How to find cash flow-positive property
Many first-time real estate investors take it for granted that their investment will be negatively geared, at least for the first few years: costs will be greater than income, but hopefully the capital gain when it is eventually sold will more than make up for those expenses.
But some investors prefer their investments to generate cash from day one. Cash flow-positive property investments are not easy to find but some are being generated by the National Rental Affordability Scheme (NRAS).
The scheme's purpose is to increase the supply of new, affordable private rental property and reduce housing costs for low- to moderate-income households. About 50,000 investment properties are planned and around 9000 have been built.
Investors who are prepared to buy an approved NRAS scheme property and let it at 20%-30% below market rent for 10 years to tenants who meet an income test will receive tax-free incentives from federal and state governments.
The payment for 2012 is nearly $10,000 and the yearly sum is indexed to inflation. Onyx, a company that lists NRAS properties for sale (do an internet search for others), says the total incentive is likely to be closer to $120,000 because of the indexing.
Of course, you should never choose an investment just because of tax breaks.
"Don't get caught buying just any NRAS property, in any location, without considering a myriad issues including a proper assessment of the capital growth prospects of the suburb, city and state," says The 11 greatest NRAS mistakes not to make, an ebook from Wealth Adviser.
It is also a mistake, says the ebook, to dismiss the NRAS as social or government housing. It is aimed at gainfully employed people: singles earning up to $45,496; couples with three children earning up to $108,169.
Another mistake is not understanding the critical difference between head lease (where you lease your property for 10 years to the NRAS operator and it subleases it to an eligible tenant) and direct residential tenancy agreement structures, and the costs of each, says the ebook.
It advises against investing in a head lease structure, saying the direct tenancy structure, where the investor appoints the managing agent, mirrors normal residential property investment arrangements.
NRAS investors also need to be aware that financing restrictions, such as a lower loan-to-value ratio and the exclusion of NRAS incentives when assessing your ability to service the loan, may apply.
As well, consider the timing of incentives and costs, as the NRAS incentive is paid yearly. If your cash flow is tight you may be able to claim your incentive during the year through a tax withholding variation (see ato.gov.au).
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