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How to rent your property and get a subsidy

By Pam Walkley,
Money Magazine, November 2009

Any landlord will tell you that having your rental property vacant and bringing in no rent is one of their worst nightmares.

So for many investors a rental property backed by a government commitment to secure a rental income for 10 years plus up to $8600 a year sounds like a dream come true.

“I am looking to buy an investment property for the long term and a friend was telling me there are properties the government will subsidise for 10 years if the owner agrees to accept a lower rent,” writes Money reader Melanie.

“This sounds perfect for me so where can I find out more?”

The National Rental Affordability Scheme, which aims to provide 50,000 affordable rental properties nationally to tenants who meet income eligibility criteria, is what Melanie is referring too.

And yes, it does have many attractions for investors, but also some potential downsides. For all the details of the scheme go to www.fahcsia.gov.au and do a search on the scheme.

Initially NRAS was not aimed at smaller investors but that has changed, says Mark Illingworth, general manager of Brisbane Property Brokers, which is selling individual properties covered by the scheme.

Buyers must agree to a discounted rental income – ranging from 20% to 25% – in return for a 10-year commitment from federal and state governments, including the annual incentives, indexed to the rental component of the CPI each year.

Although the government does not guarantee the 10-year income stream from each property, it is secured through compulsory insurance and the annual subsidy, says Illingworth.

“It’s really easy,” he says. “You are investing in a normal property with normal deductions, but the difference is you also pocket over $8000 a year.”

The investor receives the annual revenue in two payments, a refundable tax offset of $6504 from the commonwealth, plus a state/territory contribution of $2168 in the form of cash support or, in the case of the ACT, an in-kind contribution.

In most instances this annual boost will more than make up for the rental reduction plus some of the extra costs, including compulsory insurance and a 10% management fee (which includes re-letting expenses) that owners of these properties must meet.

An example on BPB’s website (at www.brisproperty.com.au) shows someone earning $70,000 buying a property for a total of $376,645 (all borrowed at 5.04% interest only) would receive an after-tax surplus of $110 a week after all income and expenses are taken into account.

Investors can on-sell an eligible NRAS property, but some analysts have questioned whether the value will be less because of the scheme attached.

Concerns have also been expressed about leasing properties to lower-income tenants, but as Illingworth points out, the income target (initial $41,514 to $98,695) covers over 70% of Australian earners.

He says investors considering the scheme should get independent advice. And they should also check they will be the ones receiving the annual government largesse, as this is not the case with all the NRAS properties being sold.

Money Magazine's October 2009 issue is out now. Subscribe now.