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The Pros & Cons of Defence Housing
Is Defence Housing investing right for you? It’s not for everyone. Learn the difference between regular and DHA investing here.
Time and time again, we see people NOT using their housing entitlements to the best of their abilities. But it’s not their fault. If you don’t have a plan going into Defence Housing, you could waste the opportunities and support you are entitled to, or worse, lose money on your hard-earned investment!
If you are looking to maximise your investments, you must understand your investment strategy and make the right decisions. Learn the difference between regular everyday investing for civilians vs in Defence housing, the process of investing and the methods and techniques we have perfected to create long term assets and wealth for our clients.
Firstly – what are Australian Defence Housing Investments?
Essentially Defence Housing Australia will provide housing to members of the ADF and their families. It’s not for everyone, and investors have limited opinions: DHA housing investment properties generally have several differences from regular investment properties.
DHA typically sells and leases housing within 30km of bases and puts them up for sale along with ‘a leaseback agreement’. These properties are not aimed at owner-occupiers as the properties come with long leases with assured rentals.
Next, what’s the process of DHA?
The process involves DHA building or acquiring property and then selling it to an investor at market value. The investor then leases the property back to DHA for between nine and 12 years, with options for extension while being paid market rent.
You’ll need to register with DHA, obtain finance pre-approval, and THEN you’ll get to select properties released for sale (hot tip: they’re released every second Tuesday).
Properties with a DHA lease in place have become exceedingly popular, so much, so that prospective buyers are required to go through a ballot system just to secure a property.
Once you’ve completed the first steps, such as obtaining finance and selecting a DHA property – your consultant will enter you into the fortnightly ballot.
If you have been successful in the ballot, the DHA property will be placed on hold for seven days. A small number of those properties are occasionally made available to buy outside of the ballot system. They’re marked as ‘buy now’ and are available for immediate purchase. This creates a fair system so that anyone interested in a DHA property has an equal opportunity to do so.
Like any investment, there are pros and cons to the scheme. So we’re here to break down DHA for you.
Pro: Independent evaluations
To keep aligned with the terms of your lease, DHA will conduct independent rent reviews annually by a licensed valuer. They will provide ongoing recommendations on whether you should increase, decrease or maintain the level of rent.
Pro: Guaranteed rent
You sign an agreement with DHA as your tenant. This means you’ll receive guaranteed rental income for the term of the lease and no vacancy risk – even if the property is without a tenant, the government will cover you. Considering most DHA properties on offer are built new, it ensures the age of the average housing inventory is relatively low.
Pro: Never face the risk of no tenants
The lease terms are also much longer with DHA – ranging from 3-6 years or 9-12 years. For comparison, typical investment properties usually experience an average of at least 1-2 weeks vacancy a year, with the national rate currently held at 1.6%.
Pro: Ensure you pick a premium home
The common misconception is that DHA properties are in non-so-desirable locations, thus limiting capital gains potential in the future. This is not true – with The Australian Financial Review highlighting that DHA has managed properties in capital cities AND award-winning developments.
Pro: They will manage everything for you.
This is great for “buy and forget” attitudes in the investment game. When you purchase an investment property from DHA, you lease it back to them. A huge attraction is the idea of NO management responsibilities. They will even refurbish the property when tenants move on – an appealing offer for risk-averse people.
Con: You are geographically limited to where you can buy
It’s not necessarily a deal-breaker, but the locations of DHA properties are usually restricted to military bases within 30km to provide homes for ADF members and their families. So if you have your heart set on a particular area, there’s no guarantee that properties will be available in your desired location.
Note: This often means they could be located in regional areas rather than high growth capital cities. If you pick in a low-growth or declining area, you could limit the potential capital appreciation in that location when it comes time to sell.
Tip: Specific areas for DHA properties can be found here.
Con: There are some extra costs involved
DHA will deduct a 16.5% service fee on the rental income per annum (13% for townhouses and units) for managing and maintaining your property. This compares to the average 4-10% annual fee charges under typical property management – more than double.
If not planned and budgeted for correctly, all your investment profits could go down the drain, and as with any fees, the fees could significantly reduce your return.
As the homeowner, you will be responsible for outgoing costs such as council and water rates (usage reimbursed), strata rates, land tax, insurance, termite inspections and some repairs and maintenance.
Con: Limited appeal JUST to investors
Since the scheme is based on sale and leaseback, DHA will restrict the sale of properties if a rental agreement is still in place, meaning it eliminates owner-occupiers as buyers. In short, your only potential buyers will be investors who think DHA properties are a good bet since owner-occupiers comprise around 70% of the real estate market in Australia, the leaseback agreement attached to the scheme rules out that entire segment.
Con: What you see is what you get
DHA properties are always sold at market value. The price is fixed and non-negotiable, meaning you may not see the maximum value if you sell mid-lease; you also can’t negotiate lower when you buy.
So, how do I know if DHA investing is the best option for me?
Like all investing, there are risks involved. Depending on your personal and financial circumstances, there is a range of options available for you to choose from. As an ADF member, several benefits, entitlements, subsidies, and grants are available. These range from assistance on mortgage repayments to total lump-sum payments.
The answer to whether DHA is a suitable investment will depend on you. Before you decide to invest, make sure you do your due diligence, think through your decisions and educate yourself to kick things off the right way successfully.
Here at Axon, we teach you how to invest in property the right way and help you set yourself up for a lifetime of investment success. Click below to watch our free video training webinar to get started today or take a closer look at DHA today.