Lily Chong from IQI WA shares her insight into the National Rental Affordability Scheme (NRAS) and why this is so attractive to rentals.
Perth property investors have finally seen some signs of hope with Perth rental market activity recovering at gathering pace. This resurgence is made even more promising with the recent headline from The West Australian reporting “staggering 70 people turned up to look at a single rental property on a stormy day”, and apparently that was just half of the registered viewers.
Recent statistic from the Real Estate Institute of WA indicated Perth vacancy rate has plummeted to 2.2 per cent low, which is below the 3 per cent rate in Sydney where there is a recognised “housing shortage”. Perth current vacancy rate is more than three times lower than the peak of 7.3 per cent in June 2017 and slightly lower than the 2.6 per cent rate a year ago.
The improvement in vacancy rate can be attributed to reduction in the number of properties available for rent on the market as a result from slowing down in investor participation in the housing market. This shortage may prompt a bidding war on some properties sooner or later, pushing the rent up in the process.
In a rental market like this, affordable rental homes will undoubtedly be on high demand, just like the property The West Australian has reported here. Investors whose investment properties come with NRAS incentive will receive overwhelming interest and let us tell you why.
Why tenants love NRAS homes?
NRAS rental homes are not social housing, they are affordable rental homes located at suburbs identified to have a high rental demand and well equipped with amenities like shops, schools, businesses, services such as hospitals and public transport. This Scheme provides individual or family on moderate or lower income with affordable rental home that is at least 20% lower than the market value rent, making NRAS home incredibly desirable for tenants. For example, for a rental home with market rent of $350 per week, with NRAS minimum 20% discount that is substantial $70 of saving every week for the tenant/s.
Nevertheless in order to eligible for a NRAS home, tenants must meet household income limits under the NRAS regulation. Income levels are assessed against gross income limits according to the household composition. Some example of income limits for various household compositions are shown in the table below.
*This column shows figures which are 25 per cent more than the initial household income limits. If the combined gross household income of existing tenants exceeds the initial income limit by 25 per cent or more (i.e. is at or is more than the existing tenant income limit) in two consecutive eligibility years, the tenants will cease to be eligible tenants.
Tenants love NRAS, but what is in there for investors? Below is a quick comparison between NRAS investment property and property without NRAS. NRAS investment property typically provide greater return in comparison to the same property without NRAS. In the example below, investors will be close to $7,000 better off when holding an investment property with NRAS.
Note: The information included in this example is provided as a guide only and all potential investors should consult their professional advisor.
The State component of NRAS is paid as a non-assessable, non-exempt income (NANE). The Federal Government component is a refundable tax offset (RTO) and is required to be claimed through your annual tax return. ATO rulings have determined that expenditure associated with deriving the NANE is non-deductible which should also be calculated in your tax return.
Assumptions: Annual gross taxable income $60,000, loan 88% interest only at 4.5% p.a, market value rent at $280 (before NRAS discount). NRAS incentive indexed based on 2019/2020 NRAS year.
What is NRAS?
The National Rental Affordability Scheme (NRAS) is an initiative from both Australia Federal and State and Territory Governments with an aim to stimulate the supply of affordable rental housing. This is done by offering tax-free incentives to property investors who have purchased a property with NRAS allocation and rent the dwellings to eligible tenants or households at 20% below market rates. NRAS is an annual incentive and is indexed according to CPI. The incentive for 2019/2020 is $11,248 per annum and of this, 25% of the incentive comes from the State Government as direct payment, and the remaining 75% is funded by Federal Government and is paid in the form of refundable tax offset (RTO).
For more information on strategic property investment or information on NRAS scheme, please visit IQI WA.
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