Is Defence housing a good investment? It’s a topic that divides many property investors.
While some are attracted to its relatively low risk, others are repelled by its lack of flexibility.
We thought we’d take a look at the benefits and drawbacks of Defence housing to explore whether it really is as good as the Government claims.
How does Defence Housing work?
Defence Housing Australia (DHA) has thousands of properties in different locations. As an investor, you can choose to purchase a property for market value, which is then leased back to DHA. They take care of property management, including the cost of repairs and maintenance during this term.
Leases are typically nine to 12 years in length.
Once this is up, the property is handed over to the landlord who can either enter into another lease or rent it out to the public.
While some properties are located on military bases, many are not. According to a sponsored article published by Fairfax,
“They are within close proximity to schools, shops, transport and other amenities, so should retain desirability after the defence rental agreement is up.”
The benefits of investing in DHA property.
- Guaranteed rent.
Probably one of the biggest draw cards for those who favour defence housing is the fact that rent is guaranteed for the life of the lease.
Rent is set at market value, and cannot drop lower than this initial amount even if the market does.
Independent rent valuations are performed on a yearly basis to ensure that the optimum level of rent is being charged.
In other words, rent can’t go down but it can go up.
The best thing about the deal is that if the property is vacant for any period, DHA will still pay your rent for the term of the lease.
- The property can be sold during the lease term.
Investors can sell the property even if the lease has not expired. The new purchaser takes ownership of the property and the lease remains current.
This means, of course, that you can purchase properties which only have a few years left on the lease if you like.
- Maintenance and repairs are paid for.
Not only does DHA organise for any repair or maintenance work to be done throughout the lease term, they pay for it too.
This means the investor doesn’t need to budget for the cost of unexpected repairs.
- Property is restored at end of lease.
DHA restores each property at the end of the lease term. If this has been six years or more, they will have it repainted on the inside. If the lease has been nine years or more, they will re-carpet it and repaint the outside of the property.
- The DHA Property Care fee is all-inclusive.
While many property managers charge extra for letting, advertising and preparing the lease, the DHA fee includes everything.
Costs they don’t cover.
It almost sounds too good to be true, but DHA doesn’t pay for every cost involved. The investor is still liable to pay council rates, utility service charges, strata and sinking fund levies, pest reports and building insurance.
Now let’s look at the other side of the coin.
The drawbacks of investing in DHA property.
- The DHA Property Care fee is about twice that of a regular property manager.
Property management doesn’t come cheap – and it’s no surprise when you look at the costs that DHA cover.
DHA charge a 16.5% management fee for freestanding houses and a 13% management fee for properties run by a body corporate.
While repairs are paid for, it is arguable whether paying such a high fee for 9 to 12 years is really worth it.
The same can be said about the property being repainted and recarpeted. Is the fee still good value when you take these costs into consideration?
- The lease term is long.
For those who prefer short-term investments, DHA housing is not the best option.
Although they can be sold during the lease, this limits buyers to those who want a DHA property.
Since they are sold at market value, there is no scope for getting the max when selling – unless you wait until after the lease has expired.
On the other hand, demand for DHA housing does seem to be prevalent. A ballot system is used for purchasers. After registering with DHA and providing a loan pre-approval, purchasers can elect to purchase a property. A ballot is then run, and one lucky investor is chosen as the winner.
- There isn’t as much to choose from.
While not all properties are located on military bases, some of them are. This limits the way they can be used after the lease period.
When it comes to choosing a property, there isn’t as much choice as there is when choosing a conventional property. You may not be able to invest in an area of your choice because you are limited to what is available.
- Properties are sold at market value.
While most people will see this as a benefit, savvy inventors will see it as a drawback.
If the properties are sold at market value – there is no scope for negotiation.
It is impossible to buy a DHA property for less than market value.
- The investment offers no flexibility.
Successful property investors such as Nathan Birch say it is possible to build wealth through investing while also minimising risk.
While many people favour DHA properties because of the low risk involved, the properties also offer no flexibility.
It is possible to minimise risk while buying conventional properties without compromising on flexibility.
- Buying below market value builds capital into the deal and provides a buffer should you need to sell.
- Buying in a good growth area minimises the risk of overcapitalising and the risk of prolonged vacancies.
- Buying properties with a strong cash flow minimises the risk that you will be out of pocket each month.
While rent isn’t guaranteed, vacancies are less likely in metropolitan areas that have strong renter demand.
The cost of property management is much lower – and if you choose good tenants who are in it for the long run, then you may not need to pay letting fees for several years.
So, are they a good investment?
While DHA properties come with many benefits, they also come at a cost to manage. They could be suitable investments for those who don’t mind paying more to reduce risk. For those who want more flexibility, however, they aren’t the best option.
Would a DHA property be a good investment for you? Why not speak to our Strategy Team about if you should be considering them as an option.