The Active Home Loan Manager

Investing in the National Rental Affordability Scheme

While buying a National Rental Affordability Scheme property comes with tax benefits, it can be difficult to finance the purchase with a home loan.

The National Rental Affordability Scheme (NRAS) is designed to help low-income earners rent good-quality properties for at least 20% below market rates.

On the face of it, the NRAS looks like a good investment opportunity. If you buy a new property through an approved participant and rent it to someone who is eligible under NRAS regulations, the government pays an annual subsidy. This minimises your investment risk. The scheme also offers potential tax benefits.

On the downside, many lenders are wary about financing NRAS real estate buyers. Most will also not accept NRAS properties as security when you try to get a home loan.

Since the Rudd Labor government launched the NRAS in 2008, it has faced its share of criticism. At the end of 2017, the Federal Government announced an independent inquiry into the scheme following complaints against housing providers, including delays passing on financial incentives to investors.

What is the NRAS?

The NRAS is a government scheme that aims to increase the supply of new rental homes in approved areas as long-term accommodation options for low-to-moderate-income singles, couples and families.

In exchange for investors charging rents that are 20-25% below current market rates, they get government subsidies for up to 10 years and often receive tax benefits. Only NRAS-approved tenants are eligible to rent NRAS properties.

The Department of Social Services says 133 approved providers participate in the scheme, including property developers, not-for-profit organisations and community housing bodies. Individual investors participate as part of a joint-venture arrangement with an NRAS-approved participant or by purchasing an NRAS property from an approved participant.

All investment arrangements are between the investor and the NRAS-approved participant (the government doesn’t play an intermediary role). Typically, government incentives are passed directly from approved providers to investors.

What is the NRAS Incentive?

The NRAS Incentive is indexed according to movements in the rents component of the Housing Group CPI for the year, using the weighted average rate of the eight capital cities. For the 2017-18 period, for instance, the incentive was $11,114.33, which was made up of federal ($8335.75) and state ($2778.58) contributions.

What are the tax benefits of investing under NRAS?

According to the Australian Tax Office, an individual, corporate tax entity or super fund may be entitled to claim a refundable tax offset for participating in the NRAS. Investors who derive rent from an NRAS property claim the refundable tax offset in their tax return.

See the NRAS page on the ATO website for more details.

Can I sell my NRAS property and rent it at market rates?

Yes. Depending on any contractual agreements they may have with investors, approved participants who don’t want to participate in the scheme can sell their properties before the end of the 10-year NRAS term without incurring any government penalties.

Any incentive payments end at this time, too, of course.

Can I buy a house and have it included in the NRAS?

No. The Department of Social Services says that only NRAS-approved participants can have properties approved under the scheme.

“Participants are selected through an application process and have approved dwellings in approved locations,” it says.

Can lenders identify NRAS properties?

Yes. Several property documents, include building contracts, contracts of sale and title searches, contain references to NRAS status. Lenders can also search the name of the consortium attached to a property.

One of the following four terms usually indicates a property is part of the NRAS:

  • NRAS
  • Head lease
  • National Rental Affordability Scheme
  • Non-equity joint venture agreement

Investors should look for these terms if they want to avoid NRAS properties, too.

Why don’t lenders accept NRAS properties as security?

Some lenders refuse to finance NRAS properties entirely because they don’t consider the NRAS tax benefits as suitable proof that investors can repay their loan. This can reduce your borrowing ability and limit your ability to build a portfolio.

Other lenders will accept NRAS properties as security on a loan, although they may want a specific consortium attached to the property. If you find the right consortium, you may get a home loan.

You increase your chances of getting an investment loan for an NRAS property if you want to borrow less than 80% of the value of the home, although the lender is still likely to attach strict requirements. It’s best to talk to an adviser to find out which lenders can help you.

Why are lenders so wary of NRAS?

It all comes down to the limitations placed on NRAS homes. Buyers of NRAS rented homes must stick to the terms of the original lease. As such, they can only rent their new properties to others through the NRAS.

This makes the home harder to sell. A vendor can only advertise it to a small group of investors, shrinking the buying pool. Selling becomes especially difficult if there are few NRAS investors in the market. This may also affect how much you can earn from the sale of the property.

These difficulties also make lenders wary about taking on an NRAS property as security for a home loan. You may have a better chance in areas where NRAS properties are in demand. Even so, investors should be aware of the possible pitfalls.

What should I do?

NRAS properties may offer some tax benefits for investors. Talk to an adviser to find out if these benefits would work for you.

This information in this article is general only and does not take into account your individual circumstances. It should not be relied upon to make any financial decisions. uno can’t make a recommendation until we complete an assessment of your requirements and objectives and your financial position. Interest rates, and other product information included in this article, are subject to change at any time at the complete discretion of each lender.

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Alexi Neocleous

With over 20 years experience, Alexi has written extensively a wide cross section of financial topics. These topics range from financial planning, mortgages, property commentary and all points in between.


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