There are several partnership arrangements in the investor market such as NRAS, Defence Housing, Quest and Punt Hill Apartments.
With the exception of NRAS, many of these partnerships are designed as a win-win relationship, targeting low risk profiled investors who put the money up to secure the asset and in return for guaranteed rental with no down times, can often take a discount on the rent.
Naturally, the defence force seeks to house their employees and the Quest and Punt Hill apartment type of organisations seek to profit from reduced rents so that they may make a return on their investment with short term stays with their hotel-apartment clientele.
I often consider these types of investment properties more like a managed property fund.
These investment opportunities are marketed like a joint venture partnership. You pay for the property and they essentially agree to rent continuously from you with no downtime during what could be a two to five years plus agreement. They take the risk out of investing. In fact. I have noticed on their respective websites that they even promote that no purchase inspection of the property is necessary and rarely do their clients see the property.
They simply show you the return on investment to encourage you to partner with them.
In taking out the risk, the property investor may trade off flexibility and performance, or lock themselves in for extended contract periods.
This style of investment is potentially well suited to a low risk investor who is happy to remain in a ‘packaged investment’ suitable only to the target tenant.
I recently met a woman who has four Quest Apartment investments and was looking to purchase another.
It is my experience that Defence Housing is often outside the ‘coffee and donut’ ring. As an investor, it is a good idea to do a risk-reward-return assessment on this type of investment and benchmark it against returns you may otherwise achieve in the ‘donut’.
Structure is very important when investing and you need to be aware that finance for these types of purchases can suffer reduced LVR’s (Loan to value ratios). Please do your research. My experience tells me that some of these models can often attract an LVR. Please do your research. My experience tells me that some of these models can often attract an LVR of 50% rather than 80%, which requires you to come up with the other 50% from your equity. Further check the size of the investment. Smaller apartments can trigger a lower LVR.
We had a young couple telephone us the other day after they had been to one of our seminars. They couldn’t wait to tell us that they had taken our advice on position, proximity and prospect’ and had gone and purchased in a Quest Apartment.
My mum often says if it is too good to be true, maybe it is. My major concern with these types of fixed-contracts is that the reward over risk is skewed towards the controlling party. I had a client who signed a renewal contract with a serviced apartment arrangement and it was for ten years. He hadn’t read the contract and was locked in for a long time.
I have never been an advocate for buying property with other family members, other than your spouse, or with friends. It is my experience that these types of partnerships in property purchase rarely work in the long term. I have seen too many families come undone from a partnership that started out with a well-meaning flavour and turned sour, mostly due to change of circumstances with one of the investors. I see many examples of a family trust where ownership and purpose become divided.
My counsellor Jan Beam says that people operate from their highest purpose and if you don’t share the same goals or purpose you may find yourself swimming against a tide in your own backyard.
I love this saying:
Too often people think that by dividing risk and sharing an investment they are in front. I usually discourage people from the notice that divided risk is stress-free investing. I have seen the worst in these circumstances.
NRAS is the National Rental Affordability Scheme whereby a developer, generally at the time of construction, purchases a licence from the government agency that controls the scheme and joins that licence to the sale of the property.
In exchange for government assistance, you in turn offer your property to lower income groups at a discount of 20% of the agreed rental market value.
The benefit of offering at a lower than market value, is that your negative gearing loss increases; and so too does your tax return. Currently in 2012, the rebate on an NRAS licence to the property owner is around $9,900. This puts the majority of negatively geared investments into the breakeven or even positive cash flow status. More information can be found online.
Lynne Wilton, The Formula – A mentor’s guide to confident property investing
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