The purchase of a DHA investment property appears to provide all that most property investors are looking for. It is typically a 3 to 5 bedroom house, 2 or 3 bedroom townhouse or a 2 bedroom apartment with the following characteristics:
- The properties are generally no older than 2 years, therefore providing high depreciation deductions and potential tax benefits;
- There is a guaranteed lease to the Defence Forces on the property (typically 9 to 12 years with an option to extend for 3 years); · No tenanting obligations for the investor;
- Rent is paid monthly in advance for the term of the lease, even if the property is not occupied;
- All general maintenance is covered by DHA throughout the term of the lease; · Property is restored at the end of the lease, which typically covers items such as internal repainting, re-carpeting and replacing vinyl floor coverings (depending on the term of the lease).
So why don’t more people invest in DHA houses?
Property commentator Michael Yardney offers the following reasons why you need to take care when looking at a DHA property investment:
- The initial cost of the new property could be too high, with a “premium” factored into the price because the total package includes a tenant and guaranteed rent. Price should be driven by a number of factors which include proximity to infrastructure, a growing population, a number of industries contributing to the prosperity of the local area, etc. These are the factors that underpin capital growth in a solid property investment.
- There may be difficulty in selling in the future – generally the demand for a property which pushes up the property’s value comes from owner occupiers. If you sell a DHA property in the middle of a lease term, you can only sell to other investors because the lease cannot be broken. Considering 70% of house purchasers are owner occupiers you are cutting out 70% of potential buyers! Again this reduces the potential demand for the property;
- High management fees – the standard rental management fees charged by DHA are 16.5% (inc GST) compared to a standard rental commission charged by a rental manager of 8.8%. On face value this obviously suggests your returns will be less. It is interesting to note however that DHA appointed BIS Shrapnel to complete a report in 2014 into the actual cost differences over a 9 year term between DHA’s “all inclusive” rental arrangement with a “traditional real estate agent’s management agreement”. The results of the report indicates that DHAs “all inclusive” management fee actually provides costs savings compared to a traditional rental manager. These savings are based on assumptions surrounding vacancies, letting fees, repairs & maintenance, value of restoration at the end of the lease, etc.
- What happens at the end of the lease? Will owner occupiers want to buy in an area where all of their neighbours are tenants and not owner-occupiers? What if all other owners want to sell at the same time? In other words, it comes back to basic property fundamentals – what are the factors for property in the area which will drive demand for housing and capital growth?
All we are suggesting, like any potential property investment, is to do your homework. Make sure you do your research, get some independent advice, regardless of the glossy brochures and silky sales pitches.
If your new to property investing, or even if you’re already in the property market – I’d still recommend you read some of Margaret Lomas’s books on what makes a good property investment!