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Is Defence Housing the right investment for you?

What is Defence Housing? Why do people invest through it? and why you should avoid it? 

Paul Nugent has a close look at what Defence Housing offers and why it appeals to some investors before considering the negatives and providing other investment options. He talks about the three main selling points for Defence Housing – guaranteed rental income, long term tenants and low hassle property management. 

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Transcript

Compare transcript to actual delivery. 

There are many conflicting ideas out there about Defence Housing Australia which bring out more questions than answers. 

In the next couple of minutes, I will answer some of these questions and hopefully shine some light on your future investments. 

Defence Housing is a government initiative that provides housing to members of the Australian defence forces and their families. 

Defence Housing Australia purchase and construct properties throughout Australia where there is a need for defence housing. A portion of these homes are then sold to investors with a leaseback arrange to DHA.

There are three main selling points for investing in Defence Housing. 
- Guaranteed Rental Income 
- Long Term Tenants 
- Low Hassle Property Management

In essence, there is a promise of a sense of security. 

Guaranteed Rental Income
DHA Properties come with a guaranteed rental income. 

So what does this mean?

It means the investor is paid rent each month regardless of whether or not there is a tenant occupying the property. 

DHA also undertake annual rent evaluations, with the commitment that the investor will be paid the market rate without ever going below their initial rental income. 

Long Term Tenants 
DHA leases are for the long term with their shortest ones lasting for three to six years whilst the majority go for 9 to 12 years. 

After the lease is finished and DHA no longer needs the property it is then placed back in your control where you can decide what to do with it. Live, sell or rent out again yourself. 

Similar to the guaranteed rent, long term tenancies offer would-be investors peace of mind. They don’t have to worry about having to find new tenants every year or finding tenants in slow periods. 

Hassle Free Property Management
Imagine not having to deal with any minor concerns or renovations with your investment property. 

That is what DHA promises.

In managing your property, DHA pledges to look after any tenant concerns, pay for minor structural repairs and maintenance, and pay for after-lease restoration, which can include repainting and/or recarpeting, depending on the length of the lease and the condition in which the property is left.

While these promises seem very attractive, tread carefully as they aren’t always as good as they seem. 

Guaranteed Rental yield 
Ask yourself how can Defence Housing Australia afford to pay me regardless of whether the property is rented out or not?

Well, they can make this kind of guarantee because the cost is worked into the initial price of the property. In other words, you are paying more than the property is worth up front in order to ensure you always get paid your rent. 

When you come to sell your property in the open market, the price will be set by market forces. You are unlikely to recoup the premium that you paid for that rental guarantee in the first place. 

Long Term Tenants 
While having the same tenant for around nine years is great, the lack of flexibility can turn into a hindrance. 

Sometimes things come up in life that require you to sell your property sooner than expected. Selling a DHA property mid-lease limits the pool of prospective buyers, so it has to be sold with the lease in place. This could be a major drag on your sale price. 

Hassle Free Management 
As with all amazing deals, there are strings attached. 

The DHA property care service fee is 16.5 per cent of the rental dollars, while the average property management fee in the open rental market is generally around five to eight per cent. To some, the inclusions in the DHA property care service make the difference worthwhile, given DHA will do any repairs or maintenance during and at the end of the lease. 

But a well-bought property should be in good condition and not in need of too many repairs. For example, if there is no need for any maintenance in any year you are paying an extra eight per cent for nothing. On a million dollar property on a six per cent rental yield, that additional eight per cent management fee represents nearly $5,000 a year in above market management fees. 
 

Other Issues 
1. While there are some DHA properties available in major population centres, the majority are in areas far from capital cities. Great locations for defence force staff but there isn’t a deep pool of other prospective tenants which can put off investors or homebuyers 
2. The types of property that suit defence forces – usually family homes with plenty of accommodation – aren’t necessarily the optimal type for the rental market. The greatest demand is for one- and two-bedroom dwellings.

Good Rental Returns and Long Leases

If you are after a good investment property these are the qualities you should look for:

  • In a high land value area i.e. close to a CBD in a major capital city
  • In close proximity to transport, schools, village type shopping strips, restaurants and other recreational activity,
  • Sited on an attractive street with architecturally consistent streetscape.
  • And something that is a scarce property that is not being built anymore  

These properties are more likely to have long-term tenants and a constant rental income as they are always in high demand.

No built-in rental guarantee is needed if you pick a property that a large collection of people will always want but is in low supply.

And while rental dollars matter, a property’s propensity for capital growth is more important. Properties that tick these boxes are more likely to have a higher capital growth, earning you more money in the long run which should outweigh the advantages of a rental guarantee.

Property Managing

Rather than paying 16 per cent to the DHA manager, hire your own carefully selected property manager, pay an eight per cent management fee and consider putting aside what you would have given DHA into a rainy day fund each year. That way, if a repair is needed you have the funds available without it being an unexpected expense. You will probably find that you have money left over after ten or so years to use as you wish. 

While defence housing properties look attractive after a cursory consideration, there are many other opportunities that deliver stronger return and genuine peace of mind