A balanced investment portfolio is supposed to include property. However, I always struggled with the concept of negative gearing to create a future capital gain. It is based on speculative growth (essentially inflation – just viewed from a different perspective), rather than creating value in the process.
Cashflow Positive Property
This was the main reason that I had always tried to find cash flow positive property. Then I saw an ad about NDIS properties, purpose-built for people with special needs, government-supported for 20 years and promoted by someone whose own daughter was living in an NDIS home.
My wife and I immediately agreed that this was something worth supporting. There are thousands of young, disabled people living in retirement homes because they cannot find suitable accommodation.
The location looked good on paper. When we visited, we could see a new community starting to grow. Hospital, university, schools, a park and a shopping centre with a village feel. Promising.
Building and Certification Process
After the initial wait for council approval, the building process was quite amazing. We just received updated pictures every few weeks as the house was growing.
Then in March 2021, it was officially completed. Unfortunately, we have battled with paperwork since then. So it has just been empty for the past 5 months.
It is hard to say what actually went wrong. The main problem seems to be that five different companies: the salesperson, the planner, the builder, the SDA certifier and the SDA provider (who finds the tenants and manages them) did not communicate well enough.
I am still not 100% sure whether some of the things we were promised were blatant lies or honest mistakes. Here is what I would look for in the future:
- Having the SDA provider involved from day one to make sure that what we build is suitable for tenants with special needs.
- All parties committed to creating value for the tenants rather than just focusing on a financial return.
- A stronger and clearer late delivery clause in the contract, so that the builder is incentivised to complete all required paperwork as well as the construction.
- Clear definition of who is responsible for what.
- Frequent meetings between all parties to align understanding of where we are at and what needs to happen next.
A great part of the experience was upgrading the home with energy efficiency features. The additional costs were negligible (even the builders were astonished at what could be achieved). The outcome in energy savings over the next few years will be enormous.
As a standard build, the house had a 6-star energy rating. By adding less than 1% to the building costs, we were able to increase that to a 7.7-star rating. Here is what we did for it:
- r4 ceiling insulation
- r1.5 insulation in exterior walls
- white roof
- sealed doors
- ceiling fans in all rooms
- 4-star split system air conditioning units in all rooms
- a heat pump instead of a hot water system
- a 6.6kW solar system
We should have insulated the internal walls as well so that the room specific temperatures were kept more efficiently, but there was not enough space in the walls.
The only disappointing thing about this was that Bank Australia promised a 0.5% reduction in the interest rate for energy-efficient homes. When I sent all the certifications for it, they informed me that it was only available for owner-occupiers, not investors (something they did not mention when we took out the loan and they promoted this green loan feature to me).
Firstly, I am grateful that we were able to survive the delays (the original salesperson prediction was we’d have tenants in there by December 2020). Lucky we did not count on that.
The salesperson also promised us 3 bedrooms, but it actually turned out that this was not possible and we ended up with two (and the carer’s room). I am ok with that because sharing with one other person is certainly easier than with two other people and it would have been a bit cramped. But it means a third of our potential income has fallen away.
We have had a few people show interest, but due to the delays and uncertainties about actual final certification, no one committed.
It was more expensive to build the house due to the special requirements for high physical support (a ramp, wider doors, accessible showers, an accessible kitchen, automatic door, blind and window preparation, etc.). But the generous government support is likely to still lead to a good cash return.
So contrary to the Good Earth Dairy investment, this NDIS house will most likely create a reliable, long-term (20 years?) return. How much, we’ll hopefully find out in the next 6 months.
Achieving the Impacts We Wanted to Have
The building process was smooth and joyous. The paper-pushing, in the end, was not and came with frustration for all people involved. I hope that long-term it will have been worth it for the tenants that stay in the home.
Living in a good environment within a real community is definitely healthier than living in an institution. We tried to create that.
Taking control of your own life within your own four walls is a good step towards being full of hope. In an ideal scenario, I would like to find pathways for the tenants to eventually own their home. We’ll have to see whether we can make that happen.
Closing natural resource loops
We neglected this a bit by not being involved in the building process. It would be good to put a stronger emphasis on that in the next building project (should we actually get involved in another).
We have achieved that with our energy efficiency features and the solar system. We’ll have to see whether the system is actually large enough for the electricity needs of the tenants.
When we saw the original plans, I imagined this lush garden with native plants. What we got was a lawn with a few plants at the front entrance (which had been stolen by the time we went for the second visit).
As the whole development actually destroyed native bushland, we have gone backwards with this one. Once we have tenants, and their agreement on doing something special with the garden, we’ll work on that.
Would we do it again? Most likely not with the current team.
While I really support decentralised responsibility and decision making, it needs to come with a strong sense of trust, respect and clarity around who does what.
None of this existed and I felt like I had to consistently pull the parties together and request the next steps for anything to happen (in this last phase of getting the certification done). Maybe this is more a reflection of the NDIS and constantly changing requirements that even the experts in the field cannot keep up with.
But who knows, if we have happy tenants in there in a couple of months, it might look very different.
We did invest in another NDIS development but in a totally different way.