New investment homes and the National Rental Affordability Scheme (NRAS)

In Australia, the housing supply shortfall is currently running at around 30,000-40,000 dwellings per annum. In an attempt to understand the problems that this is creating for people on lower incomes, the Commonwealth Government has created the National Rental Affordability Scheme for these people and identified 1.5 million households that are eligible to go on the waiting list.

Graph: Housing shortage set to worsen. Can the National Rental Afforability Scheme help?

The National Rental Affordability Scheme encourages owners of approved new housing stock to provide housing to these 1.5 million eligible tenants for at a 20% discount to the local market rent.

In return, they will receive a tax-free incentive of over $8000p/a per dwelling for ten years. Rents on the NRAS are indexed annually to the rental component of the CPI.

This is broken down into:

  • A Commonwealth Government Incentive currently of $6 504 per dwelling per year as a refundable tax offset or payment; and
  • A State or Territory Government Incentive currently of $2 168 per dwelling per year in direct or in kind financial support.

I've heard some people complain that it is then your responsibility as the owner (under the rules of the scheme) to provide Market Value assessments in the 1st, 4th and 7th years, but we all know that you should really review rents annually, or at least once every two years to get the best out of your property, even if you choose o keep the rent at the same level at your own discretion.

The problems with the National Rental Affordability Scheme

There are issues with the NRAS which should be carefully considered before you decide to take part in some of these investments.

  • You are locked into the scheme for 10 years under a contract, which could be difficult if your circumstances change.
  • To my current understanding, the $8000p/a is not a cash incentive. It is a tax credit paid at the end of each Australian Financial Year (30th June). If this is the case, and if you pay less than $8000 p/a in tax, this makes the National Rental Affordability Scheme pointless for you.
  • High management fees: You will have a housing manager assigned to your property and he will receive 10% of the gross market rent (including the 20% you are discounting). The average paid for good property management is around 7.5%-8% of the rent received.
  • You have no say in who gets placed in your property. The tenants are simply sourced from the next-in-line on the waiting list. There is an increased risk that your lovely new property will be damaged when less care is taken with choosing who is placed.
  • This can mean more insurance claims and potentially higher insurance premiums from the very start, if insurance companies get wind that your property is on the NRAS.
  • The CPI indexing of the rent in the years between 1, 4 and 7 may not keep up with the market rent for the area your property is in. The question we need to answer is "Will they accept the valuations you get if you do them every one or two years?". If they don't you might be losing out.

It's not all bad

I've gone through the possible issues with this scheme, but the main aim is to make you aware of the things you need to consider if you decide to become involved. Otherwise, the NRAS is quite a laudable concept on the part of the Australian Government.

If you pay less than $8000 per year in tax, it may not be practical for you to take part in the Scheme. It is not really designed to be directly used by small-scale or private investors, although they can access it through a superannuation fund or property trust and through some development companies marketing the Scheme as an investment opportunity...

Some of these marketing companies are promising huge returns on National Rental Affordability Scheme properties (as high as 7%). While this figure isn't impossible to achieve, as always it pays to do all your sums and seek financial advice from a professional before you dive in!

There is an Australian Federal Government web site about NRAS where you can find information about the NRAS.

In 2008, the Australian Government asked the Community Housing Federation of Australia (CHFA) to provide ongoing management of an internet-based clearinghouse where interested investors can access tools relevant to their business. It includes a financial modelling tool for the National Rental Affordability Scheme, and should be visited as the next step (after the Federal Government site) in your research.

Return from National Rental Affordability Scheme to Financing Rental Property