Is there really "government income guaranteed" housing?: Ask Margaret

A property broker has suggested that I invest in Brisbane in government income guaranteed apartments.

Currently, I live in Sydney and my bank has warned that interstate investments using a broker often are 'two-tiered pricing'.

I had never heard of this.

Thanks,

Shirley

Dear Shirley,

First let’s get clear exactly what this might mean.  There is no such thing as a ‘government income guaranteed’ apartment and many spruikers use this term very loosely to inspire confidence in you and to infer that what they are selling to you is, in some way, iron clad – not true!

I can think of only two scenarios where a spruiker might attempt to trade off on some kind of government backing – Defence Housing Australia (DHA) and the National Rental Affordability Scheme (NRAS).

DHA is a scheme whereby you purchase a property in an area where this department has supply and they provide to you a ‘management agreement’ type service. 

This management agreement costs more than a standard management agreement (around 16% of rent) but in return your property is maintained against wear and tear (not major repairs) and a member of the defence force is chosen for a tenant. 

In some ways this is a rent guarantee and the terms are usually between 7 and 10 years.  

NRAS is a scheme whereby, in return for the owner leasing their property at a rent which is 20% below market value, tax credits of around $10,000 per annum for 10 years are supplied. 

This scheme was originally designed for large institutional investors, such as insurance companies and superannuation funds, who would build and supply lots of 100+ properties and in return receive the tax credits. 

Somewhere along the way spruikers got their grubby little hands on them and on-sold the scheme to individual investors. 

The tax office had to run around placing interim tax arrangements in place to deal with this and now we see them offered as an investment opportunity for anyone.  

While both schemes have a possible cash flow upside, the existence of an overlying scheme cannot assure you of a quality underlying asset.

Just because you get a tax benefit or a guaranteed rent doesn’t mean you are buying a property which will grow well or be a good investment. 

You must separate the scheme from the asset and ask 20 questions to determine if the property would be a good buy without the scheme.  

Where NRAS is concerned I happen to know that the re-sellers are in for around $25k+ in commissions and so do be careful that the property is at market value when you buy it. 

Remember too that, as they are usually built in lots of 100, all completed at the same time.

The market is often flooded with properties – this not only impacts values (and usually they are worth considerably less on completion than the investor pays) but it means there are plenty of rentals available. 

This will push down yields and, as you already have to charge 20% below the market rent, if the market rent falls you could be up for very low yields indeed.  

My final word on the subject is this – you should never take investing advice from a property ‘broker’, or anyone whose aim is to sell a property to you. 

They cannot possibly be independent if they are giving you advice about where to buy and then profiting from selling you a property there!

Margaret Lomas is a best-selling author and writes and hosts the popularProperty Success With Margaret Lomas and heads up the panel on Your Money, Your Call, both on Sky News. She is the founder of Destiny.

Have a property question? Ask Margaret!