Defence personnel and not necessarily to provide investors with the best possible investment property.

Don’t be lured by guaranteed rental income or perceived tax advantages that often go hand in hand with these kinds of properties. Often these incentives are factored into the purchase price and/or management costs.

What happens if Defence downsizes in your area? Once your contact with DHA expires you and many other Defence Housing investors may find it hard to find willing buyers or tenants.

But there’s more. The National Rental Affordability Scheme (NRAS) is a government initiative to increase the supply of affordable accommodation by providing a financial incentive of $10,000 per property to investors who lease their property out at a rent of 20% or more below the market rate.

NRAS is a wholesale investor initiative that is open to developers building large numbers of properties rather than the retail residential investor who has just one property to lease out. It is however, possible for an individual to get involved by buying an NRAS property from an accredited developer and having the NRAS credits passed on to them so long as they continue to meet the “affordable rent” criteria.

I warn investors away from NRAS investments because in order to meet the NRAS criteria, the properties, just like Defence Housing, tend to be in areas with lower land values and poor capital growth prospects. Yes, the combination of rent and government incentives might provide a high yield, but your capital would be better off in an area where capital growth is strong.

Once again, I fear that investors see the government involvement as a stamp of approval for these investments. It’s not.

The reality is that investors are now being wooed by advisers to use their SMSF’s to buy DHA and NRAS properties. To my mind, these properties are wholly unsuitable for this investment purpose. If this situation is allowed to continue, we are sowing the seeds of a crisis that may well be reaped during the next downturn.

Mr Kell, it’s time to turn your attention to the complicity of government in promoting dodgy dealings.

NOTE:  I have republished this article because NRAS properties are being heavily promoted on radio and TV as good investment opportunities. They are generally not.

The prices are often inflated and they are often located in areas that are already over supplied.

Long term these areas could become ghettos and NRAS properties virtually worthless. This is not something that we have ever seen in Australia but we need only look the US to see what happens when builders and developers are given free rein to build as many houses as they can with Government supported initiatives.

Property is a good investment dont let a few bad eggs spoil this investment. Do your part and let people know.

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Is it time to consider investing in commercial properties?

With our residential property markets in a slump over the last few years, some investors are wondering if it’s worthwhile considering commercial property as an alternative.

So lets take a look...

 

Potential investors see that these are the type of properties owned by people in the BRW Rich 200 List and the big institutions; and they hear of high rental yields, long term leases and tenants paying the outgoings. This makes commercial property sound very appealing.

So let’s do a Q&A to find out a bit more about this asset class:

Q: What are commercial properties?

A: Commercial properties consist of shops (retail) factories and warehouses (industrial) and office space (commercial).

Experience shows that commercial real estate has both historically, and in our recent times of economic turbulence, have proven to be significantly more risky for investors than residential real estate because of businesses (potentially your tenants) failing and/or closing down.

Q: What’s the fundamental difference between the 2 types of investment?

A: They are very different investment vehicles. Residential property is a high growth, low yield investment while commercial property is a higher yielding but low growth investment.

The values of commercial properties are yield driven rather than demand driven in residential property and the values fluctuate over time related to yields available from other competing investments and the prevailing interest rates of the time.

With most commercial rental leases increases are usually pegged to the rise in by C.P.I. Your rent therefore increases at around 2% or 3% each year. This has the effect of stifling your capital growth. Then when the economy falters and businesses languish commercial property tends to be out of favor because of the risk of your tenant going broke and hence they drop in value.

Q: If the total return is similar, why not go for the investment with the higher cash flow, in other words commercial investments?

A: The fundamental job of property investors is to build themselves a substantial asset base to one day create a “cash cow/machine” to replace their personal exertion income. This is much easier to do with capital growth that can be refinanced and which is not taxed, than with cash flow from commercial rent which is taxed.

Q: How else does commercial property investment differ from residential real estate investment?

A: There are considerable differences between the two types of property which may make them a less safe option for beginning real estate investors:-

• Commercial properties tend to yield a higher return than residential properties – usually between 7% and 10% net compared to residential properties which yield 4.5% to 5% gross (then you subtract rates taxes insurance etc. to net about 3%).
• Professional investors investing in Commercial property require a higher rental return to make up for this type of property’s inferior capital growth and the longer vacancy factors.
• With commercial properties the tenants usually pay all the outgoings such as rates, taxes and insurance. But this merely offsets the lower Tax deductions for Depreciation available on residential property.
• Because your tenant conducts their business from your commercial property, they tend to look after it better by maintaining the property including painting it and most leases require the tenant bring the property back to its original condition at the end of the lease.
• Leases for commercial properties tend to be for longer periods, often 3 to 5 years as opposed to the one year lease you can get from a residential tenant.
• However when vacancies occur in commercial properties they are often for considerably longer periods than the week or 2 you may have a residential property vacant. How often have you seen a shop in your local shopping center vacant for months or even years on end? And when you do find a tenant you often have to offer them an incentive such as a rent free period or a free fit-out to entice them to lease your property.
• Lenders will usually only lend up to 70% of the value of commercial properties and I don’t know of any mortgage insurers who will lend on commercial property because they consider them to be higher risk.
• Interest rates for a loan on commercial properties are usually higher than for residential properties- sometimes around 1% higher.
• Investors need significantly more equity to purchase a commercial property. Partly because a bigger deposit is required and also because a good commercial property usually costs significantly more than a house or apartment. Sure you can buy cheap shops or factories in secondary centers, but they will usually have secondary tenants who are more likely to go broke and leave you with a vacancy.
• The cycle for commercial properties is different to that for residential properties and is more dependent on the general economic factors than the residential market.
• The lease required for a commercial property is a much more complex and is often prepared by a lawyer and at significant cost.
• It’s easier for the average investor to pick a top performing residential investment. Most know what to look for in a residential property but few would know what a tenant looks for in a good commercial or industrial property unless they have conducted their own business from one.

In summary:

There is a place for commercial property in an investment portfolio but it is more suitable for investors who already have a substantial asset base and have transitioned to the cash flow stage of their lives. It is important to remember that it is higher risk and requires a differnet set of knowledge and skills to make it work for you as an investment vehicle to secure your future.

But it makes a great investment to consider in your Self-Managed Super Fund if you have substantial equity within the fund.