The defence rests on military housing investment

How would you like a brand new investment property with a secure long lease, no property management hassles, zero vacancy risk and guaranteed rental income.

Sounds good doesn’t it?

Defence Housing Australia (DHA) which advertises all of these benefits.  They also build or buy houses, lease them to military families and then sell them to property investors.

While this sounds great to an uninitiated investor, in my opinion it comes at too high a price, which make these very poor investments.

Let me explain…

 1. New house equals poor gains

In general DHA promotes newly constructed homes often in master planned estates in regional Australia.

Being new, your investment comes with a long list of depreciation benefits and of course doesn’t have that lived in look, so this seems like a pretty good deal right?

Unfortunately, there are more negatives than positives when it comes to buying a new home such as those the DHA has on offer.

First there’s the fact that new houses almost always cost more than comparable established homes in the same area, meaning you are buying them at top dollar.

This is particularly true for DHA homes, where you pay a premium for what is sold as a “total package”; you get the tenants and even a pre-appointed property manager with the house.

While this type of “guarantee” panders to the inexperienced, insecure investor, it’s worth remembering that property investment is about building an asset base through above average long-term capital growth – something new homes in large, purpose built estates simply don’t provide.

Fact is these properties tend to be in regional areas. I have always avoided investing in regional towns because of their heavy reliance on one or two industries to sustain their local economies and population.

Remember, when those industries take a battering, it’s not long before local house prices start to bear the brunt.

Instead I look to invest in areas where property values will be driven up by a large and growing population base, a diverse economy and scarcity of supply of well-located properties.

Clearly there is little scarcity to push up the value of DHA properties – they’re built by the hundreds in some towns.

 

2. Difficult to sell.

One of the big obstacles to capital growth for DHA properties is the lack of a secondary market.

Demand from owner occupiers is what pushes up the value of most properties.

But if you bought a Defence property and chose to sell, or even worse, had to sell you’d cut out 70% of potential buyers because your property would not suit an owner occupier because of its long lease

This adds up to one big fly in the proverbial ointment when it comes to owning DHA properties. A minimal secondary market for this type of property puts these investments on my “stay well clear of” list.

By the way…mortgage insurers aren’t find of DHA properties, and this makes it difficult to get a mortgage for more than an 80% LVR.

 

3. High management fees means reduced rental returns

O.K. you may pay too much, have below average capital growth and can’t easily sell your property, but at least you’ll be guaranteed a tenant for up to 12 years.

[sam id=36 codes=’true’]This means no extended vacancy periods where you could end up struggling to meet the mortgage repayments.

Then there’s the “make good” clause that means at the end of the lease period, the DHA ensures it will replace the carpets and give the house a fresh lick of paint.

Sounds good doesn’t it? So what’s the catch?

Well, as usual, this “peace of mind” comes at a cost.

Specifically, the cost is in DHA property management fees charged at a whopping 16.5 per cent or more than double that of a regular property manager.

‘Fine’, I hear you argue, ‘I’ll just employ my own property manager!’

Unfortunately you can’t. It’s compulsory to hand full management of your investment over to the DHA.

Start crunching the investment returns and suddenly those guarantees lose a bit of their luster.

 

4. The rental guarantee is up, now what?

What happens at the end of the lease? Well the DHA may renew it – or not.

But what if you want to sell your property then?  How will a home that’s had long term tenants in place and is surrounded by other long term rentals appeal to owner occupiers?  What if other investors in the estate also plan to sell at the same time?

Not an ideal situation –is it?

 

Look before you leap

There’s lots of ways to make money in property and there seems to be just about as many ways to get property investment wrong.

Before you make any investment decision first have a plan, a property investment strategy and know what you’re looking for from your property investments.

Then, if you’re considering a DHA investment, here are some questions you should ask:

  1. How much more would I be paying for a DHA house than other comparable properties in the area? What is the mark up for this new home and the “bells and whistles” that go with it?
  2. How does the supply of new properties compare to demand for houses in the area from owner-occupiers?
  3. How much of my rental return will I be forfeiting in excessively high management fees?
  4. Will the security of a guaranteed tenant and the benefit of depreciation allowances compensate for the slower capital appreciation I can expect?

When you start to weigh it all up, mounting a defence for military housing as an investment prospect is a difficult ask.

Trying to build a wealth-generating portfolio through niche property investing is a bit like playing roulette and hoping to win big. The odds are not in your favour.

 

So what should an investor do?

Owning real assets is a powerful wealth creator and with our property markets moving on, a whole new generation of property millionaires will be created over the new decade.

However, if history repeats itself, and it most likely will, most people who get involved in property investment will not become financially independent.

Many will buy the wrong property or at the wrong time or in the wrong location.

With so many mixed messages out there about what type of what makes a good property investment it’s hard to know who to listen to.

It’s hard to know who to trust.

If you’re looking for independent advice, no one can help you quite like the independent property investment strategists at Metropole.

Remember the multi award winning team of property investment strategists at Metropole have no properties to sell, so their advice is unbiased.

Whether you are a beginner or a seasoned property investor, we would love to help you formulate an investment strategy or do a review of your existing portfolio, and help you take your property investment to the next level. Please click here to organise a time for a chat. Or call us on 1300 20 30 30.

When you attend our offices you will receive a free copy of my latest 2 x DVD program Building Wealth through Property Investment in the new Economy valued at $49.

Just click on this link to find out more and reserve your place.

 



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Michael is a director of Metropole Property Strategists who create wealth for their clients through independent, unbiased property advice and advocacy. He's been once agin been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au


'The defence rests on military housing investment' have 5 comments

  1. June 21, 2013 @ 8:50 am Ian

    Well, while i agree with many of the overall sentiments and views expressed regarding the DHA homes I do think Michael’s comments are too negative.

    1) Many DHA homes are in central areas including capital cities so like any purchases, a regional area is a crap shoot but picking the right DHA home can still show excellent capital growth.

    2) Guaranteed rental is not to be dismissed, especially with yearly rental reviews, most DHA homes are 10 yrs rentals so you just have to figure 2 weeks missed rental X 10 yrs to add a few things up

    3) Banks love DHA homes for lending money as they will usually count 100% rental as a factor

    4) a DHA home in the right place can be a nice addition to your property portfolio as it is a “set and forget” while a smart purchase with the long term view (7-10yrs) can still see excellent capital gain.

    5) Finally the “make good” clause is also thousands of dollars worth to you and you are now in a position to sell to all the market an x-DHA home not just to your investors.

    6) A careful DHA purchase can be positive geared within a few years especially with the depreciation factor

    I believe there is excellent grounds to consider a DHA home as a long term property investment but carefully considering the excellent points made by Michael

    Reply

    • June 21, 2013 @ 2:08 pm Michael Yardney

      Ian
      Thanks for the detailed rundown, obviously you have some intimate knowledge of DHA properties.
      And you are right – like with all investments there are pros and cons – there is no “ideal” investment.

      Go in with your eyes wide open

      Reply

      • June 24, 2013 @ 4:27 pm Ian

        Hi Michael,

        Yep, I am in the process of considering adding a DHA home to our portfolio so been doing a fair bit of research about it and looking at the offerings. I enjoy your blogs and thoughts so thanks for the feedback

        Reply

        • July 30, 2013 @ 12:44 pm devank

          I agree with Ian’s comments. Well located DHA property can be a good investment.
          I will touch on few points Michael raised.

          Local economies – At least this has the ‘defence’ in the first place. So find a place where there are few other economies.

          Lack of a secondary market – You are a bit stuck for 9-12 years but property investment is long term. After the lease period (say 12) then it is just like any other property expect in much better condition than similar aged property.

          Lack of capital growth & rental increase – I don’t know how each DHA property perform but we bought one in 2008 (Newcastle region) for 350K with 350 p/w rent. It is now valued 455K and the rent is 455 p/w. It is not a bad performance for last 5 years.

          Management fees charged at a whopping 16.5 % – Have you calculated the cost of property maintenance? It can easily come to 16.5 % or more by the time you include vacancies, re-letting fees, maintenance fees, landlord insurance, etc. Recently they replace the whole Air-con system at the above mentioned property. It costed me 4K to install simialr air-con in another IP!

          Difficult to get a mortgage for more than an 80% LVR – Wrong information. Last month, we did a deal on a WA property 90% LVR. Oh.. and the PM fees are generally more than 10% in WA! So 16.5% doesn’t seem so bad.

          How will a home that’s had long term tenants in place … appeal to owner occupiers – Why does it matter in the first place? As a buyer I would be happy to know that it had a long term tennant.

          What if other investors in the estate also plan to sell at the same time? – This can be an issue if the whole suburb is full of DHA properties. However, they are not all sold at the same time so the rental agreement doesn’t expire at the same time. I don’t know the procedure at the end of the lease period. Does it become ‘periodic’? This problem is less if that happens.

          As you said “Go in with your eyes wide open”.

          Reply

          • July 30, 2013 @ 1:03 pm Michael Yardney

            Thanks for your comments devank
            Clearly there are many different investment strategies.
            Buy and hold and not do anything for 12 – 15 years is one.
            If you’ve been following my blogs for a while I take a slightly more active approach and don’t just wait for things to happen, make make things happen.
            And it’s worked well for me


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